December 10, 2025 • 20 mins
The Federal Reserve reduced its key interest rate by a quarter-point for the third time in a row but signaled that it may leave rates unchanged in the coming months. The dollar had its worst day in nearly three months after Federal Reserve Chair Jerome Powell highlighted labor market risks and downplayed inflation concerns. For more on what this means for the emerging markets debt space, we heard from Jeff Grills, head of US cross markets and emerging markets debt at Aegon Asset Management.
Plus- Asian equities echoed gains on Wall Street after the Federal Reserve cut interest rates and Chair Jerome Powell voiced optimism that the US economy will strengthen as the inflationary impact from tariffs fades away. For her outlook on the Fed's decision and the overall market outlook, we heard from Christina Woon, Portfolio Manager at Eastspring Investments. She spoke to Bloomberg's David Ingles and Annabelle Droulers.
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Episode Transcript
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Speaker 1 (00:02):
Bloomberg Audio Studios, podcasts, radio news. Welcome to the Daybreak
Asia podcast. I'm Doug Prisner. Markets across the Asia Pacific
are reacting today to the FED cutting its policy rate
by twenty five basis points now. To be fair, that
move was widely expected. At the same time, FED officials
(00:26):
maintain their outlook for just one rate cut in the
new year. Here's Fed Shair J. Powell with today's decision.
Speaker 2 (00:32):
We have lowered our policy rate three quarters of a
percentage point over our last three meetings. This further normalization
of our policy stance should help stabilize the labor market
while allowing inflation to resume its downward trend toward two
percent once the effects of tariffs have passed through.
Speaker 1 (00:49):
The Fed also subtly altered the wording of its statement
to suggest greater uncertainty about when it may cut rates again.
For a closer look, now, I'm joined by Jeff Grills,
his head of US cross Markets and Merging Markets Debt
at Agon Asset Management. Jeff, thank you so much for
making time to chat. Let's begin with a FED decision.
(01:09):
Not a big surprise here, but what's curious is that
the FED seems to be maybe moving more toward a
neutral place. How do you read what we had from
policymakers today, Well.
Speaker 3 (01:21):
I think you had both the two official descents, where
you had two governors putting no cuts as we read it,
and then you have Mirin who wanted a fifty basis
point cut.
Speaker 4 (01:30):
But then you had what was considered these silent descents.
Speaker 3 (01:33):
Right, So six of the forecast said that the FED
funds rate would stay somewhere between three seventy five, three
point seventy five and four percent.
Speaker 4 (01:41):
So I think what you've really set up for is.
Speaker 3 (01:43):
A more difficult environment in twenty twenty six, especially when
pal is no longer on the committee. You're going to
have a candidate that likely is announced sometime in the
new year by Trump, who is going to be wanting cuts.
But he's got to manage a committee that scenes right
now like they are nervous about too many cuts, and
as they don't really think the GDP growth numbers are
(02:04):
all that week, the labor markets could be the ultimate
determiner in this right, So what those will be the
key statistics to watch for the next couple of weeks
and months.
Speaker 1 (02:11):
Well, if there is a question, it seems to be
around the persistence of inflation, how stubborn it is.
Speaker 3 (02:17):
What's your view, Well, I mean, I think that the
inflation that we've had has been somewhat tariff driven, you know.
I think I think I've said this before, we had
we talked about before. I mean, tariffs to me are
a one off inflationary impact, right, the tariff goes on,
it creates a move up, and then you know it's
(02:38):
not compounding, or it doesn't.
Speaker 4 (02:39):
It doesn't do that in the future.
Speaker 3 (02:40):
So we are of the view that inflation should stay
low enough for the FED to continue cutting. Our official
call is that they'll cut two times in twenty twenty six,
or even the official house call is for another cut
in January. Although I think the next three labor market
data points right. We're going to get the December and
November or sorry, October and November payrolls here soon, and
(03:02):
then the December payrolls in January. But I think that
what we're setting up for is if labor continues to
be weak and inflation stays in sort of that two
and a half to three percent.
Speaker 4 (03:14):
I think their official forecasted rate is two and a half.
Speaker 3 (03:18):
I don't see why we wouldn't have some more easing
into twenty twenty six.
Speaker 1 (03:21):
So the Fed, if it did deliver a surprise, it
was on the resumption of purchases of treasury bills. The
aim ostensibly is to support liquidity in the overnight funding markets.
From your point of view, I mean, you're looking at
bond market liquidity all the time. Was this warranted?
Speaker 3 (03:38):
Well, there was a lot of illiquidity in the markets
back in September and early October, and part of that
was a function of the government shut down and just
people wanting to be cautious.
Speaker 4 (03:49):
I think the FED had.
Speaker 3 (03:50):
Forecasted that they were going to do something on the
ease of either stopping purchases or doing something to aid liquidity.
Speaker 4 (03:57):
So a little surprising, but not really surprising.
