June 30, 2025 • 20 mins
Asian stocks are poised for a cautious open as investors weighed the buoyant mood on Wall Street with lingering concerns over the global impact of President Donald Trump's tariff agenda. Equity-index futures pointed to a decline in Tokyo as Trump threatened to impose a fresh tariff level on Japan. Contracts for the S&P 500 edged down 0.1% after the index notched its best quarter since December 2023 on Monday, with technology shares leading. Wall Street's bulls drove stocks to all-time highs at the end of a solid quarter amid hopes the US is moving closer to reaching concrete deals with its top trading partners. We break down the forces driving the day's price action with Burns McKinney, Managing Director and Senior Portfolio Manager at NFJ Investment Group.
Plus - with thousands of generative AI tools flooding the market and firms slashing prices to zero, Chinese startups are battling not just global rivals - but each other. We explore the challenges facing the so-called "Little Dragons," the role of state support, and why monetizing AI might be the industry's biggest unsolved puzzle with Catherine Thorbecke, Asia Tech Columnist for Bloomberg Opinion.
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Speaker 1 (00:02):
Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2 (00:10):
Welcome to the Bloomberg day Break Asia Podcast. I'm Doug Chrisner.
So markets in Asia are looking to mimic Monday's performance
in the US, where the bulls drove equities to all
time highs. Also today the question of whether fierce competition
in China's AI industry is muddying the long term outlook
for the sector. In a moment or two, we'll be
(00:30):
joined by Bloomberg Opinion columnist Catherine Thorbeck. But we begin
this morning with markets. As I mentioned, equities in the
States at all time highs on the final day of
the second quarter. So now the S and P five
hundred is up roughly twenty five percent from its April lows,
its best quarter since December twenty twenty three. Today we
broke above sixty two hundred for the first time, tech
(00:53):
shares leading the charge. And for a closer look at
the price section, I'm joined now by Burns McKinney. He
is managing to arect doctor also senior portfolio manager at
NFJ Investment Group. Burns, thank you so much for making
time to chat with me. What's your view on the
rally that we saw in Q two.
Speaker 3 (01:11):
It's it's it's just amazing.
Speaker 4 (01:12):
How you know, if an investor went to sleep at
the end of the first quarter and then woke up
at the end of the second quarter, they think, hey,
this has been a pretty quiet quarter.
Speaker 3 (01:20):
And not a lot has happened.
Speaker 4 (01:21):
But you know, we've been on a pretty wild round trip,
and you know, really it's it's at least pretty simple
to explain. I mean, the market's you know, really got
pummeled after the April second announcement of the tariffs, the
Liberation Day or obliteration Day, if you will, And you know,
as the markets have kind of gained more and more
confidence that okay, you know what, the president really does
(01:44):
care what the markets think, and a lot of these
tariffs won't be as bad as feared, they rebounded really
just back where they were. That said, you know, the
risk awards, you know, may be a little bit worse
than it was at the beginning of the period, simply
because you know, despite the fact that the tariffs may
not be as bad as once feared, you're still looking
(02:04):
at levels that will probably be three to four times
anything that we've seen in our lifetime.
Speaker 2 (02:10):
Last Friday strategist over at Bank of America, we're warning
that there is an increasing risk of a speculative bubble inequities.
Is that something you share.
Speaker 3 (02:21):
Yeah, Bubble is a word that I think.
Speaker 4 (02:23):
It gets clicks, It gets people excited. You know, it's
hard to say there's a bubble. But that said, you know,
equity markets do look a bit richly valued. You're looking
at you know, the US markets trading at about twenty
three times earnings. That's about a third above their long
term average valuation. And it's really only been more expensive
(02:44):
than this about twenty percent of the time over the
last twenty five years. And so stocks are rich. You know,
looking forward, it's hard to see multiple expansion from here
for an investor in the broader market. So you're just
going to have to rely on good old fashion earnings growth,
and even that's at risk given the fact that you know,
tariffs could squeeze margins. And so, you know, looking looking backward,
(03:05):
you in the last couple of years, you know, I say,
last year, we're sort of like throwing the football down
the field forty yard bomb. Year before that, forty yard
hail Mary. You know, going forward, investors probably kind of
looking at the good old fashioned, you know, three yards
in a cloud of dust, But there are opportunities to
be had beneath the surface.
Speaker 2 (03:22):
So you mentioned margins. Are margins really the biggest test
in the upcoming earning season.
Speaker 4 (03:28):
It's definitely what investors are going to be keeping an
eye on, and that's what they're going to be listening
for in all the earnings calls.
Speaker 3 (03:34):
I mean in general, you know, you know, in.
Speaker 4 (03:37):
A capitalistic society, margins are one of the most mean
reverting stats out there. And you know, even prior to
the current policy environment, corporate profit margins were really near
all time highs. And now when you factor in the
fact that we've seen tariffs start to go into place,
we haven't necessarily seen a lot of those increases in
(03:59):
costs be passed on to consumers, and so there's really
nowhere for that to go.
Speaker 3 (04:04):
But basically squeeze.
