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Welcome to the Bloomberg Daybreak Asia

podcast. I'm Doug Krer. Equity markets

in the Asia-Pacific are poised for gains

in the Thursday session. This is after

the latest print on US inflation matched

expectations and that seemed to ease

concern about an imminent rate hike from

the Fed. We had the S&P 500 coming

within striking distance of a record

high. Chipmakers rallied and that seemed

to lift the NASDAQ 100 to a one-mon

high. Coming up, we'll hear from Aaron

Sai, senior multiasset strategist at

Pictt Asset Management. But we begin in

the Lion City. Joining me now is Mark

Cranfield, Bloomberg Mive Strategist. He

joins from our studio in Singapore. I

appreciate you being here and can I ask

for you to give me a kind of your sense

of what's going on with with the

Japanese yen? I mean, it seems like two

weeks ago we had the US and Japan

essentially surprising the market with a

coordinated intervention. It's is it too

much to say that this has failed?

>> Um, I wouldn't say failed. They bought

some time. I mean there was a

possibility that if they had done

nothing that dollar yen would have just

continued to grind higher and and who

knows where the the top side could could

be under those circumstances if you

allow traders to think that a market's

become a one-way bet uh you could risk

sending it to unprecedented levels and

and of course the contagion risk as well

it may have spread across Asia other

currencies may have got involved it may

even gone global um it may have stirred

up markets in Europe Europe and and

South America as well. So certainly the

consequences of doing nothing could have

been quite extreme if the let's say the

yen had drifted on to 170 180 something

like that you could have had a global

crisis on your hands. So certainly they

bought themselves some time. Clearly

from a a big picture point of view,

unless monet monetary authority comes

alongside currency intervention, you

will not get a long-term impact on the

currency unless the Bank of Japan steps

up and does its job and convinces

investors [snorts] that it is ready to

really take rates to the neutral level

to address the inflationary problems in

Japan. Then people will start to say,

"Okay, both hands are clapping together

here. We've got full commitment from the

central bank, from the monetary

authorities. Everything is coming

together. Here we are. It's a change in

direction of the yen. Until you see

that, then the yen will basically stay

as an undervalued currency.

>> So, speaking of hands, what if the Fed

were to essentially sit on its hands and

do nothing in a rate environment that

may argue for higher interest rates? If

the Fed were to just remain on hold for

a while longer, does that necessarily

provide a little bit more support?

>> Um maybe not that much. The the issue is

that the markets can see there's a bit

of a disconnect here. We just just last

night we had the um US the budget

deficit numbers came out above 400

billion for July when it was forecast to

be 300 something more than 25% above

forecast. That number is extraordinary

and it doesn't seem to have a cap. It

just investors are not convinced that

the US authorities are trying their best

to rein in the deficit in the United

States. That means that the long end of

the Treasury curve will continue to be

under upward yield pressure. We saw

yesterday the 10-year auction needed the

highest yield since 2007 to get the

bonds cleared. And we have a 30-year

auction coming today. prospects are not

great for that 30-year auction today. As

long as you have that continuous upward

pressure in the long end of the US

Treasury yield curve, it will gradually

filter through even towards the shorter

maturities regardless of whether the Fed

is on hold or not on hold. The bond

vigilantes will decide for themselves

where they think interest rates should

be. And of course, at a certain level,

high yields will support the the US

currency. So that makes the carry trade

more attractive again for the Japanese

and other currencies as well, not just

the the Swiss Frank we're seeing under

pressure as well, relative pressure at

the moment as well. So whether the Fed

keeps on hold for the rest of this year

or not, the Treasury yield curve will

decide for itself where it thinks is the

fair compensation based on the inflation

data it sees, based on the budget

deficit in the United States and other

factors which will always affect the

bond market regardless of what the

central bank does.

>> So I'm curious as to whether or not you

suspect that we could see another

intervention on the part of monetary

authorities in Japan. maybe not in

coordination with US authorities. And if

we wind up in that situation, is there

the risk that Japan could essentially

sell US treasuries to raise dollars?

>> Um, they already really already appear

to have sold some treasuries to help

with the most recent intervention that

seems to have already happened. So, you

would expect that should they need to um

intervene again, that's the first piece

that we go. They haven't. Um although

Scott Besson was talking about this uh

FEMA situation where they could go to

the to borrow essentially money through

SOP arrangements to to get the US

dollars they need without needing to

sell US treasuries. That issue was

raised. The Japanese don't seem to have

taken any advantage of that so far.