Speaker 3 (04:00):
But I think the market took it positively right, having
forty billion, having liquidity in the markets is good. That's
why you had the stocks stocks up anywhere from a
half to a percent, depending on which indicator you're looking at,
And I think the FED is always there to make
sure that liquidity is functioning right. So that's the only
part that surprises me a little bit is I don't
feel like it had gotten. It had gotten better since September,
(04:20):
so I'm surprised they announced it as a more official program.
But at the end of the day that you know,
there's plenty of liquidity in the markets, you just want
to make sure that the grease is there to keep
the wheels moving in the interim.
Speaker 1 (04:31):
So, not surprisingly, we had yields down across the curve today,
more so at the short end, and right now in
the Tokyo session, I think the two years down another
basis point or so. We're trading around three point fifty two.
With those lower yields, it's not a surprise to see
some dollar weakness. I think in New York trading. The
Bloomberg Dollar Spot Index fell to the lowest level in October.
(04:53):
So if you've got this dollar weakness, which seems to
be kind of the base case going forward here, what
does it do to your foothilosophy on em debt.
Speaker 3 (05:03):
Well, first of all, I think that you know our
view has been that EM local will continue to be
reasonably well positioned.
Speaker 4 (05:10):
It's done very well in twenty twenty five. The dollar.
Speaker 3 (05:13):
The dollar strength story I think officially turned back earlier
this summer, and you have the FED as the last
central bank really easing rates. Everybody else is either on
hold or has done all their cuts, or in some
cases are hiking rates, as we're seeing in other major
central banks. So it's not surprising to see that the
dollar is weakening somewhat.
Speaker 4 (05:35):
I mean as it relates to emerging markets. I mean,
stronger local currencies tend to be better for them.
Speaker 3 (05:41):
It helps reduce their indebtedness, at least if they have
offshore indebtedness. But the grand scheme, it's going to be
really about where rates are, and as long as rates
on the ten year stay four percent or lower. Right
we're at four thirteen. I think right now that's going
to be the key for these countries. They need to
issue at rates that are attractive to them, and then
(06:02):
they need to have growth. So I think it's going
to be less about the currency and more about just
where is their access to financing.
Speaker 1 (06:07):
We've got the BOJ meeting next two week. It seems
right now that the market is pricing in something greater
than a ninety percent probability of a twenty five basis
point rate hike, which would take this policy rate to
around seventy five basis points. I think that would be
the highest for Japan in around thirty years. How do
you view the situation with the BOJ and the implications
(06:31):
for the broader global bond market story.
Speaker 4 (06:35):
Yeah, I mean I think it's very interesting, right, I
mean your point.
Speaker 3 (06:38):
I mean, we haven't seen positive rates, much less rates
where where they are here in quite some time in Japan.
But it's a good thing, right, I mean, I think
as long as Japan doesn't choke off inflation in their
economy and they can continue to get some sort of
inflationary I mean, the biggest problem they had for the
last thirty years really has been disinflation. But I mean, overall,
(06:58):
I think what's going on in Pan is sort of
unique to Japan. I think in general, you're going to
continue to see currency appreciation in Asian currencies, right remember,
probably will continue to appreciate some of the other regional
currencies Malaysia, Korea, things of that nature. But it's all
a reflection of just a longer term trend in the
US dollar. I think that the markets, you know, US
(07:21):
was the primary spot for people to invest, and I
think people will make allocations that move away from the dollar,
and that's part of that pressure you're seeing. So I
think that the boj action is going to be a
little independent, but it adds to that fuel, right, it
adds to dollar weakness and going into other currencies.
Speaker 1 (07:38):
So when you look at the e M debt space broadly,
are you tempted to avoid the sovereign space maybe and
take a flyer on corporate debt in e M?
Speaker 4 (07:50):
Yeah, well I wouldn't. I wouldn't say we take flyers.
Speaker 1 (07:52):
So we've liked We've liked.
Speaker 4 (07:55):
Corporates for for quite some time.
Speaker 3 (07:57):
I mean, corporates were the big thematic allocation coming out
of COVID. The big problem you have for all of
it is that in credit markets in general are that
credit spreads are at multi decade low. So when you
look at sovereign spreads, investment grade sovereign spreads are right
around ninety five to one hundred basis points over investment
grade corporate spreads in EM are as well, about one
(08:20):
hundred basis points over. So you have to be very
selective with what you like. We do still like some sovereigns.
We think things on the gold side. We do think
there are exporters like Ghana and Ivory Coast which will
continue to benefit from gold exports as along with South Africa.
We do think the local markets look look attractive, so
our favorite is Mexican ten year rates. And on the
(08:41):
corporate side, again, I would probably go more towards the
metal and mining as ones that will likely benefit.
Speaker 4 (08:47):
But there are a number of select corporates.
Speaker 3 (08:49):
The corporate market is huge now, which is nice, so
there are a lot of corporates that you can pick from.
Speaker 4 (08:53):
But it's going to be an interesting year.
Speaker 3 (08:54):
Just because spreads are tight in EM and in credit
markets in general.