Speaker 4 (04:06):
Profit margins a little bit on the corporate environment, and
that's certainly what investors are going to be focused on.
Speaker 2 (04:10):
Maybe we can talk a little bit about the dollar.
For the month of June, I think the Bloomberg Dollar
Spot index was down about two percent, and I think
right now we're at about the lowest level since March
twenty twenty two. I'm wondering whether you think this is
an illustration of diminished appeal of US assets globally. And
if that's the case, why is.
Speaker 4 (04:31):
That there's definitely been more and more discussion about a
sort of an end to the period of US or
American exceptionalism. You know, we've been in an environment whereby
you know, US stocks ab outperformed global global global markets
outside the United States by over the last decade by
(04:51):
you know, one hundred percentage points. And you know a
lot of that's had to do with the innovation and
environment embracing in the United States. But you know, as
investors have seen certain threats to that again, you know,
trade wars. You know, we we say trade war is
easy to win. You know, there's really aren't. There might
be relative winners in a trade war, but you know,
(05:13):
basically on absolute basis, everyone loses. And so you know,
between that between you know, geopolitical risk and you know,
whether it's just smaller risks like threats to fit into independence. Uh,
and investors are starting to look elsewhere and you know,
you've seen lower evaluations overseas for a long time, but
you haven't necessarily had the catalysts to get investors to
(05:34):
jump into those valuations. So it definitely makes a case
for uh, you know, maybe investors diversifying their portfolios. Maybe
you know, again not necessarily selling the US, but you know,
maybe you know, diversifying away from your winners and maybe
you know, adding to some of your losers.
Speaker 2 (05:49):
So the equity market seems to be telling us we
will avoid a recession here in the US. The bond
market seems to be suggesting that inflation is not an issue.
Right now, does the bond market have it right?
Speaker 3 (06:02):
Yeah?
Speaker 4 (06:03):
Well, first, yeah, I hate to admit this as an
equity investor, but the bond market usually gets a little
bit more correct than equity managers such as ourselves. But
you know, inflation, you know, you really have seen you know,
I think that the FED was fairly successful in you know,
threading that needle and navigating you know, cutting job openings
(06:24):
without cutting jobs, and taming inflation and just keeping you know,
the most important thing they had to do was keep
investor expectations of inflation down because that's the type of
thinking that can just spiral out of control. And you know,
we're in a world now where you know, the Fed's
preferred measure, the you know, the core PCEE for inflation
is now running roughly you know, two and a half percent,
(06:46):
and if in fact, if you look at the last
three months and annualize those, it's really right at the
FEDS two percent target.
Speaker 3 (06:52):
And so inflation has been coming down.
Speaker 4 (06:54):
You know. One of the big fears has been that
tariffs might you know, cause resurgence in inflation. We haven't
seen that yet, and so it does seem that you know,
you know, pricing increases are probably a bit behind us,
notwithstanding whether we have a geopolitical shock that might actually
drive up energy prices in the their term.
Speaker 2 (07:13):
So I think we can agree that a lot of
the gains that we have seen in stocks have been
built on hope that the FED is going to resume
rate cuts at some point. Do you have a sense
of when that may happen? Is it September? Perhaps a
little sooner, maybe July?
Speaker 4 (07:26):
Yeah, yeah, I think what the markets are pricing in
is something along the lines of September or October.
Speaker 3 (07:32):
You know.
Speaker 4 (07:32):
The great thing about this, and this is the reason
the markets have rallied, is that there's you know, there's
there's two reasons the Fed would cut rates. One is,
you know, in case of emergency, you see, you know
something has been broken, you know you're you're heading towards
a recession. And the other reason is simply when they
determine that the FED rate adjusted for inflation has just
gotten restricted because of the fact that they've been winning
(07:55):
that warworth inflation. So if you see a continuation of
that Fed cutting cycle, this is actually for the good reason,
the good news reason for the latter, as far as
you know, when they cut them, whether it's July, September, October,
you know, really what investors should focus on is not
necessarily what the Fed does next, but what they do last,
insofar as where they ultimates ultimately settle.
Speaker 3 (08:17):
And this is.
Speaker 4 (08:17):
Probably you know, if you're looking for a contrarian view,
it would be that given the fact that inflation's coming down,
but just due to deglobalization, it might not go back
to the you know, entirely to the levels that it's
been over the last ten fifteen years. And as such,
you know, when you know, the FED resumes cutting, they
might not be able to get rates down to that
(08:38):
year zero level that we've been at which you know,
if rates are just a little bit higher for longer,
that really makes a case for investors. Well, how do
I respond to this? It means go short duration with inequities,
go for value stocks, and specifically companies that are paying
and raising dividends.
Speaker 2 (08:54):
Are those the key tenants of your strategy at this point?
Speaker 4 (08:59):
You know, we're we're looking for relative valuation regardless of markets.
We don't like to try to time markets. We you know,
we like to stay fully invested at all times within
the framework diversification. But you know, we've always made the
case that you know, the some of the best strategies
through time have been those that have focused on companies
that are returning capital to shareholder, that are shareholder friendly,
(09:22):
and that means companies that are either buying back shares
or paying dividends.