Maybe they will be pushed into into the

future but traditionally they will wear

down their their sovereign investments

before they get to such issues. So from

the Japanese point of view, yes, if they

if they need to do aggressive

intervention again, you would expect the

first place they will go is to reduce

some of their holdings of US bonds.

>> So in terms of the macro story in Japan,

we have a lot of economic data in the

coming week, including second quarter

GDP figures. Give me a sense of your

read on the Japanese economy right now.

How are things holding up?

>> Uh it's going well. I mean Sane Takichi

the prime minister has got a clear

objective of reflating the Japanese

economy. They're getting fantastic

investments because of they do have some

AI sectors which are very attractive at

the moment. So you got companies like

Taiwan Semiconductor biggest chip maker

in the world making huge investments

into Japan to build plants to help to

maintain its its amazing production. is

already production levels. People are

buying whatever chips they make and

their order books are full well into

2027. They they can make as many chips

as the world can take and Japan is now

becoming a big base for them there. So

you're seeing and that's just one

example of companies who are going to

the specialized kind of um AI products

which Japan can produce. So that's very

very good for the economy and under

Takichi the government has a clear sense

of what is needs to be done to get the

the Japanese economy back on track and

we're beginning to see signs of it

already. Japanese companies are making

very good profits. Company stock market

is pretty bulliant and of course the

relatively weak yen helps their

situation. The I think that's partly

what investors can see is that Japan

doesn't have a very big incentive to

change the direction of the yen. If they

can keep it relatively weak but stable,

that's the ideal environment for Japan.

So for them to to really change the

mindset that the yen is suddenly a

strong currency that doesn't really suit

them at the time this time anyway.

>> All right, Mark, good stuff. Always a

pleasure. Thank you. Bloomberg's Mark

Cranfield M live strategist joining from

our studios in Singapore here on the

Daybreak Asia podcast.

[music] Welcome back to the Daybreak

Asia podcast. I'm Doug Krer. Information

tech shares are higher in early Asian

trading. That's after the Philadelphia

semiconductor index rose 2.5% in the US

session. There were some disappointments

after the US close. Cisco systems

earnings failed to impress and Cerebra

Systems reported a decline in sales for

its hardware business. For a closer look

at the AI trade and markets more

broadly, we spoke with Aaron Sai. He is

senior multiasset strategist at Pictet

Asset Management. Aaron spoke with

Bloomberg TV host Heidi Straoud Watson.

Sherry on on the Asia trade.

>> Aaron, really great to have you with us.

Uh let's start off with these sort of AI

heavy markets. We're seeing that

recovery in the Korean markets again.

What do you make of the volatility and

where do you see the opportunities in in

these AI heavy spaces like Korea by

extension also a bit in Japan, Taiwan

for example?

Yeah, I mean the good thing is that uh

we have managed to digest a historical

unwind in the the momentum uh trade and

um part of the reason why we've why

equities are back at an all-time high.

Um despite that is there is an element

of a rotation within the AI space. If

you if you look at the AI trade um we

think we're already in the in the third

phase of the trade. The first phase was

the rising tide lifted all AI boats.

anything with uh an AI in the ticker

went up. Uh the more capex the better.

Um that then um transitioned into a

phase where we saw rotations between

hyperscalers and capex beneficiaries and

that has played out for pretty much the

last year. Where we are today we think

is going to be a more nuanced phase

where single stock differentiation and

dispersion matters. We think uh if you

take the the Hypixcalers for instance,

they're going to tread a very fine

balance between keeping capex up but

still because they're now relying on the

market for additional capex spending,

they would have to continue to to

provide evidence for monetization. So

it's a fine balance and we don't think

all companies can pull that off equally

well. So that's why we are kind of

seeing the dispersion between names at a

single stock level and we think that

would uh continue. But overall by and

large we still think that we are in the

early innings of the capex buildout. We

are going to have cycles around it. Of

course we have digested a fair bit of

uncertainty in the AI ecosystem and

we're reasonably constructive now but

it's important to be selective. Does the

broader monetary policy backdrop uh

particularly if we have inflation

staying benign as this most re recent

reading seems to suggest does that paint

a longer runway when it comes to how

much more we could see from the AI

rally?

>> Absolutely. So in a way we had the the

perfect print um yesterday. It was a is

in a way a dull print, but sometimes

boring is good because what that lets

you do is then focus on the um on the

micro on the fundamentals of um the the

AI ecosystem and that we think is still

very strong, right? So we're still in

the middle of uh the first genuine

earnings uh upcycle since the commodity

super cycle. Um we are in a phase where

demand is high when supply is

constrained and companies are earning

what we can call supernormal

profitability. um so what you don't need

is for the macro picture to muddle that

story too much. Um which is why it's

important that um the the the US long

end bond deals remain contained. Um so

we were getting a little worried about

uh the the Fed um kind of withdrawing

forward guidance and the bond market not

digesting that very well. But given that

we've had a couple of soft prints um as

you say that kind of definitely is a is

a sigh of relief for the market and that

lets the focus go back to the micro

fundamentals.