Speaker 1 (08:58):
One of the things that we've seen recently in terms
of the corporate bond market in the US companies many
hyperscalers involved with the AI theme have come to market
in search of new issuance. Is that something that's playing
out in EM at all as it relates to AI.
Speaker 4 (09:18):
Very little?
Speaker 3 (09:18):
I mean, I believe there's only been one issuer out
of China that was a direct data center issuer, and
then you get the Ali Baba's and Tencent and who
are sort of more in the AI space. But it's
not really much much activity going on in terms of
the hyper scalers and data centers. I mean, it was
interesting there was a there was a headline I think
(09:39):
back in October that said that open Ai, which has
been funding everything that it can get its hands on,
it seems, and I'm not sure where the cash is
going to come from, but was going to do a
twenty five billion dollar investment in a data center in Argentina.
Speaker 4 (09:50):
So I'll believe it when I see it.
Speaker 3 (09:52):
So I don't think we're going to get much of
that going on in EM, and I don't think we
need to. Most of these data centers are going to
be in developed markets in the US and in China,
and so I don't anticipate much action from that perspective
even in twenty six for EM.
Speaker 1 (10:05):
So just to focus on duration for a moment, where
are you finding the best opportunity if you look across
the curve.
Speaker 4 (10:11):
Yeah, we used to be in front end, but given.
Speaker 3 (10:16):
How flat the curves are, we've sort of looked at
the belly of the curve. So five and ten year
parts of most curves, I mean curves have really flattened
in quite a bit. There's only about a ten or
twenty basis point pickup if you go from ten year
to thirty year, and most EM curves now that's more
investment grade triple B some double B, at least on
the sovereign side, So we.
Speaker 4 (10:37):
Favor five to ten year parts of the curve.
Speaker 3 (10:41):
After that, when you get down to lower rated credit,
you have to be on a case by case basis.
So there's not many in the single B range that
we're very bullish on today. I mean, Ecuador we think
looks interesting. We still think Equador continue to have fundamental improvements.
Argentina was an interesting one for the last three months,
but it's fine ten percent, but I don't think you're
gonna get any kind of tightening, So as long as
(11:02):
you're willing to take kerry in Argentina, which sometimes can
be a little daunting, but otherwise when it comes to
other curves, we prefer not being in the thirty year
and being more in the ten year.
Speaker 1 (11:13):
So within em as you look out to the year ahead,
i'd like your take very quickly on the macro and
the extent to which you may see some sort of
pickup in default risk. Is that something you're concerned about?
Speaker 4 (11:27):
There?
Speaker 3 (11:28):
No, not, at least not from a sovereign perspective. Mean,
it's pretty interesting. We actually have had no defaults last
year in this year in sovereigns right, so we had
some restructurings that came out of the whole Russia Ukraine
crisis that saw a number of credits needing to reprofile.
You may get one.
Speaker 4 (11:46):
Senegal is definitely on the radar for overstructuring. They're saying
they're committed.
Speaker 3 (11:51):
The IMF is a little bit of a differential, so
you might get that one, but it's not a huge
market exposure. On the corporate side, you had some pickups
and a couple of very isolated predominantly in Brazil, but
overall the backdrop remains reasonably positive. I mean, it's a
little boring just to say that, oh, we're going to
get three and a half to four percent growth, but
that's probably what we're going to get. I think the
biggest risk to watch that could lead to higher defaults
(12:14):
is if you'd get some sort of a sudden stop
in all this AI and other types of funding, or
just some sort of a pullback and activity. That would
be a concern for me. But otherwise the backdrop is
reasonably constructive. I mean, we're going to have growth that's
picking up in the US. We have Frankly, you saw
that in the fed's projections. They raise their growth outlook
for twenty twenty six. Part of that's the delayed government shutdown,
(12:38):
but most economies should be picking up in develop markets.
That translates well to EM so we don't really have
a major concern for defaults other than just idiosyncratics where
you have to do your homework.
Speaker 1 (12:48):
Okay, Jeff will leave it there, Thanks so much. Jeff
Grills is head of US cross Markets and Emerging Market
stat at Agon Asset Management. Joining us here on the
Daybreakas podcast. Welcome back to the Daybreak Asia podcast. I'm
(13:09):
Doug Chrisner. Equity markets in the APAC region are rising
in sympathy with US stocks. That's after the FED cut
its policy rate as expected, and FED Shair J. Powell
seemed to voice a bit of optimism about stronger growth,
while at the same time suggesting the inflationary impacts from
tariffs will fade away. That's where we begin our conversation
(13:30):
with Christina Woon, portfolio manager at east Spring Investments. She
spoke with Bloomberg TV host Annabel Droolers and David Nglase.
Speaker 5 (13:39):
We can start with the FED and your reaction to
the decision.
Speaker 6 (13:45):
Yeah, I think the FED cut rates has expected, and
that was a fairly consensus view as well. I would
say that what that reiterates for me is that we
will see into twenty twenty six traditional opportunities or avenues
for income tail off a little, and then when we
think about how the market's actually done so well this
year as well, perhaps a narrowing of the opportunity set
(14:07):
for alpha as well. So I do think that going
into next year where we are right now, we probably
will have to be even more selective in trying to
drive both income as alpha for equity investors.
