October 2, 2025 • 19 mins
In the US, stocks just notched record highs thanks to the tech rally. That is despite an ongoing government shutdown. Meantime, emerging markets are facing challenges from political risks in South America to Asia's slowdown under tariffs. For more insights, we turn to Jeff Grills – Head of EM Debt at Aegon Asset Management.
We go to Japan, where the country will get its second prime minister in just over a year when the ruling Liberal Democratic Party holds a leadership election this weekend. The new leader will replace outgoing Prime Minister Shigeru Ishiba, who was forced to resign after a historic upper house election loss in July. For more, we heard from David Boling, Eurasia Group Director for Japan and Asian Trade. Boling spoke to Bloomberg's Shery Ahn and Avril Hong on the Asia Trade.
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Speaker 1 (00:00):
Bloomberg Audio Studios, podcasts, radio news.
Speaker 2 (00:10):
Welcome to the Daybreak Asia podcast. I'm Doug Risner. In
the US, there were no official government data given the shutdown,
so that left private economic surveys to kind of set
the tone for trading. Today's reading showed a fragile but
stable labor market, so we had equities overcoming early losses
and finishing at record highs. Meantime, global markets are now
(00:32):
looking ahead to this weekend's leadership vote in Japan's parliament.
The race between reformists in jiro Koizumi and right leading
Sunai Takeichi is too close to call in a moment.
We'll go to Tokyo for more, but we begin here
in the States. Joining me now is Jeff Grills. He
has head of EM debt at Agon Asset Management. Jeff,
(00:52):
thank you so much for making time to chat with me.
If you don't mind, I'd like to get your view
initially on the US interest rate environment. Since we know
that US rates drive so much of the story when
it comes to EM debt.
Speaker 3 (01:06):
Well, we currently think that rates are slightly undervalued. Our
view has been that all the tariff concerns that have
been going on for twenty twenty five, and what inflationary
impact that will have have been overstated. Tariffs are a
one time adjustment to prices other than just future changes,
(01:28):
and therefore we don't expect them to be inflationary. So
our view is that the Fed will have room to
cut rates. The ten year rate will have an ability
to continue to go down lower, not dramatically, but three
seventy five to three fifteen we're already seeing a decline
in ten year yields. The thirty year might have a
little bit more pressure, So we do think there'll be
a steeper curve just because of fiscal concerns, But overall,
(01:50):
the trend should be to rates being here to slightly
lower over the next twelve to eighteen months.
Speaker 2 (01:55):
So if that comes to pass, where what jurisdictions are
you looking at an EM right now that you think
would be the biggest beneficiaries.
Speaker 3 (02:05):
Well, the big challenge for emerging markets across which is
the same for credit markets in general, is that spreads
are at multi almost multi decade tights. I mean, we
really haven't been to these types of tights now since
two thousand and six, two thousand and seven, which everybody
we will call was led into a more difficult period,
which I'm not saying we're there, but so you know,
(02:27):
we continue to think that you're supposed to have a
combination of the stable credits that have that offers some value.
So in Latin America we still have a couple of
favorites that we have Columbia, which we'll get through their
elections next year, but spreads are wider as a result
of that, but we think they'll get through those elections.
So Colombia is one of our top overweights. Costa Rica
(02:48):
bounces that it's a much more stable, It's got growth
in the three and a half to four percent range,
so it will do well. Now within Latin America, Argentina
has been one that for the for those that are braver,
we've seen a big correct and prices in Argentina, with
Argentine bonds going down about twenty points. You've seen there's
been the headlines about the support from the US investment.
(03:08):
We think that Malay will survive the election, but that
is the big risk and we think that they'll be
upside into Argentina. So for the riskier segments or portfolios
that we manage, Argentina's where we're looking at least in
Latin America.
Speaker 2 (03:20):
So in the US today, the equity market closed it
record highs. There's a lot of debate in terms of
where we are in this cycle and whether or not
there's the potential here for a meaningful pullback in US
stocks given the concerns about valuation and the fact that
maybe the economy is slowing to an extent where you
have to kind of re evaluate the corporate darning story.