Speaker 2 (09:26):
What about opportunities offshore? Given everything that you're describing, I'm
wondering whether you find the same thing to be true
let's say in Asia or in Europe.
Speaker 4 (09:35):
You know, I mean absolutely, I think at this point
in time, you've you know, I noted ago that you know,
whereas the S and P five hundreds trade and at
twenty three times earnings, the stocks in Europe are trading
at like fourteen times earnings. That valuation gap is as
wide as it's been in the last you know, ten
or fifteen years. And you know, again, investors have been
looking for a catalyst, and you know, that catalyst may
(09:57):
be the fact that you have overseas and place is
like Europe, a delayed response to interest rate cuts there
they have, you know, because inflation has really pulled back
there and they have been able to resume cutting interest rates.
You have that, but the policy environment is also looking
a little bit more favorable on the fiscal side. You're
starting to see signs of life there, whereas places like
(10:18):
Germany have basically been removing some of their debt caps
and starting to focus on infrastructure and defense spending. The
same goes for France and other countries, and so that
could be maybe that catalyst to you know, sort of
kickstart a reversion of the mean in places like Europe.
And you know, one other place to you know, investors
to look or at least for diversification purposes, is the
(10:38):
fact that you noted a few minutes ago the weakening
of the dollar. Historically speaking, when the dollar weakens, that
bodes well for emerging markets equities, so it makes a
great case for getting a little bit of exposure there too.
Speaker 2 (10:50):
Burns will leave it there. Thank you so very much.
Burns McKinney is managing director also senior portfolio manager at
NFJ Investment Group. Joining us here on the Daybreak Asia podcast.
Welcome back to the Daybreak Asia Podcast. I'm Doug Chrisner.
(11:12):
China's crowded AI landscape is not only fueling rapid innovation,
but fierce competition as well, and it's that competition that
seems to be dragging down profits. Let's check in with
Bloomberg opinion columnist Katherine Thorbek. She covers all things tech
in Asia, and she joins us from our bureau in Tokyo. Catherine,
(11:32):
thank you for making time to chat with me about this.
Give me a sense of perspective on this. How recent
has this kind of tension between innovation and competition been
developing in AI in China?
Speaker 1 (11:44):
This is really a story we've seen play out many
times in the history of China's tech sector. You know,
competition is notoriously fierce in the world's second largest economy,
So whenever a new craze emerges there's always just so
many rivals that sort of come out of the woodwork
ready to pounce, And for example, we saw this in
the food delivery market. There's some food delivery wars that
were going on, and it really became a race to
(12:05):
the bottom when it comes to pricing. You know, we
saw bubble t being sold for less than twenty five
cents last month, and we also SAWT in the electric
vehicle market, which is sort of left behind a trail
of zombie cars. And now these sort of same forces
are really in full swing in the booming artificial intelligence industry,
and these AI firms have really been focused on this
sort of classic playbook, which is scaling up their user
(12:27):
bases and racing for market share, and the result has
sort of been this rat race. You know, they're at
each other's throats when it comes to pricing, and it's
really become a race to the bottom. But I think
a key difference here is that nobody has actually figured
out has really cracked the key to getting consumers to
pay for these services. So it makes the issue of
monetization or a path to profitability seem a really long
(12:48):
way off. And this is really unique to China's tech sector.
You know, in the States, in Silicon Valley, there's sort
of a smaller number of large players that really dominate
the market and they really have control over pricing, whereas
in China, you know, there's just so many smaller players
and as well as the big tech companies, So competition
has been really really fierce, and I'm just not sure
(13:09):
how sustainable it is.
Speaker 2 (13:10):
I'm just wondering. When you talk about big tech companies,
I think of Ali Baba, and you would expect maybe
that company or companies like Baba to have some sort
of advantage.
Speaker 1 (13:20):
That's right. So Ali Baba and Byteedance and Tencent, these
sort of big tech players, I think they really can
play the long game and they can sort of sort
of weather this storm a little bit better than these
so called little dragons, which are these sort of startups
that are really driving innovation in China's tech ecosystem. And
so I think the big tech players are definitely in
a better position. But I also think that's a little
(13:41):
bit unfortunate because we really see sort of the biggest
breakthroughs in AI come from these smaller startups, which I
think are at higher risk.
Speaker 2 (13:48):
Here does the government have a view on what's happening,
do you think so.
Speaker 1 (13:51):
I think post deep Seek, there's just been a lot
of exuberance. There's been a lot of top down support
for the AI sector, and so it's sort of driving
the and in some ways it's a double edged sword,
you know, because there's so much excitement for AI and
so much top down support, it has really been driving
widespread adoption of AI services and AI tools throughout China,
which the government wants. But I think it definitely puts
(14:13):
these companies in a crunch when it comes to sort
of figuring out how to make money.
Speaker 2 (14:17):
So when you talk about adoption, is it primarily on
the part of consumers using more AI related devices or
is it in industry as well?