Speaker 7 (14:20):
Okay, well, I was going to ask you then what
this means for you know, A trade has been very,
very popular Christina David here, by the way, we talked
that length about this.
Speaker 4 (14:27):
Already with you too.
Speaker 7 (14:28):
You know, the AI trade and the megacap play in
the US, and we've seen an internal rotation within some
of those big names in the US of late. How
has that affected how you look at your portfolio or
has it affected you at all? Yeah?
Speaker 6 (14:42):
Definitely. I mean I would say that just given how
everything has shaped up over the year, or actually over
the past few months within the AI trade, that strong
rally means that it is definitely a key risk that
we have to watch, even out here in Asia. You know,
we've got diversified supply chains here, but it doesn't mean
that it's something that we we should be complacent about.
(15:04):
So I do think it's something that you know, I've
been taking a bit of profit into the valley. But
having said that, I do remain constructive on the trade.
You know, I was in Soul just last week speaking
to some of the big memory makers, and the consistent
message that we've been getting is that supply into next
year remains very tight. So that does have positive support
for demand and supply within certain spaces. So I can
(15:27):
find some comfort by focusing on where the bottlenecks are
within this trade.
Speaker 5 (15:33):
And so how did those continue to perform? I think
obviously the big theme of watching is Oracle, for instance,
and in their latest numbers we see quite a significant
cape spend, a lot more than Wall Street had been expecting.
But still that ROI isn't there quite yet either or
at the level that's been anticipated. How long is this
sort of going to also sustain? Of course, they've got
(15:55):
the demand for for memory from the likes of a
Samsung or SK heinex. But when does that also start
to reach a tipping point, do you think?
Speaker 6 (16:05):
Yeah? I think the worry that we have when we
see all these big CAPEX numbers, and I think we've
seen that express in the market as well, is on
the funding side. But again, if we look at cash
flows and if we do see or we do have
the expectation that cash flows should pick up a little
alongside or keep pace versus where they are right now,
then there should there should be some support for their
(16:26):
overall rhetoric. I would say, though, going back to my
point earlier, and that's where we really do have to
focus on where the bottlenecks are, because that's where that
gives you more visibility and comfort in in playing this trade.
The worry, of course that people have in mind is
with all of these big numbers that we're seeing, is
there the risk of double booking anywhere? I think we
(16:46):
have to be cognizant of the fact that that that
risk will always be there. So again to solve that,
you have to focus on where the bottlenecks are.
Speaker 7 (16:55):
And risking asking the obvious where are those bottlenecks? And
you know, you just thing you've recently come from a
from a trip to career, is it in that market,
because that market's also done exceptionally well, and I wonder
how you pair that with the price right now.
Speaker 6 (17:10):
No, I think that's that's absolutely right. So career has
been such a strong market this year, and it's driven
so much by tech. I would say though, that the
memory players are just given what I've heard from them
about the complete lack of clean room facilities into next year.
And you know, capacity doesn't just come in overnight. You
can't snap your fingers and magic up capacity. So we're
still looking at that situation remaining tight at least into
(17:34):
into next year as well. So I do think that
within the tech trait, the memory players do stand out
quite well. That the difficulty with that, though, is just
given how how we balance that out with where sentiment is,
which is why I do think that for prudent's sake,
taking some profit into the rally still remains my stance
at this point. And then elsewhere in Korea, I wouldn't
(17:56):
forget that there are the themes that are playing there
as well. I'm still finding out ideas. So for example,
just last week or earlier this week, we saw the
dividend tax reform come around as well, So that does
have implications for how companies will be thinking about their
Shhelder return policies in the coming months. So that could
be a potential opportunity for income funds too.
Speaker 5 (18:17):
We're talking with a few analysts that are saying that
in light of these concerns around the AI bubble essentially
that they're thinking maybe India could present a good diversification
opportunity for twenty twenty six. You are you in that
camp as well?
Speaker 6 (18:33):
I am, I mean I would be in agreement with that.
And you know, India has quite a number of things
going for them at this point. You know, domestically they
do have they had their RBI cut last week. Inflation
does remain benign at this point, which does benefit household
spending going into next year. If we do see a
finalization of any trade deal with the US, so that
(18:55):
could also be positive for sentiment. So a number of
things that are lining up simply into next year. And then,
as you mentioned as well, just given how many of
the companies or listed companies in in India aren't as
driven by the AI trade as you would see in
the rest of the in the rest of the world.
It does present as a pretty good AI hedge in
(19:16):
the current times from a portfolio perspective, so I do
think for diversification reasons, India is actually a good allocation
to have at this time.