You we spoke a little bit about you know

obviously not not all companies are

going to thrive in this new era of more

scrutiny on AI spending. Where do you

prefer to place your bets then? Is it

still overweight when it comes to the

yield birth? Are you looking more at

diversification in China for example

because that's obviously where that

major threat is also coming from.

>> Yeah. So we still are relatively

constructive the US. We think uh the

earnings uh upswing is is quite strong.

We expect about 30% earnings growth this

this year. That's uh that's quite a

powerful tailwind. But the real

differentiator for of performance within

equity markets would be uh along sector

lines we think not so much between

regions because if you think of a theme

if you if you're constructive memory u

you would probably consider Micron and

SKH highex uh if you're constructive

broadening out of the the AI theme into

data centers and spending of data

centers. If you're looking for cap goods

uh names, we wouldn't differentiate too

much between a Schneider in Europe or a

um or or or a Caterpillar in the US for

instance. So for us, it's not really uh

regional um diversification, but more

about uh being in the right sector. So

we're still selectively constructive

tech. Um we think that the AI ecosystem

broadens out from here. Um but we're

also constructive banks, banks both

across emerging markets and uh the US.

Um and finally, we like areas of

industrials as well.

>> I wanted to also ask about what we're

seeing with Treasury markets. We've got

that 30-year auction coming up soon.

Where do you see yields are? You've

talked about the potential for becoming

unanchored from here,

>> right? So, thankfully, we've got a

couple of soft prints. We had a a soft

labor market print and we had a pretty

benign CPI print. So that kind of takes

the heat of um uh what was the central

debate in the bond market which was the

sudden withdrawal of forward guidance

essentially means that bond managers now

have to continue doing their job with

one less tool in their toolkit something

they've relied on uh for for pricing um

for pricing bonds and especially if you

think of the long duration they're

demanding and I think rightfully so an

additional uncertainty premium given

that it's not obvious what the new

framework is going to be or even what

the new uh right data series is going to

be in terms of inflation for them to to

look at. So I think in a way um uh we

were it's it's a sigh of relief that we

had a couple of soft prints because the

conversation moves away from what is

happening in the long end in terms of uh

the term premier um and the data is

letting uh some of these hikes which

were previously priced in unwind. Um so

that's giving some relief to the bond

market. So um we would be a bit more

uncomfortable if the the data picks up

again and then it's back to uh how the

wash fed um decides to to to signal

their framework going forward.

>> You've talked about outdated notions of

sector and styles. How does that play

into how you're investing at the moment?

Can you give us an example?

>> Right. So um coming back to the

hyperscalers I mean if you think of the

the traditional um definition of how

benchmarks like MCI look at it you you

have Amazon for instance in consumer

discretionary you have meta in

communication services you have

Microsoft in software in information

technology so if you if you're following

a strictly topdown approach of um

selecting asset allocation first and

then regions and then sectors what you

often do you're going into buckets which

don't very well capture the opportunity

set. So if you want to be constructive

hyperscalers and if you wanted

diversified basket you you need the

ability to to invest across a few

different sectors. So the world has

moved on, markets have moved on in terms

of um these definitions, these labels

not really being fit for purpose

anymore. um but uh we are still catching

up in terms of um how the nomenclature

works. So that's why it's important not

to be straight jacketed by some of these

definitions. And uh as another kind of

point there is uh the importance of

value versus growth we think is uh

overestimated today. I mean in the past

this used to be the single different uh

single biggest differentiator of

performance within equities. We think

that'll be uh no longer the case. If you

think of AI, if you think of

electrification, these are broad mega

themes which have winners on both the

value side and the growth side of the

market. So it's no longer about just

picking one style definition or sticking

strictly to sector definitions, but

having the ability to be flexible and

nimble and not be straight jacketed by

uh by outdated labels. That was Aaron

Sai, senior multiasset strategist at

Picttet Asset Management in conversation

with Bloomberg TV host Sheron and Heidi

Strad Watts bringing you their

conversation here on the Daybreak Asia

podcast.

Thanks for listening to [music] today's

episode of the Bloomberg Daybreak Asia

Edition podcast. Each weekday we [music]

look at the stories 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 [music]

and Australia. I'm Doug Krer, and this

is Bloomberg.