Speaker 1 (14:26):
That's right, So I think consumers definitely demand for AI
services and tools is red hot. You know, we see
so many chatbots, so many people using deep seak across
you know, local governments and across even hospitals. So I
think the adoption has been widespread. And the way I
kind of look at it when we talk about the
sort of top down support was you know, I'm not
going to remember which US president it was, but there
(14:47):
was a President that put electricity in the White House
to sort of signal that you know, this technology is
safe and we can, you know, rapidly adopt it. And
I think there have been a lot of top down
signals coming from Beijing and coming from Hijinping about how
AI is, you know, the future, and we shouldn't be
afraid of it. And I think we've really seen that
play out when it comes to consumers really sort of
embracing this technology and not being afraid of it and
(15:08):
sort of rushing to adopt it.
Speaker 2 (15:09):
One of the big questions in the States as it
relates to the investments being made in artificial intelligence, is
the ROI the return on those investments. Do we have
any visibility into whether or not this is having kind
of a similar conundrum in China right now.
Speaker 1 (15:26):
Right so, I really think that's sort of the biggest
existential threat hanging over sort of the entire AI ecosystem
in China is that there really is not a clear
path to profitability, and there's not even a clear path
to sort of monetization and making money off of consumers.
You know, so many of these chatbots are being offered
for free, and because you know, competitors are offering them
(15:46):
for free. Basically peer pressures all of the companies to
do the same. And I think there's one statistic that
our Bloomberg Intelligence colleagues wrote, which was that I think
all of the top ten AI chat bomds at China
generated just one million dollars in revenue from Apple's iOS
app store in twelve months, And during that same time period,
(16:08):
Open AI's chat ebt garnered six hundred and sixty nine
million dollars in iOS revenue. So that's quite a big difference.
And that's just one chatbot compared to ten of China's.
Speaker 2 (16:18):
So what do we know about the rate of failure here?
I mean, do we have enough data to begin to
kind of quantify that?
Speaker 1 (16:25):
So I think it's too soon to tell. Like I said,
there's you know, this top down support, and there's just
this insatiable hype, especially in the wake of Deep Seek,
and I think for now that's been a really strong
propellant of the AI sector. You know, A former government
official in China last week said that the nation is
on the cusp of generating more than one hundred Deep
Seek like breakthroughs. But I think you know, if you
look at more than one hundred deep seeks, you know,
(16:46):
what does that actually mean? That means such fierce competition,
And so I think in the long run we may
see at least one hundred you know, zombie AI tools
or zombie AI agents. But I think, you know, that's
still a long way off. And for now, you know,
this hype is really driving a lot of exuberance. But
we'll have to see how it plays out.
Speaker 2 (17:04):
And I'm wondering about the workers that are involved in
these companies, the programmers, the software engineers. I would imagine
that it's a very good sign for them. The question
is whether it continues.
Speaker 1 (17:16):
Yes, we will definitely have to see. You know, I
think the AI exuberance has just been especially after Deep Seak,
has just been absolute pandemonium in China, and so we'll
have to see how it eventually plays out. But yes,
a lot of excitement.
Speaker 2 (17:30):
What is the next thing that you're going to be
watching for in trying to understand this story more deeply?
Speaker 1 (17:37):
So I think eventually it's inevitable that there's going to
be some kind of cooling down, whether that's sort of
a consolidation on the horizon. But like I said, I
don't think that's coming anytime soon, because, you know, because
of all this excitement, because of all this top down support,
I think that this frenzy still has a little bit
of room to run. But I think the big question is, really,
how can any of these companies find a way to
(17:57):
monetize if nobody's actually willing to pay for these services?
You know, Chinese consumers historically have just not liked paying
for software services they're sort of intangible, and they've also
refused subscription models, which are sort of the two sort
of revenue streams that have taken hold in the US.
So without those, we'll have to see how how any
of them, whether they could come up with a killer
app that people are willing to pay for, or whether
(18:20):
you know, enterprises decide it's worth you know, shelling out
for AI services. But for now, it's the market is
pretty much dominated by free to use services, so I
question how sustainable that is.
Speaker 2 (18:33):
We know the tension that exists, particularly in the realm
of technology between the US and China, and the limitations
that are inherently a part of that story, but I'm
wondering about the adoption of AI related products created by China.
Maybe being employed by or in other jurisdictions across parts.
Speaker 1 (18:51):
Of Asia, right, So I think that there was hope that,
you know, if Chinese consumers aren't willing to pay, and
if the market at home is so hyper competitive, of
maybe these firms can start looking abroad for growth. But
I think that's really an uphill battle. You know, we've
already seen jurisdictions around the world, whether that's Italy Taiwan,
start to crack down on deep seek and restrict use
(19:14):
just because of all those sort of geopolitical tensions. So
I think going abroad would definitely be there's definitely hope
that that's like a market overseas markets or where some
of the growth is. But I think it's going to
be very, very difficult for these Chinese AI firms to
sort of distance themselves from Beijing.