Speaker 1 (19:24):
That was Christina Woun from East Spring Investments speaking to
Bloomberg TV host Annabel Droolers and David nglace Here on
the Daybreak Asia Podcast. Thanks for listening to today's episode
of the Bloomberg Daybreak Asia Edition podcast. Each weekday, we
look at the story shaping markets, finance, and geopolitics in
(19:46):
the Asia Pacific. You can find us on Apple, Spotify,
the Bloomberg Podcast YouTube channel, or anywhere else you listen.
Join us again tomorrow for insight on the market moves
from Hong Kong to Singapore and Australia. I'm Doug Prisoner
and this is Bloomberg
Bloomberg Audio Studios, podcasts, radio news. Welcome to the Daybreak
Asia podcast. I'm Doug Prisner. Markets across the Asia Pacific
are reacting today to the FED cutting its policy rate
by twenty five basis points now. To be fair, that
move was widely expected. At the same time, FED officials
(00:26):
maintain their outlook for just one rate cut in the
new year. Here's Fed Shair J. Powell with today's decision.
Speaker 2 (00:32):
We have lowered our policy rate three quarters of a
percentage point over our last three meetings. This further normalization
of our policy stance should help stabilize the labor market
while allowing inflation to resume its downward trend toward two
percent once the effects of tariffs have passed through.
Speaker 1 (00:49):
The Fed also subtly altered the wording of its statement
to suggest greater uncertainty about when it may cut rates again.
For a closer look, now, I'm joined by Jeff Grills,
his head of US cross Markets and Merging Markets Debt
at Agon Asset Management. Jeff, thank you so much for
making time to chat. Let's begin with a FED decision.
(01:09):
Not a big surprise here, but what's curious is that
the FED seems to be maybe moving more toward a
neutral place. How do you read what we had from
policymakers today, Well.
Speaker 3 (01:21):
I think you had both the two official descents, where
you had two governors putting no cuts as we read it,
and then you have Mirin who wanted a fifty basis
point cut.
Speaker 4 (01:30):
But then you had what was considered these silent descents.
Speaker 3 (01:33):
Right, So six of the forecast said that the FED
funds rate would stay somewhere between three seventy five, three
point seventy five and four percent.
Speaker 4 (01:41):
So I think what you've really set up for is.
Speaker 3 (01:43):
A more difficult environment in twenty twenty six, especially when
pal is no longer on the committee. You're going to
have a candidate that likely is announced sometime in the
new year by Trump, who is going to be wanting cuts.
But he's got to manage a committee that scenes right
now like they are nervous about too many cuts, and
as they don't really think the GDP growth numbers are
(02:04):
all that week, the labor markets could be the ultimate
determiner in this right, So what those will be the
key statistics to watch for the next couple of weeks
and months.
Speaker 1 (02:11):
Well, if there is a question, it seems to be
around the persistence of inflation, how stubborn it is.
Speaker 3 (02:17):
What's your view, Well, I mean, I think that the
inflation that we've had has been somewhat tariff driven, you know.
I think I think I've said this before, we had
we talked about before. I mean, tariffs to me are
a one off inflationary impact, right, the tariff goes on,
it creates a move up, and then you know it's
(02:38):
not compounding, or it doesn't.
Speaker 4 (02:39):
It doesn't do that in the future.
Speaker 3 (02:40):
So we are of the view that inflation should stay
low enough for the FED to continue cutting. Our official
call is that they'll cut two times in twenty twenty six,
or even the official house call is for another cut
in January. Although I think the next three labor market
data points right. We're going to get the December and
November or sorry, October and November payrolls here soon, and
(03:02):
then the December payrolls in January. But I think that
what we're setting up for is if labor continues to
be weak and inflation stays in sort of that two
and a half to three percent.
Speaker 4 (03:14):
I think their official forecasted rate is two and a half.
Speaker 3 (03:18):
I don't see why we wouldn't have some more easing
into twenty twenty six.
Speaker 1 (03:21):
So the Fed, if it did deliver a surprise, it
was on the resumption of purchases of treasury bills. The
aim ostensibly is to support liquidity in the overnight funding markets.
From your point of view, I mean, you're looking at
bond market liquidity all the time. Was this warranted?
Speaker 3 (03:38):
Well, there was a lot of illiquidity in the markets
back in September and early October, and part of that
was a function of the government shut down and just
people wanting to be cautious.
Speaker 4 (03:49):
I think the FED had.
Speaker 3 (03:50):
Forecasted that they were going to do something on the
ease of either stopping purchases or doing something to aid liquidity.
Speaker 4 (03:57):
So a little surprising, but not really surprising.
Speaker 3 (04:00):
But I think the market took it positively right, having
forty billion, having liquidity in the markets is good. That's
why you had the stocks stocks up anywhere from a
half to a percent, depending on which indicator you're looking at,
And I think the FED is always there to make
sure that liquidity is functioning right. So that's the only
part that surprises me a little bit is I don't
feel like it had gotten. It had gotten better since September,
(04:20):
so I'm surprised they announced it as a more official program.
But at the end of the day that you know,
there's plenty of liquidity in the markets, you just want
to make sure that the grease is there to keep
the wheels moving in the interim.