(03:41):
If we do see the market wobble and there is
a repatriation of foreign money out of the United States
and into other parts of the global market structure, does
EM necessarily come out on top. Are there opportunities that
you think foreign investors would take advantage of if they
(04:02):
removed money from the US.
Speaker 3 (04:05):
No, EM probably would not be the first place that
people would do in that type of scenario. I think
that people would probably go back to develop markets, looking
to Europe or other economies, at least the more stable
countries within Asia. I do think that it won't be
terrible for emerging markets. I mean, in past times of
(04:26):
that type of scenario that you just outlined, EM spreads
could widen one hundred and two hundred basis points. I
don't think that's the type of scenario that we're setting
up for. But also because I mean currently I don't
know that we're going to face major volatility, I mean
at least major downturn, because spending on AI is still
very strong. The PE ratios for some companies are very high,
(04:47):
but for the main main ones are you know, at
the upper end of the ranges, but they're not the
dot com type levels that we had. So I still
think EM probably does find but there would it would
definitely underperform and not be the first place to go.
Local markets have done very well, so I think if
you've got to pull back there, that would be the
first place where people would start to go back in
since the since the local market trade still is one
(05:07):
that most investors faive.
Speaker 2 (05:10):
So talk to me a little bit about how the
dollar figures into this. If we're talking about lower interest
rates in the United States and we're talking essentially about
a week er dollar, how does that correlate with your
EM trade.
Speaker 3 (05:23):
Well, I think we've set off a path of a
weeker dollar. Ever since the tariffs were first initiated back
in April of this year, we saw a big ten
percent correction. Now we've stabilized around that. But our view
is that the US dollar will likely weaken over the
next two to three years, but not on more than
a magnitude of two to five percent. So it's not
(05:44):
that this is going to be a massive flight from
the US dollar. The asset allocators, they just don't move
their money that fast. They do it and want to
two percent movements, they don't do it in ten percent movements.
So but if we do have that depreciation of the dollar,
I do, But as long as we have the low
rates that go along with that, I think for em
countries and issuers, including the corporate sector, they're going to
(06:08):
still be able to access capital markets at rates that
are still very attractive to them, with growth rates that
are higher than developed markets. So I think US dollar
assets will do fine. I do think again that you'll
see local markets they're more volatile, but local markets will
probably still benefit from that. So countries like Brazil and
Colombia and Peru should do fine. The Asian currencies probably
(06:31):
more balanced, but we should expect both US dollar assets
and local market assets to do somewhat favorably, at least
in a weaker dollar scenario.
Speaker 2 (06:39):
So I'd like to get your take on the China story.
We're in the Golden Week holiday right now. There's a
lot of pressure I think that the government is putting
on the consumer in China to really help ignite a
little bit more domestic demand. How do you see the
China story.
Speaker 4 (06:56):
China story is to us a two prong stories.
Speaker 3 (06:59):
So you have the old economy with the consumer property
sector and everything that has been going unfortunately wrong with that,
and we don't see the property sector necessiarily spurring on
growth too dramatically, and I think the consumer will be
directly impacted by that, and that's the frustration in what
you're seeing with President z. I do think that people
should not underestimate how much support the government has been
(07:23):
putting into the technology sector and into the things that
they want to exceed at. They are excelling in the
money that's been put into technology, They are excelling at
evs and other types of renewable energies, and so I
know there's been criticism in the past, but they are
definitely looking to grow and the numbers have shown that
(07:44):
they've had pretty substantial growth there, and so I think
that's helping them to offset their growth story at least
the weakness. It just needs to filter down to the
consumer so that the consumer can get confidence. There's just
really no place for them to go other than property sector,
which is keeping them somewhat less vigorous with their spending.
Speaker 2 (08:02):
So when we get to the trade story, a lot
of the focus tends to be on US China from
the US side, With a lot of the changes that
we have seen in economic policy from the administration, do
you have a concern of some type of diminishment in
the influence of the United States going forward, that other countries,
whether it's China, maybe even India to some extent, will
(08:24):
begin to kind of develop ways of conducting business that
are less reliant on the US.