Speaker 2 (19:31):
We'll leave it there. Catherine, always a pleasure. Thank you
so very much, Bloomberg Opinion columnist Katherine Thorbeck. She covers
all things Asia tech from our bureau in Tokyo, talking
here on the Daybreak Asia podcast. Thanks for listening to
today's episode of the Bloomberg Daybreak Asia Edition podcast. Each weekday,
(19:51):
we look at the story shaping markets, finance, and geopolitics
in the Asia Pacific. You can find us on Apple, Spotify,
the Bloomberg Podcast, Fast 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.
Speaker 2 (00:10):
Welcome to the Bloomberg day Break Asia Podcast. I'm Doug Chrisner.
So markets in Asia are looking to mimic Monday's performance
in the US, where the bulls drove equities to all
time highs. Also today the question of whether fierce competition
in China's AI industry is muddying the long term outlook
for the sector. In a moment or two, we'll be
(00:30):
joined by Bloomberg Opinion columnist Catherine Thorbeck. But we begin
this morning with markets. As I mentioned, equities in the
States at all time highs on the final day of
the second quarter. So now the S and P five
hundred is up roughly twenty five percent from its April lows,
its best quarter since December twenty twenty three. Today we
broke above sixty two hundred for the first time, tech
(00:53):
shares leading the charge. And for a closer look at
the price section, I'm joined now by Burns McKinney. He
is managing to arect doctor also senior portfolio manager at
NFJ Investment Group. Burns, thank you so much for making
time to chat with me. What's your view on the
rally that we saw in Q two.
Speaker 3 (01:11):
It's it's it's just amazing.
Speaker 4 (01:12):
How you know, if an investor went to sleep at
the end of the first quarter and then woke up
at the end of the second quarter, they think, hey,
this has been a pretty quiet quarter.
Speaker 3 (01:20):
And not a lot has happened.
Speaker 4 (01:21):
But you know, we've been on a pretty wild round trip,
and you know, really it's it's at least pretty simple
to explain. I mean, the market's you know, really got
pummeled after the April second announcement of the tariffs, the
Liberation Day or obliteration Day, if you will, And you know,
as the markets have kind of gained more and more
confidence that okay, you know what, the president really does
(01:44):
care what the markets think, and a lot of these
tariffs won't be as bad as feared, they rebounded really
just back where they were. That said, you know, the
risk awards, you know, may be a little bit worse
than it was at the beginning of the period, simply
because you know, despite the fact that the tariffs may
not be as bad as once feared, you're still looking
(02:04):
at levels that will probably be three to four times
anything that we've seen in our lifetime.
Speaker 2 (02:10):
Last Friday strategist over at Bank of America, we're warning
that there is an increasing risk of a speculative bubble inequities.
Is that something you share.
Speaker 3 (02:21):
Yeah, Bubble is a word that I think.
Speaker 4 (02:23):
It gets clicks, It gets people excited. You know, it's
hard to say there's a bubble. But that said, you know,
equity markets do look a bit richly valued. You're looking
at you know, the US markets trading at about twenty
three times earnings. That's about a third above their long
term average valuation. And it's really only been more expensive
(02:44):
than this about twenty percent of the time over the
last twenty five years. And so stocks are rich. You know,
looking forward, it's hard to see multiple expansion from here
for an investor in the broader market. So you're just
going to have to rely on good old fashion earnings growth,
and even that's at risk given the fact that you know,
tariffs could squeeze margins. And so, you know, looking looking backward,
(03:05):
you in the last couple of years, you know, I say,
last year, we're sort of like throwing the football down
the field forty yard bomb. Year before that, forty yard
hail Mary. You know, going forward, investors probably kind of
looking at the good old fashioned, you know, three yards
in a cloud of dust, But there are opportunities to
be had beneath the surface.
Speaker 2 (03:22):
So you mentioned margins. Are margins really the biggest test
in the upcoming earning season.
Speaker 4 (03:28):
It's definitely what investors are going to be keeping an
eye on, and that's what they're going to be listening
for in all the earnings calls.
Speaker 3 (03:34):
I mean in general, you know, you know, in.
Speaker 4 (03:37):
A capitalistic society, margins are one of the most mean
reverting stats out there. And you know, even prior to
the current policy environment, corporate profit margins were really near
all time highs. And now when you factor in the
fact that we've seen tariffs start to go into place,
we haven't necessarily seen a lot of those increases in
(03:59):
costs be passed on to consumers, and so there's really
nowhere for that to go.
Speaker 3 (04:04):
But basically squeeze.
Speaker 4 (04:06):
Profit margins a little bit on the corporate environment, and
that's certainly what investors are going to be focused on.
Speaker 2 (04:10):
Maybe we can talk a little bit about the dollar.
For the month of June, I think the Bloomberg Dollar
Spot index was down about two percent, and I think
right now we're at about the lowest level since March
twenty twenty two. I'm wondering whether you think this is
an illustration of diminished appeal of US assets globally. And
if that's the case, why is.