Speaker 1 (04:31):
So, not surprisingly, we had yields down across the curve today,
more so at the short end, and right now in
the Tokyo session, I think the two years down another
basis point or so. We're trading around three point fifty two.
With those lower yields, it's not a surprise to see
some dollar weakness. I think in New York trading. The
Bloomberg Dollar Spot Index fell to the lowest level in October.
(04:53):
So if you've got this dollar weakness, which seems to
be kind of the base case going forward here, what
does it do to your foothilosophy on em debt.
Speaker 3 (05:03):
Well, first of all, I think that you know our
view has been that EM local will continue to be
reasonably well positioned.
Speaker 4 (05:10):
It's done very well in twenty twenty five. The dollar.
Speaker 3 (05:13):
The dollar strength story I think officially turned back earlier
this summer, and you have the FED as the last
central bank really easing rates. Everybody else is either on
hold or has done all their cuts, or in some
cases are hiking rates, as we're seeing in other major
central banks. So it's not surprising to see that the
dollar is weakening somewhat.
Speaker 4 (05:35):
I mean as it relates to emerging markets. I mean,
stronger local currencies tend to be better for them.
Speaker 3 (05:41):
It helps reduce their indebtedness, at least if they have
offshore indebtedness. But the grand scheme, it's going to be
really about where rates are, and as long as rates
on the ten year stay four percent or lower. Right
we're at four thirteen. I think right now that's going
to be the key for these countries. They need to
issue at rates that are attractive to them, and then
(06:02):
they need to have growth. So I think it's going
to be less about the currency and more about just
where is their access to financing.
Speaker 1 (06:07):
We've got the BOJ meeting next two week. It seems
right now that the market is pricing in something greater
than a ninety percent probability of a twenty five basis
point rate hike, which would take this policy rate to
around seventy five basis points. I think that would be
the highest for Japan in around thirty years. How do
you view the situation with the BOJ and the implications
(06:31):
for the broader global bond market story.
Speaker 4 (06:35):
Yeah, I mean I think it's very interesting, right, I
mean your point.
Speaker 3 (06:38):
I mean, we haven't seen positive rates, much less rates
where where they are here in quite some time in Japan.
But it's a good thing, right, I mean, I think
as long as Japan doesn't choke off inflation in their
economy and they can continue to get some sort of
inflationary I mean, the biggest problem they had for the
last thirty years really has been disinflation. But I mean, overall,
(06:58):
I think what's going on in Pan is sort of
unique to Japan. I think in general, you're going to
continue to see currency appreciation in Asian currencies, right remember,
probably will continue to appreciate some of the other regional
currencies Malaysia, Korea, things of that nature. But it's all
a reflection of just a longer term trend in the
US dollar. I think that the markets, you know, US
(07:21):
was the primary spot for people to invest, and I
think people will make allocations that move away from the dollar,
and that's part of that pressure you're seeing. So I
think that the boj action is going to be a
little independent, but it adds to that fuel, right, it
adds to dollar weakness and going into other currencies.
Speaker 1 (07:38):
So when you look at the e M debt space broadly,
are you tempted to avoid the sovereign space maybe and
take a flyer on corporate debt in e M?
Speaker 4 (07:50):
Yeah, well I wouldn't. I wouldn't say we take flyers.
Speaker 1 (07:52):
So we've liked We've liked.
Speaker 4 (07:55):
Corporates for for quite some time.
Speaker 3 (07:57):
I mean, corporates were the big thematic allocation coming out
of COVID. The big problem you have for all of
it is that in credit markets in general are that
credit spreads are at multi decade low. So when you
look at sovereign spreads, investment grade sovereign spreads are right
around ninety five to one hundred basis points over investment
grade corporate spreads in EM are as well, about one
(08:20):
hundred basis points over. So you have to be very
selective with what you like. We do still like some sovereigns.
We think things on the gold side. We do think
there are exporters like Ghana and Ivory Coast which will
continue to benefit from gold exports as along with South Africa.
We do think the local markets look look attractive, so
our favorite is Mexican ten year rates. And on the
(08:41):
corporate side, again, I would probably go more towards the
metal and mining as ones that will likely benefit.
Speaker 4 (08:47):
But there are a number of select corporates.
Speaker 3 (08:49):
The corporate market is huge now, which is nice, so
there are a lot of corporates that you can pick from.
Speaker 4 (08:53):
But it's going to be an interesting year.
Speaker 3 (08:54):
Just because spreads are tight in EM and in credit
markets in general.
Speaker 1 (08:58):
One of the things that we've seen recently in terms
of the corporate bond market in the US companies many
hyperscalers involved with the AI theme have come to market
in search of new issuance. Is that something that's playing
out in EM at all as it relates to AI.
Speaker 4 (09:18):
Very little?