Speaker 3 (08:32):
Well, I think they've already been doing that. I mean,
I think the actions of the US have clearly been
more protectionist and centrist. But this is something that's been
going on for a long time. I am not in
the camp of that. I think that the US is
in big trouble today. I think we are still a
great source of innovation, capitalism, the other things that will
go with it. But you've seen central banks start to
(08:54):
diversify out their reserves. You've seen people try to figure
out ways to diversify their reliance on the Take Latin
America for example, they were wholly reliant on the US
twenty to thirty years ago. Today they're now much more balanced,
about a third to third, a third to the US,
Europe and to Asia China. So I think that trend
will continue. The question will be who wins the technology race,
(09:17):
And it's gonna be an interesting one because China, as
I said, is putting a lot of investment into that.
The US has been great capital spirits and innovation, So
I think you will see that competition going there.
Speaker 4 (09:27):
The good news is they both are reliant on each other.
Speaker 3 (09:30):
So as much as we want to have this protectionist approach,
at least in terms of America, first we are reliant
on trade and we are reliant on investment, and so
I think that relationship is not going to go away.
And best And said today there might be some news
that can be positive out of China on that front.
Speaker 2 (09:44):
So what's the one thing that you are most concerned about?
Speaker 3 (09:49):
So the big thing that I get concerned about, well,
two things. One, we are having exceptional growth. Everybody has
been very cautious. Everybody's been very nervous about what will
growth look like. The market keeps surprising, at least the
GDP numbers keep surprising. So if we were to have
some sort of more prolonged slow down, if the labor
force was weaker, that would be something that would make
(10:09):
me nervous about risk valuations across most markets, including emerging
market debt. That's not our central view. The other one
that does worry me, and I'm a pretty positive on
AI and what we're going to do in terms of
the investment and the productivity boost that can have. But
while PE ratios, as I mentioned before, are not necessarily
my concern, the E is sometimes because if innovation, as
(10:32):
it normally does, figures out the way to produce things
at a lower cost, then that E can go down.
Speaker 4 (10:37):
Right, So the big Mega, the mag.
Speaker 3 (10:39):
Sevens, the invidious of the world, which have a great
monopoly and a great ability to do this, If somebody
eventually does the true deep seek offset to that, you
could start to see some concerns about, Okay, what does
that mean for earnings and what is that? I think
that's just a correction. I think the long term trend
is still to stay in, but that could be a
correction that could cause volatility for markets.
Speaker 2 (10:59):
Jeff will leave it there, Thank you so very much.
Jeff Grills is head of em Debt at Aigon Asset Management.
Joining us here on the Daybreak Asia podcast. Welcome back
to the Daybreak Asia Podcast. I'm Doug Prisner. Japan is
set to elect its second prime minister in over a
(11:20):
year this weekend, when the ruling Liberal Democratic Party holds
a leadership vote.
Speaker 5 (11:26):
Now.
Speaker 2 (11:26):
Recent opinion polls show Agriculture Minister Sinjiro Koizumi and former
Economic Security Minister Sanae taka Ichi are neck and neck.
The new leader will replace outgoing Prime Minister Shaghiro Ishiba,
he was forced to resign after an historic Upper House
election loss in July. For more, we heard from David Bowling.
(11:46):
He is the Eurasia Group Director for Japan and Asia Trade.
Bowling spoke to Bloomberg TV host Cherry On and Avril
Hong on the Asia.
Speaker 1 (11:55):
Trade David, great to have you with us. How different
could Japan be depending on who wins this leadership election tomorrow?
Speaker 5 (12:05):
Thank you for having me well. I think it's clear
that Koizumi is the leader here among the five and
he's emphasized the importance of dealing with inflation. And I
think that's the big lesson that we learned from the
Upper House elections and why the LDP lost the Upper
(12:26):
House is that the Japanese public is very irritated with inflation.