Speaker 4 (04:31):
That there's definitely been more and more discussion about a
sort of an end to the period of US or
American exceptionalism. You know, we've been in an environment whereby
you know, US stocks ab outperformed global global global markets
outside the United States by over the last decade by
(04:51):
you know, one hundred percentage points. And you know a
lot of that's had to do with the innovation and
environment embracing in the United States. But you know, as
investors have seen certain threats to that again, you know,
trade wars. You know, we we say trade war is
easy to win. You know, there's really aren't. There might
be relative winners in a trade war, but you know,
(05:13):
basically on absolute basis, everyone loses. And so you know,
between that between you know, geopolitical risk and you know,
whether it's just smaller risks like threats to fit into independence. Uh,
and investors are starting to look elsewhere and you know,
you've seen lower evaluations overseas for a long time, but
you haven't necessarily had the catalysts to get investors to
(05:34):
jump into those valuations. So it definitely makes a case
for uh, you know, maybe investors diversifying their portfolios. Maybe
you know, again not necessarily selling the US, but you know,
maybe you know, diversifying away from your winners and maybe
you know, adding to some of your losers.
Speaker 2 (05:49):
So the equity market seems to be telling us we
will avoid a recession here in the US. The bond
market seems to be suggesting that inflation is not an issue.
Right now, does the bond market have it right?
Speaker 3 (06:02):
Yeah?
Speaker 4 (06:03):
Well, first, yeah, I hate to admit this as an
equity investor, but the bond market usually gets a little
bit more correct than equity managers such as ourselves. But
you know, inflation, you know, you really have seen you know,
I think that the FED was fairly successful in you know,
threading that needle and navigating you know, cutting job openings
(06:24):
without cutting jobs, and taming inflation and just keeping you know,
the most important thing they had to do was keep
investor expectations of inflation down because that's the type of
thinking that can just spiral out of control. And you know,
we're in a world now where you know, the Fed's
preferred measure, the you know, the core PCEE for inflation
is now running roughly you know, two and a half percent,
(06:46):
and if in fact, if you look at the last
three months and annualize those, it's really right at the
FEDS two percent target.
Speaker 3 (06:52):
And so inflation has been coming down.
Speaker 4 (06:54):
You know. One of the big fears has been that
tariffs might you know, cause resurgence in inflation. We haven't
seen that yet, and so it does seem that you know,
you know, pricing increases are probably a bit behind us,
notwithstanding whether we have a geopolitical shock that might actually
drive up energy prices in the their term.
Speaker 2 (07:13):
So I think we can agree that a lot of
the gains that we have seen in stocks have been
built on hope that the FED is going to resume
rate cuts at some point. Do you have a sense
of when that may happen? Is it September? Perhaps a
little sooner, maybe July?
Speaker 4 (07:26):
Yeah, yeah, I think what the markets are pricing in
is something along the lines of September or October.
Speaker 3 (07:32):
You know.
Speaker 4 (07:32):
The great thing about this, and this is the reason
the markets have rallied, is that there's you know, there's
there's two reasons the Fed would cut rates. One is,
you know, in case of emergency, you see, you know
something has been broken, you know you're you're heading towards
a recession. And the other reason is simply when they
determine that the FED rate adjusted for inflation has just
gotten restricted because of the fact that they've been winning
(07:55):
that warworth inflation. So if you see a continuation of
that Fed cutting cycle, this is actually for the good reason,
the good news reason for the latter, as far as
you know, when they cut them, whether it's July, September, October,
you know, really what investors should focus on is not
necessarily what the Fed does next, but what they do last,
insofar as where they ultimates ultimately settle.
Speaker 3 (08:17):
And this is.
Speaker 4 (08:17):
Probably you know, if you're looking for a contrarian view,
it would be that given the fact that inflation's coming down,
but just due to deglobalization, it might not go back
to the you know, entirely to the levels that it's
been over the last ten fifteen years. And as such,
you know, when you know, the FED resumes cutting, they
might not be able to get rates down to that
(08:38):
year zero level that we've been at which you know,
if rates are just a little bit higher for longer,
that really makes a case for investors. Well, how do
I respond to this? It means go short duration with inequities,
go for value stocks, and specifically companies that are paying
and raising dividends.
Speaker 2 (08:54):
Are those the key tenants of your strategy at this point?
Speaker 4 (08:59):
You know, we're we're looking for relative valuation regardless of markets.
We don't like to try to time markets. We you know,
we like to stay fully invested at all times within
the framework diversification. But you know, we've always made the
case that you know, the some of the best strategies
through time have been those that have focused on companies
that are returning capital to shareholder, that are shareholder friendly,
(09:22):
and that means companies that are either buying back shares
or paying dividends.
Speaker 2 (09:26):
What about opportunities offshore? Given everything that you're describing, I'm
wondering whether you find the same thing to be true
let's say in Asia or in Europe.