Speaker 3 (09:18):
I mean, I believe there's only been one issuer out
of China that was a direct data center issuer, and
then you get the Ali Baba's and Tencent and who
are sort of more in the AI space. But it's
not really much much activity going on in terms of
the hyper scalers and data centers. I mean, it was
interesting there was a there was a headline I think
(09:39):
back in October that said that open Ai, which has
been funding everything that it can get its hands on,
it seems, and I'm not sure where the cash is
going to come from, but was going to do a
twenty five billion dollar investment in a data center in Argentina.
Speaker 4 (09:50):
So I'll believe it when I see it.
Speaker 3 (09:52):
So I don't think we're going to get much of
that going on in EM, and I don't think we
need to. Most of these data centers are going to
be in developed markets in the US and in China,
and so I don't anticipate much action from that perspective
even in twenty six for EM.
Speaker 1 (10:05):
So just to focus on duration for a moment, where
are you finding the best opportunity if you look across
the curve.
Speaker 4 (10:11):
Yeah, we used to be in front end, but given.
Speaker 3 (10:16):
How flat the curves are, we've sort of looked at
the belly of the curve. So five and ten year
parts of most curves, I mean curves have really flattened
in quite a bit. There's only about a ten or
twenty basis point pickup if you go from ten year
to thirty year, and most EM curves now that's more
investment grade triple B some double B, at least on
the sovereign side, So we.
Speaker 4 (10:37):
Favor five to ten year parts of the curve.
Speaker 3 (10:41):
After that, when you get down to lower rated credit,
you have to be on a case by case basis.
So there's not many in the single B range that
we're very bullish on today. I mean, Ecuador we think
looks interesting. We still think Equador continue to have fundamental improvements.
Argentina was an interesting one for the last three months,
but it's fine ten percent, but I don't think you're
gonna get any kind of tightening, So as long as
(11:02):
you're willing to take kerry in Argentina, which sometimes can
be a little daunting, but otherwise when it comes to
other curves, we prefer not being in the thirty year
and being more in the ten year.
Speaker 1 (11:13):
So within em as you look out to the year ahead,
i'd like your take very quickly on the macro and
the extent to which you may see some sort of
pickup in default risk. Is that something you're concerned about?
Speaker 4 (11:27):
There?
Speaker 3 (11:28):
No, not, at least not from a sovereign perspective. Mean,
it's pretty interesting. We actually have had no defaults last
year in this year in sovereigns right, so we had
some restructurings that came out of the whole Russia Ukraine
crisis that saw a number of credits needing to reprofile.
You may get one.
Speaker 4 (11:46):
Senegal is definitely on the radar for overstructuring. They're saying
they're committed.
Speaker 3 (11:51):
The IMF is a little bit of a differential, so
you might get that one, but it's not a huge
market exposure. On the corporate side, you had some pickups
and a couple of very isolated predominantly in Brazil, but
overall the backdrop remains reasonably positive. I mean, it's a
little boring just to say that, oh, we're going to
get three and a half to four percent growth, but
that's probably what we're going to get. I think the
biggest risk to watch that could lead to higher defaults
(12:14):
is if you'd get some sort of a sudden stop
in all this AI and other types of funding, or
just some sort of a pullback and activity. That would
be a concern for me. But otherwise the backdrop is
reasonably constructive. I mean, we're going to have growth that's
picking up in the US. We have Frankly, you saw
that in the fed's projections. They raise their growth outlook
for twenty twenty six. Part of that's the delayed government shutdown,
(12:38):
but most economies should be picking up in develop markets.
That translates well to EM so we don't really have
a major concern for defaults other than just idiosyncratics where
you have to do your homework.
Speaker 1 (12:48):
Okay, Jeff will leave it there, Thanks so much. Jeff
Grills is head of US cross Markets and Emerging Market
stat at Agon Asset Management. Joining us here on the
Daybreakas podcast. Welcome back to the Daybreak Asia podcast. I'm
(13:09):
Doug Chrisner. Equity markets in the APAC region are rising
in sympathy with US stocks. That's after the FED cut
its policy rate as expected, and FED Shair J. Powell
seemed to voice a bit of optimism about stronger growth,
while at the same time suggesting the inflationary impacts from
tariffs will fade away. That's where we begin our conversation
(13:30):
with Christina Woon, portfolio manager at east Spring Investments. She
spoke with Bloomberg TV host Annabel Droolers and David Nglase.
Speaker 5 (13:39):
We can start with the FED and your reaction to
the decision.
Speaker 6 (13:45):
Yeah, I think the FED cut rates has expected, and
that was a fairly consensus view as well. I would
say that what that reiterates for me is that we
will see into twenty twenty six traditional opportunities or avenues
for income tail off a little, and then when we
think about how the market's actually done so well this
year as well, perhaps a narrowing of the opportunity set
(14:07):
for alpha as well. So I do think that going
into next year where we are right now, we probably
will have to be even more selective in trying to
drive both income as alpha for equity investors.
Speaker 7 (14:20):
Okay, well, I was going to ask you then what
this means for you know, A trade has been very,
very popular Christina David here, by the way, we talked
that length about this.
Speaker 4 (14:27):
Already with you too.