So I think that all of the candidates, whether it's
Koizumi or Takaichi or Hayashi, and those are really the
three who are in contention at this point, are going
to spend a lot of time focusing on inflation. The
(12:48):
only piece playbook so far though, has been that it
is relied on cash handouts to households who are suffering
from inflation, and I think the Japanese public is tired
of that. What they would probably really like to see
is a cut in the consumption tax, but the LDP
is opposing that. The opposition party support that. But the
(13:11):
LDP is in somewhat of a difficult position because it
doesn't want to cut the consumption tax, which is what
the public wants, but at the same time, it does
want to address inflation because it's a real incumbent killer
and they know that.
Speaker 1 (13:27):
I mean, you mentioned Kavnat, secretary of Hayashi who would
be a continuity candidate from prime minister issue, but who
himself surprising the election last year which led to the
nik tanking the next day. Could we see a surprise
and would that mean a change, a significant change in
terms of policy or perhaps continuity as well.
Speaker 5 (13:48):
I mean, let's remember this is an LDP presidential election,
and so the candidates are largely in agreement. I think
when it comes to economic policy and the direction for
the country, Takaichi is somewhat a different one because she's
been a long time supporter of avenamics, which is, you know,
(14:11):
loose fiscal policy uh and loose monetary policy. So she's
certainly won to watch and I think that if she
did prevail on Saturday, that you could see, you know,
some reaction from the markets because of her her winning
and her her different her different views. I don't really
(14:32):
think that abnomics is the right prescription for Japan right now.
It has inflation. Abynomics was was there to deal with deflation,
and I think that Takaichi even recognizes that some if
if you saw that some of the debate forms that
they had, even she moderated somewhat on her positions about
spending and sounded a bit more moderate. I think she
(14:53):
has to appeal to the moderates and the LDP to
win because the Conservatives, the ave faction that she relied
on last year, has splintered and has smaller numbers.
Speaker 6 (15:08):
Not just appeal to lawmakers, but also potentially for forming
the coalition later on with working along with opposition. Who
do you think has a better sense of engaging with
those parties well, I.
Speaker 5 (15:26):
Think all of the candidates in the debate forums have
recognized that the LDP and Comeato have to expand their coalition. Right.
They do not have a majority in the lower House,
which is stronger of the two houses. They do not
have a majority and the upper House, so they are
going to have to move forward, and all of the
(15:46):
candidates have spoken about the importance of moving forward to
build the coalition. I think Takaichi has talked in terms
of moving a bit more quickly than the other candidates,
But I would see that any of the cans who
prevail will move pretty quickly to establish negotiations. I think
(16:07):
there's negotiations going on right now. I think the party
that is most likely to become a coalition member would
be the Innovation Party. The Osaka based party. They are
aligned with the LDP, particular on defense and national security issues,
and you know, I think they're at a point now
(16:27):
where they recognize they are not probably going to achieve
national strength, that they will remain a regional party, and
this probably makes them more willing to join the coalition
in order to have some influence, whereas the Democratic Party
for the People, I think is the other opposition parties,
is still on the rise and probably less interested in
(16:49):
joining the coalition.
Speaker 6 (16:53):
David wondering, also, when you look at the debt poths,
how do things look in terms of progress? You outline
some of the potential cash handouts that voters are perhaps
frustrated with. Take that along with how a consumption tax
cut doesn't seem likely. What are you seeing in terms
(17:16):
of perhaps what the progress might look like. I think
it's tough.
Speaker 5 (17:22):
I mean, I'll be honest, I think it's a very
tough environment. We all know that Japan's debt to GDP
ratio is two hundred and fifty percent, and this limits
its ability to do a whole lot. It also is
having to spend more money on defense. It is on
(17:44):
the path, you know, to reaching two percent of GDP
by twenty twenty seven. I think the LDP intends to
keep pushing for that. I think the Japanese public supports
increased spending on defense, but when you ask the Japanese
public whether they want their taxes raised to do that,
(18:06):
they're less less enthusiastic about that. So the LDP isn't
in a difficult position when you think about the current
fiscal constraints that it it's dealing with. I mean, these
are built up over the years, largely because the LDP
has been quite willing to spend more money through supplementary budgets,
(18:29):
which seem to become almost you know, an annual annual thing.