Speaker 4 (09:35):
You know, I mean absolutely, I think at this point
in time, you've you know, I noted ago that you know,
whereas the S and P five hundreds trade and at
twenty three times earnings, the stocks in Europe are trading
at like fourteen times earnings. That valuation gap is as
wide as it's been in the last you know, ten
or fifteen years. And you know, again, investors have been
looking for a catalyst, and you know, that catalyst may
(09:57):
be the fact that you have overseas and place is
like Europe, a delayed response to interest rate cuts there
they have, you know, because inflation has really pulled back
there and they have been able to resume cutting interest rates.
You have that, but the policy environment is also looking
a little bit more favorable on the fiscal side. You're
starting to see signs of life there, whereas places like
(10:18):
Germany have basically been removing some of their debt caps
and starting to focus on infrastructure and defense spending. The
same goes for France and other countries, and so that
could be maybe that catalyst to you know, sort of
kickstart a reversion of the mean in places like Europe.
And you know, one other place to you know, investors
to look or at least for diversification purposes, is the
(10:38):
fact that you noted a few minutes ago the weakening
of the dollar. Historically speaking, when the dollar weakens, that
bodes well for emerging markets equities, so it makes a
great case for getting a little bit of exposure there too.
Speaker 2 (10:50):
Burns will leave it there. Thank you so very much.
Burns McKinney is managing director also senior portfolio manager at
NFJ Investment Group. Joining us here on the Daybreak Asia podcast.
Welcome back to the Daybreak Asia Podcast. I'm Doug Chrisner.
(11:12):
China's crowded AI landscape is not only fueling rapid innovation,
but fierce competition as well, and it's that competition that
seems to be dragging down profits. Let's check in with
Bloomberg opinion columnist Katherine Thorbek. She covers all things tech
in Asia, and she joins us from our bureau in Tokyo. Catherine,
(11:32):
thank you for making time to chat with me about this.
Give me a sense of perspective on this. How recent
has this kind of tension between innovation and competition been
developing in AI in China?
Speaker 1 (11:44):
This is really a story we've seen play out many
times in the history of China's tech sector. You know,
competition is notoriously fierce in the world's second largest economy,
So whenever a new craze emerges there's always just so
many rivals that sort of come out of the woodwork
ready to pounce, And for example, we saw this in
the food delivery market. There's some food delivery wars that
were going on, and it really became a race to
(12:05):
the bottom when it comes to pricing. You know, we
saw bubble t being sold for less than twenty five
cents last month, and we also SAWT in the electric
vehicle market, which is sort of left behind a trail
of zombie cars. And now these sort of same forces
are really in full swing in the booming artificial intelligence industry,
and these AI firms have really been focused on this
sort of classic playbook, which is scaling up their user
(12:27):
bases and racing for market share, and the result has
sort of been this rat race. You know, they're at
each other's throats when it comes to pricing, and it's
really become a race to the bottom. But I think
a key difference here is that nobody has actually figured
out has really cracked the key to getting consumers to
pay for these services. So it makes the issue of
monetization or a path to profitability seem a really long
(12:48):
way off. And this is really unique to China's tech sector.
You know, in the States, in Silicon Valley, there's sort
of a smaller number of large players that really dominate
the market and they really have control over pricing, whereas
in China, you know, there's just so many smaller players
and as well as the big tech companies, So competition
has been really really fierce, and I'm just not sure
(13:09):
how sustainable it is.
Speaker 2 (13:10):
I'm just wondering. When you talk about big tech companies,
I think of Ali Baba, and you would expect maybe
that company or companies like Baba to have some sort
of advantage.
Speaker 1 (13:20):
That's right. So Ali Baba and Byteedance and Tencent, these
sort of big tech players, I think they really can
play the long game and they can sort of sort
of weather this storm a little bit better than these
so called little dragons, which are these sort of startups
that are really driving innovation in China's tech ecosystem. And
so I think the big tech players are definitely in
a better position. But I also think that's a little
(13:41):
bit unfortunate because we really see sort of the biggest
breakthroughs in AI come from these smaller startups, which I
think are at higher risk.
Speaker 2 (13:48):
Here does the government have a view on what's happening,
do you think so.
Speaker 1 (13:51):
I think post deep Seek, there's just been a lot
of exuberance. There's been a lot of top down support
for the AI sector, and so it's sort of driving
the and in some ways it's a double edged sword,
you know, because there's so much excitement for AI and
so much top down support, it has really been driving
widespread adoption of AI services and AI tools throughout China,
which the government wants. But I think it definitely puts
(14:13):
these companies in a crunch when it comes to sort
of figuring out how to make money.
Speaker 2 (14:17):
So when you talk about adoption, is it primarily on
the part of consumers using more AI related devices or
is it in industry as well?
Speaker 1 (14:26):
That's right, So I think consumers definitely demand for AI
services and tools is red hot. You know, we see
so many chatbots, so many people using deep seak across
you know, local governments and across even hospitals. So I
think the adoption has been widespread. And the way I
kind of look at it when we talk about the
sort of top down support was you know, I'm not
going to remember which US president it was, but there
(14:47):
was a President that put electricity in the White House
to sort of signal that you know, this technology is
safe and we can, you know, rapidly adopt it. And
I think there have been a lot of top down
signals coming from Beijing and coming from Hijinping about how
AI is, you know, the future, and we shouldn't be
afraid of it. And I think we've really seen that
play out when it comes to consumers really sort of
embracing this technology and not being afraid of it and
(15:08):
sort of rushing to adopt it.