Speaker 7 (14:28):
You know, the AI trade and the megacap play in
the US, and we've seen an internal rotation within some
of those big names in the US of late. How
has that affected how you look at your portfolio or
has it affected you at all? Yeah?
Speaker 6 (14:42):
Definitely. I mean I would say that just given how
everything has shaped up over the year, or actually over
the past few months within the AI trade, that strong
rally means that it is definitely a key risk that
we have to watch, even out here in Asia. You know,
we've got diversified supply chains here, but it doesn't mean
that it's something that we we should be complacent about.
(15:04):
So I do think it's something that you know, I've
been taking a bit of profit into the valley. But
having said that, I do remain constructive on the trade.
You know, I was in Soul just last week speaking
to some of the big memory makers, and the consistent
message that we've been getting is that supply into next
year remains very tight. So that does have positive support
for demand and supply within certain spaces. So I can
(15:27):
find some comfort by focusing on where the bottlenecks are
within this trade.
Speaker 5 (15:33):
And so how did those continue to perform? I think
obviously the big theme of watching is Oracle, for instance,
and in their latest numbers we see quite a significant
cape spend, a lot more than Wall Street had been expecting.
But still that ROI isn't there quite yet either or
at the level that's been anticipated. How long is this
sort of going to also sustain? Of course, they've got
(15:55):
the demand for for memory from the likes of a
Samsung or SK heinex. But when does that also start
to reach a tipping point, do you think?
Speaker 6 (16:05):
Yeah? I think the worry that we have when we
see all these big CAPEX numbers, and I think we've
seen that express in the market as well, is on
the funding side. But again, if we look at cash
flows and if we do see or we do have
the expectation that cash flows should pick up a little
alongside or keep pace versus where they are right now,
then there should there should be some support for their
(16:26):
overall rhetoric. I would say, though, going back to my
point earlier, and that's where we really do have to
focus on where the bottlenecks are, because that's where that
gives you more visibility and comfort in in playing this trade.
The worry, of course that people have in mind is
with all of these big numbers that we're seeing, is
there the risk of double booking anywhere? I think we
(16:46):
have to be cognizant of the fact that that that
risk will always be there. So again to solve that,
you have to focus on where the bottlenecks are.
Speaker 7 (16:55):
And risking asking the obvious where are those bottlenecks? And
you know, you just thing you've recently come from a
from a trip to career, is it in that market,
because that market's also done exceptionally well, and I wonder
how you pair that with the price right now.
Speaker 6 (17:10):
No, I think that's that's absolutely right. So career has
been such a strong market this year, and it's driven
so much by tech. I would say though, that the
memory players are just given what I've heard from them
about the complete lack of clean room facilities into next year.
And you know, capacity doesn't just come in overnight. You
can't snap your fingers and magic up capacity. So we're
still looking at that situation remaining tight at least into
(17:34):
into next year as well. So I do think that
within the tech trait, the memory players do stand out
quite well. That the difficulty with that, though, is just
given how how we balance that out with where sentiment is,
which is why I do think that for prudent's sake,
taking some profit into the rally still remains my stance
at this point. And then elsewhere in Korea, I wouldn't
(17:56):
forget that there are the themes that are playing there
as well. I'm still finding out ideas. So for example,
just last week or earlier this week, we saw the
dividend tax reform come around as well, So that does
have implications for how companies will be thinking about their
Shhelder return policies in the coming months. So that could
be a potential opportunity for income funds too.
Speaker 5 (18:17):
We're talking with a few analysts that are saying that
in light of these concerns around the AI bubble essentially
that they're thinking maybe India could present a good diversification
opportunity for twenty twenty six. You are you in that
camp as well?
Speaker 6 (18:33):
I am, I mean I would be in agreement with that.
And you know, India has quite a number of things
going for them at this point. You know, domestically they
do have they had their RBI cut last week. Inflation
does remain benign at this point, which does benefit household
spending going into next year. If we do see a
finalization of any trade deal with the US, so that
(18:55):
could also be positive for sentiment. So a number of
things that are lining up simply into next year. And then,
as you mentioned as well, just given how many of
the companies or listed companies in in India aren't as
driven by the AI trade as you would see in
the rest of the in the rest of the world.
It does present as a pretty good AI hedge in
(19:16):
the current times from a portfolio perspective, so I do
think for diversification reasons, India is actually a good allocation
to have at this time.
Speaker 1 (19:24):
That was Christina Woun from East Spring Investments speaking to
Bloomberg TV host Annabel Droolers and David nglace Here on
the Daybreak Asia Podcast. Thanks for listening to today's episode
of the Bloomberg Daybreak Asia Edition podcast. Each weekday, we
look at the story shaping markets, finance, and geopolitics in
(19:46):
the Asia Pacific. You can find us on Apple, Spotify,
the Bloomberg Podcast YouTube channel, or anywhere else you listen.
Join us again tomorrow for insight on the market moves
from Hong Kong to Singapore and Australia. I'm Doug Prisoner
and this is Bloomberg
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