And the LDP is talking about that now for the
for the for the October legislative session as well.
Speaker 1 (18:43):
Yeah, and of course complicating the picture of normalization by
the Bank of Japan. David Bowling, Good to have you
with us, Director of Japan and the Asian Trade of
the Eurasia Group.
Speaker 2 (18:53):
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 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
(19:16):
and Australia. I'm Doug Prisoner and this is Bloomberg
Bloomberg Audio Studios, podcasts, radio news.
Speaker 2 (00:10):
Welcome to the Daybreak Asia podcast. I'm Doug Risner. In
the US, there were no official government data given the shutdown,
so that left private economic surveys to kind of set
the tone for trading. Today's reading showed a fragile but
stable labor market, so we had equities overcoming early losses
and finishing at record highs. Meantime, global markets are now
(00:32):
looking ahead to this weekend's leadership vote in Japan's parliament.
The race between reformists in jiro Koizumi and right leading
Sunai Takeichi is too close to call in a moment.
We'll go to Tokyo for more, but we begin here
in the States. Joining me now is Jeff Grills. He
has head of EM debt at Agon Asset Management. Jeff,
(00:52):
thank you so much for making time to chat with me.
If you don't mind, I'd like to get your view
initially on the US interest rate environment. Since we know
that US rates drive so much of the story when
it comes to EM debt.
Speaker 3 (01:06):
Well, we currently think that rates are slightly undervalued. Our
view has been that all the tariff concerns that have
been going on for twenty twenty five, and what inflationary
impact that will have have been overstated. Tariffs are a
one time adjustment to prices other than just future changes,
(01:28):
and therefore we don't expect them to be inflationary. So
our view is that the Fed will have room to
cut rates. The ten year rate will have an ability
to continue to go down lower, not dramatically, but three
seventy five to three fifteen we're already seeing a decline
in ten year yields. The thirty year might have a
little bit more pressure, So we do think there'll be
a steeper curve just because of fiscal concerns, But overall,
(01:50):
the trend should be to rates being here to slightly
lower over the next twelve to eighteen months.
Speaker 2 (01:55):
So if that comes to pass, where what jurisdictions are
you looking at an EM right now that you think
would be the biggest beneficiaries.
Speaker 3 (02:05):
Well, the big challenge for emerging markets across which is
the same for credit markets in general, is that spreads
are at multi almost multi decade tights. I mean, we
really haven't been to these types of tights now since
two thousand and six, two thousand and seven, which everybody
we will call was led into a more difficult period,
which I'm not saying we're there, but so you know,
(02:27):
we continue to think that you're supposed to have a
combination of the stable credits that have that offers some value.
So in Latin America we still have a couple of
favorites that we have Columbia, which we'll get through their
elections next year, but spreads are wider as a result
of that, but we think they'll get through those elections.
So Colombia is one of our top overweights. Costa Rica
(02:48):
bounces that it's a much more stable, It's got growth
in the three and a half to four percent range,
so it will do well. Now within Latin America, Argentina
has been one that for the for those that are braver,
we've seen a big correct and prices in Argentina, with
Argentine bonds going down about twenty points. You've seen there's
been the headlines about the support from the US investment.
(03:08):
We think that Malay will survive the election, but that
is the big risk and we think that they'll be
upside into Argentina. So for the riskier segments or portfolios
that we manage, Argentina's where we're looking at least in
Latin America.
Speaker 2 (03:20):
So in the US today, the equity market closed it
record highs. There's a lot of debate in terms of
where we are in this cycle and whether or not
there's the potential here for a meaningful pullback in US
stocks given the concerns about valuation and the fact that
maybe the economy is slowing to an extent where you
have to kind of re evaluate the corporate darning story.
(03:41):
If we do see the market wobble and there is
a repatriation of foreign money out of the United States
and into other parts of the global market structure, does
EM necessarily come out on top. Are there opportunities that
you think foreign investors would take advantage of if they
(04:02):
removed money from the US.