Speaker 2 (15:09):
One of the big questions in the States as it
relates to the investments being made in artificial intelligence, is
the ROI the return on those investments. Do we have
any visibility into whether or not this is having kind
of a similar conundrum in China right now.
Speaker 1 (15:26):
Right so, I really think that's sort of the biggest
existential threat hanging over sort of the entire AI ecosystem
in China is that there really is not a clear
path to profitability, and there's not even a clear path
to sort of monetization and making money off of consumers.
You know, so many of these chatbots are being offered
for free, and because you know, competitors are offering them
(15:46):
for free. Basically peer pressures all of the companies to
do the same. And I think there's one statistic that
our Bloomberg Intelligence colleagues wrote, which was that I think
all of the top ten AI chat bomds at China
generated just one million dollars in revenue from Apple's iOS
app store in twelve months, And during that same time period,
(16:08):
Open AI's chat ebt garnered six hundred and sixty nine
million dollars in iOS revenue. So that's quite a big difference.
And that's just one chatbot compared to ten of China's.
Speaker 2 (16:18):
So what do we know about the rate of failure here?
I mean, do we have enough data to begin to
kind of quantify that?
Speaker 1 (16:25):
So I think it's too soon to tell. Like I said,
there's you know, this top down support, and there's just
this insatiable hype, especially in the wake of Deep Seek,
and I think for now that's been a really strong
propellant of the AI sector. You know, A former government
official in China last week said that the nation is
on the cusp of generating more than one hundred Deep
Seek like breakthroughs. But I think you know, if you
look at more than one hundred deep seeks, you know,
(16:46):
what does that actually mean? That means such fierce competition,
And so I think in the long run we may
see at least one hundred you know, zombie AI tools
or zombie AI agents. But I think, you know, that's
still a long way off. And for now, you know,
this hype is really driving a lot of exuberance. But
we'll have to see how it plays out.
Speaker 2 (17:04):
And I'm wondering about the workers that are involved in
these companies, the programmers, the software engineers. I would imagine
that it's a very good sign for them. The question
is whether it continues.
Speaker 1 (17:16):
Yes, we will definitely have to see. You know, I
think the AI exuberance has just been especially after Deep Seak,
has just been absolute pandemonium in China, and so we'll
have to see how it eventually plays out. But yes,
a lot of excitement.
Speaker 2 (17:30):
What is the next thing that you're going to be
watching for in trying to understand this story more deeply?
Speaker 1 (17:37):
So I think eventually it's inevitable that there's going to
be some kind of cooling down, whether that's sort of
a consolidation on the horizon. But like I said, I
don't think that's coming anytime soon, because, you know, because
of all this excitement, because of all this top down support,
I think that this frenzy still has a little bit
of room to run. But I think the big question is, really,
how can any of these companies find a way to
(17:57):
monetize if nobody's actually willing to pay for these services?
You know, Chinese consumers historically have just not liked paying
for software services they're sort of intangible, and they've also
refused subscription models, which are sort of the two sort
of revenue streams that have taken hold in the US.
So without those, we'll have to see how how any
of them, whether they could come up with a killer
app that people are willing to pay for, or whether
(18:20):
you know, enterprises decide it's worth you know, shelling out
for AI services. But for now, it's the market is
pretty much dominated by free to use services, so I
question how sustainable that is.
Speaker 2 (18:33):
We know the tension that exists, particularly in the realm
of technology between the US and China, and the limitations
that are inherently a part of that story, but I'm
wondering about the adoption of AI related products created by China.
Maybe being employed by or in other jurisdictions across parts.
Speaker 1 (18:51):
Of Asia, right, So I think that there was hope that,
you know, if Chinese consumers aren't willing to pay, and
if the market at home is so hyper competitive, of
maybe these firms can start looking abroad for growth. But
I think that's really an uphill battle. You know, we've
already seen jurisdictions around the world, whether that's Italy Taiwan,
start to crack down on deep seek and restrict use
(19:14):
just because of all those sort of geopolitical tensions. So
I think going abroad would definitely be there's definitely hope
that that's like a market overseas markets or where some
of the growth is. But I think it's going to
be very, very difficult for these Chinese AI firms to
sort of distance themselves from Beijing.
Speaker 2 (19:31):
We'll leave it there. Catherine, always a pleasure. Thank you
so very much, Bloomberg Opinion columnist Katherine Thorbeck. She covers
all things Asia tech from our bureau in Tokyo, talking
here on the Daybreak Asia podcast. Thanks for listening to
today's episode of the Bloomberg Daybreak Asia Edition podcast. Each weekday,
(19:51):
we look at the story shaping markets, finance, and geopolitics
in the Asia Pacific. You can find us on Apple, Spotify,
the Bloomberg Podcast, Fast 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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