Speaker 3 (04:05):
No, EM probably would not be the first place that
people would do in that type of scenario. I think
that people would probably go back to develop markets, looking
to Europe or other economies, at least the more stable
countries within Asia. I do think that it won't be
terrible for emerging markets. I mean, in past times of
(04:26):
that type of scenario that you just outlined, EM spreads
could widen one hundred and two hundred basis points. I
don't think that's the type of scenario that we're setting
up for. But also because I mean currently I don't
know that we're going to face major volatility, I mean
at least major downturn, because spending on AI is still
very strong. The PE ratios for some companies are very high,
(04:47):
but for the main main ones are you know, at
the upper end of the ranges, but they're not the
dot com type levels that we had. So I still
think EM probably does find but there would it would
definitely underperform and not be the first place to go.
Local markets have done very well, so I think if
you've got to pull back there, that would be the
first place where people would start to go back in
since the since the local market trade still is one
(05:07):
that most investors faive.
Speaker 2 (05:10):
So talk to me a little bit about how the
dollar figures into this. If we're talking about lower interest
rates in the United States and we're talking essentially about
a week er dollar, how does that correlate with your
EM trade.
Speaker 3 (05:23):
Well, I think we've set off a path of a
weeker dollar. Ever since the tariffs were first initiated back
in April of this year, we saw a big ten
percent correction. Now we've stabilized around that. But our view
is that the US dollar will likely weaken over the
next two to three years, but not on more than
a magnitude of two to five percent. So it's not
(05:44):
that this is going to be a massive flight from
the US dollar. The asset allocators, they just don't move
their money that fast. They do it and want to
two percent movements, they don't do it in ten percent movements.
So but if we do have that depreciation of the dollar,
I do, But as long as we have the low
rates that go along with that, I think for em
countries and issuers, including the corporate sector, they're going to
(06:08):
still be able to access capital markets at rates that
are still very attractive to them, with growth rates that
are higher than developed markets. So I think US dollar
assets will do fine. I do think again that you'll
see local markets they're more volatile, but local markets will
probably still benefit from that. So countries like Brazil and
Colombia and Peru should do fine. The Asian currencies probably
(06:31):
more balanced, but we should expect both US dollar assets
and local market assets to do somewhat favorably, at least
in a weaker dollar scenario.
Speaker 2 (06:39):
So I'd like to get your take on the China story.
We're in the Golden Week holiday right now. There's a
lot of pressure I think that the government is putting
on the consumer in China to really help ignite a
little bit more domestic demand. How do you see the
China story.
Speaker 4 (06:56):
China story is to us a two prong stories.
Speaker 3 (06:59):
So you have the old economy with the consumer property
sector and everything that has been going unfortunately wrong with that,
and we don't see the property sector necessiarily spurring on
growth too dramatically, and I think the consumer will be
directly impacted by that, and that's the frustration in what
you're seeing with President z. I do think that people
should not underestimate how much support the government has been
(07:23):
putting into the technology sector and into the things that
they want to exceed at. They are excelling in the
money that's been put into technology, They are excelling at
evs and other types of renewable energies, and so I
know there's been criticism in the past, but they are
definitely looking to grow and the numbers have shown that
(07:44):
they've had pretty substantial growth there, and so I think
that's helping them to offset their growth story at least
the weakness. It just needs to filter down to the
consumer so that the consumer can get confidence. There's just
really no place for them to go other than property sector,
which is keeping them somewhat less vigorous with their spending.
Speaker 2 (08:02):
So when we get to the trade story, a lot
of the focus tends to be on US China from
the US side, With a lot of the changes that
we have seen in economic policy from the administration, do
you have a concern of some type of diminishment in
the influence of the United States going forward, that other countries,
whether it's China, maybe even India to some extent, will
(08:24):
begin to kind of develop ways of conducting business that
are less reliant on the US.
Speaker 3 (08:32):
Well, I think they've already been doing that. I mean,
I think the actions of the US have clearly been
more protectionist and centrist. But this is something that's been
going on for a long time. I am not in
the camp of that. I think that the US is
in big trouble today. I think we are still a
great source of innovation, capitalism, the other things that will
go with it. But you've seen central banks start to
(08:54):
diversify out their reserves. You've seen people try to figure
out ways to diversify their reliance on the Take Latin
America for example, they were wholly reliant on the US
twenty to thirty years ago. Today they're now much more balanced,
about a third to third, a third to the US,
Europe and to Asia China. So I think that trend
will continue. The question will be who wins the technology race,
(09:17):
And it's gonna be an interesting one because China, as
I said, is putting a lot of investment into that.
The US has been great capital spirits and innovation, So
I think you will see that competition going there.
Speaker 4 (09:27):
The good news is they both are reliant on each other.
Speaker 3 (09:30):
So as much as we want to have this protectionist approach,
at least in terms of America, first we are reliant
on trade and we are reliant on investment, and so
I think that relationship is not going to go away.
And best And said today there might be some news
that can be positive out of China on that front.
Speaker 2 (09:44):
So what's the one thing that you are most concerned about?
Speaker 3 (09:49):
So the big thing that I get concerned about, well,
two things. One, we are having exceptional growth. Everybody has
been very cautious. Everybody's been very nervous about what will
growth look like. The market keeps surprising, at least the
GDP numbers keep surprising. So if we were to have
some sort of more prolonged slow down, if the labor
force was weaker, that would be something that would make
(10:09):
me nervous about risk valuations across most markets, including emerging
market debt. That's not our central view. The other one
that does worry me, and I'm a pretty positive on
AI and what we're going to do in terms of
the investment and the productivity boost that can have. But
while PE ratios, as I mentioned before, are not necessarily
my concern, the E is sometimes because if innovation, as
(10:32):
it normally does, figures out the way to produce things
at a lower cost, then that E can go down.
Speaker 4 (10:37):
Right, So the big Mega, the mag.
Speaker 3 (10:39):
Sevens, the invidious of the world, which have a great
monopoly and a great ability to do this, If somebody
eventually does the true deep seek offset to that, you
could start to see some concerns about, Okay, what does
that mean for earnings and what is that? I think
that's just a correction. I think the long term trend
is still to stay in, but that could be a
correction that could cause volatility for markets.
Speaker 2 (10:59):
Jeff will leave it there, Thank you so very much.
Jeff Grills is head of em Debt at Aigon Asset Management.
Joining us here on the Daybreak Asia podcast. Welcome back
to the Daybreak Asia Podcast. I'm Doug Prisner. Japan is
set to elect its second prime minister in over a
(11:20):
year this weekend, when the ruling Liberal Democratic Party holds
a leadership vote.
Speaker 5 (11:26):
Now.
Speaker 2 (11:26):
Recent opinion polls show Agriculture Minister Sinjiro Koizumi and former
Economic Security Minister Sanae taka Ichi are neck and neck.
The new leader will replace outgoing Prime Minister Shaghiro Ishiba,
he was forced to resign after an historic Upper House
election loss in July. For more, we heard from David Bowling.
(11:46):
He is the Eurasia Group Director for Japan and Asia Trade.
Bowling spoke to Bloomberg TV host Cherry On and Avril
Hong on the Asia.
Speaker 1 (11:55):
Trade David, great to have you with us. How different
could Japan be depending on who wins this leadership election tomorrow?
Speaker 5 (12:05):
Thank you for having me well. I think it's clear
that Koizumi is the leader here among the five and
he's emphasized the importance of dealing with inflation. And I
think that's the big lesson that we learned from the
Upper House elections and why the LDP lost the Upper
(12:26):
House is that the Japanese public is very irritated with inflation.
So I think that all of the candidates, whether it's
Koizumi or Takaichi or Hayashi, and those are really the
three who are in contention at this point, are going
to spend a lot of time focusing on inflation. The
(12:48):
only piece playbook so far though, has been that it
is relied on cash handouts to households who are suffering
from inflation, and I think the Japanese public is tired
of that. What they would probably really like to see
is a cut in the consumption tax, but the LDP
is opposing that. The opposition party support that. But the
(13:11):
LDP is in somewhat of a difficult position because it
doesn't want to cut the consumption tax, which is what
the public wants, but at the same time, it does
want to address inflation because it's a real incumbent killer
and they know that.
Speaker 1 (13:27):
I mean, you mentioned Kavnat, secretary of Hayashi who would
be a continuity candidate from prime minister issue, but who
himself surprising the election last year which led to the
nik tanking the next day. Could we see a surprise
and would that mean a change, a significant change in
terms of policy or perhaps continuity as well.
Speaker 5 (13:48):
I mean, let's remember this is an LDP presidential election,
and so the candidates are largely in agreement. I think
when it comes to economic policy and the direction for
the country, Takaichi is somewhat a different one because she's
been a long time supporter of avenamics, which is, you know,
(14:11):
loose fiscal policy uh and loose monetary policy. So she's
certainly won to watch and I think that if she
did prevail on Saturday, that you could see, you know,
some reaction from the markets because of her her winning
and her her different her different views. I don't really
(14:32):
think that abnomics is the right prescription for Japan right now.
It has inflation. Abynomics was was there to deal with deflation,
and I think that Takaichi even recognizes that some if
if you saw that some of the debate forms that
they had, even she moderated somewhat on her positions about
spending and sounded a bit more moderate. I think she
(14:53):
has to appeal to the moderates and the LDP to
win because the Conservatives, the ave faction that she relied
on last year, has splintered and has smaller numbers.
Speaker 6 (15:08):
Not just appeal to lawmakers, but also potentially for forming
the coalition later on with working along with opposition. Who
do you think has a better sense of engaging with
those parties well, I.
Speaker 5 (15:26):
Think all of the candidates in the debate forums have
recognized that the LDP and Comeato have to expand their coalition. Right.
They do not have a majority in the lower House,
which is stronger of the two houses. They do not
have a majority and the upper House, so they are
going to have to move forward, and all of the
(15:46):
candidates have spoken about the importance of moving forward to
build the coalition. I think Takaichi has talked in terms
of moving a bit more quickly than the other candidates,
But I would see that any of the cans who
prevail will move pretty quickly to establish negotiations. I think
(16:07):
there's negotiations going on right now. I think the party
that is most likely to become a coalition member would
be the Innovation Party. The Osaka based party. They are
aligned with the LDP, particular on defense and national security issues,
and you know, I think they're at a point now
(16:27):
where they recognize they are not probably going to achieve
national strength, that they will remain a regional party, and
this probably makes them more willing to join the coalition
in order to have some influence, whereas the Democratic Party
for the People, I think is the other opposition parties,
is still on the rise and probably less interested in
(16:49):
joining the coalition.
Speaker 6 (16:53):
David wondering, also, when you look at the debt poths,
how do things look in terms of progress? You outline
some of the potential cash handouts that voters are perhaps
frustrated with. Take that along with how a consumption tax
cut doesn't seem likely. What are you seeing in terms
(17:16):
of perhaps what the progress might look like. I think
it's tough.
Speaker 5 (17:22):
I mean, I'll be honest, I think it's a very
tough environment. We all know that Japan's debt to GDP
ratio is two hundred and fifty percent, and this limits
its ability to do a whole lot. It also is
having to spend more money on defense. It is on
(17:44):
the path, you know, to reaching two percent of GDP
by twenty twenty seven. I think the LDP intends to
keep pushing for that. I think the Japanese public supports
increased spending on defense, but when you ask the Japanese
public whether they want their taxes raised to do that,
(18:06):
they're less less enthusiastic about that. So the LDP isn't
in a difficult position when you think about the current
fiscal constraints that it it's dealing with. I mean, these
are built up over the years, largely because the LDP
has been quite willing to spend more money through supplementary budgets,
(18:29):
which seem to become almost you know, an annual annual thing.
And the LDP is talking about that now for the
for the for the October legislative session as well.
Speaker 1 (18:43):
Yeah, and of course complicating the picture of normalization by
the Bank of Japan. David Bowling, Good to have you
with us, Director of Japan and the Asian Trade of
the Eurasia Group.
Speaker 2 (18:53):
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 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
(19:16):
and Australia. I'm Doug Prisoner and this is Bloomberg
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