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>> Bloomberg Audio Studios. Podcasts,

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>> Welcome to the Daybreak Asia podcast.

I'm Doug Krizner. [music]

South Korea's equity market is back from

a long weekend with a bit of a shock

similar to the so-called deep seek

moment. At the end of last week, China's

AI pioneer Moonshot introduced its Kimi

K3 model. Now, this is an open-weight

model, meaning its parameters are

publicly available and can be customized

by the user. Last Friday, Moonshot said

Kimi K3 rivals some of the best

offerings from US labs. Here is

Bloomberg's Anthony Stevens.

>> So, there's a lot of software innovation

in there in what is objectively a very

large model. So, the first thing is the

ambition and the scale of the model is a

step further, and that's probably why it

has caught the US models on the frontier

front. But, the second most important

aspect is the resource optimization

around the model. It is very

memory-efficient. In short, there are

proprietary innovations in there to also

help with the usage of of HBM and GPUs,

where China is obviously constrained.

And the fact that this model was trained

with those constraints in mind is the

important aspect to markets here.

>> That is Bloomberg's Anthony Stevens. And

now we're being told that Moonshot is

preparing for a public listing perhaps

within 6 months. We're told Moonshot is

in the process of wrapping up a funding

round that may value this 3-year-old

startup at more than $30 billion. Demand

for Kimi K3 was said to be so great over

the past 48 hours that Moonshot

temporarily paused new subscriptions. It

appears China is closing the AI gap with

the US, and that's where we begin our

conversation with Homin Lee, senior

macro strategist at Lombard Odier. He

spoke with Bloomberg TV host Avril Hong

and weighed in on the current market

dynamics regarding AI.

>> So, in the long run, the real threat to

the memory bottleneck trade in South

Korea comes from China. And uh in the

second half of the year, we're going to

get a bit of narrative shift in favor of

China's AI and semiconductor ecosystem.

Uh you know, that leads due to all the

mega listings uh that are on the horizon

and uh which uh it now seems the

authorities are quite supportive of. So,

that's going to support uh the Chinese

story relative to South Korea. But for

South Korea itself, uh we start to feel

that maybe this uh leveraged uh you

know, retail leverage

uh impact is beginning to

uh you know, progress uh quite

substantially.

And uh uh at the fact is uh that the

bottleneck still remains in the near

term. And these memory makers have

locked up their uh prices through

long-term agreements with the the

buyers. And uh you know, US export

controls and etc. still keep the

dominant position for these names. So,

uh it is true that this week uh we have

a confluence of a pretty

uh negative events,

uh but um uh you know, given the

valuations and the unwind of the

leverage trade, maybe the uh the

trajectory for the rest of the year,

given despite the volatility that we see

now,

uh is maybe uh higher

uh before the end of the year. And

that's one of the reason why we're still

keeping

uh you know, constructive view on the

medium-term trajectory of the market. Um

uh but China story is definitely

something that worth keeping an eye on

for the investors in the second half of

the year.

>> How much does it exactly you think sap

away from the South Korean story?

>> So, um we have seen the shift uh from

the hyperscalers and the the AI as a

service story in North America, you

know, to memory makers in in past a year

or so, and and you know, we're not going

to get a complete a conclusion to this

debate or pendulum swing between the the

AI suppliers and AI themes

for the foreseeable future simply

because no one has an absolute clarity

and who will emerge as the winner in

this ecosystem, but it's quite possible

that you could actually get again, put

it, you know, once we emerge from these

headwinds related to home moves and the

the monetary policy cycles and the

capital flows,

you're going to get maybe a parity

market dynamic where both South Korea

and China for for for the investors

perspective, you know, because simply

because China has been a relatively

neglected market. Maybe it's worth

having that as a hedge,

you know, alongside you know, South

Korea trade,

you know, that will probably go through

a bit of turbulence, but ultimately

still you know, grind upward once these

headwinds fade.

>> Why did it not make sense now though? I

mean, to your point about how far

they've run up to take profit on chips.

I mean, we are also seeing in the

background this used to be a rotation to

financials.

>> So, in fact, the financial sector is one

of the sectors that we like. The

valuation is quite compelling. The

sector has been able to deliver fairly

substantial recovery since last year and

the fees, you know, from the M&A

activities and trading you know,

continue to be pretty strong not just in

North America, but the the markets

around the world. So, relative to the

other sectors that have seen some froth

and the you know, maybe excessive

momentum. This is the sector that

probably delivers that nice combination

of slight defensiveness, evaluation

appeal, and the earnings stability uh

down the road. So, alongside the other

kind of a favorite bets that we have,

including emerging markets, uh financial

markets uh financial sector is

definitely the sector that we like as we

head into the second half of the year.

>> For the big AI spenders, though, it

looks like it's increasingly difficult

to justify their valuations. How do you,

you know, weave that into your

investment thesis?

>> So, though, when you talk about

valuations, it's really um

you know, when you talk about software

or, you know, the semiconductor segment,

actually the valuation has become quite

compelling. Uh I mean, if you look at

these South Korean memory makers right

now, you know, for the entire silicon

layer, due to the sell-off that has

taken place in past weeks, now we see,

you know, forward P multiples trading

close to six or seven for some names,

and that's quite compelling for the

medium to long term, especially if you

believe in the the re-rating story for

some of the regional markets where uh

these uh you know, semiconductor stories

are concentrated. So, um we wouldn't say

um

we see a lot of excess froth uh in the

segment right now, especially because of

the sell-off. Uh but um you know, for

the North American market, uh given the

mega IPOs that are on the horizon, maybe

it's slightly trickier to make a very,

very strong valuation bet. But, for the

tech hardware ecosystem elsewhere,

especially in Asia Pacific, we think

it's quite compelling, and uh that's one

of the reasons why, you know, especially

for the diversified portfolios, it's

worth having some of these exposures, uh

and trying to look through some of these

volatilities that are highly technical

in nature will likely fade Uh in due

time.

>> I guess to your point also, I mean we've

been seeing the chip makers in South

Korea in terms of the stock action.

They've been, you know, pairing some of

the early losses. So, maybe there's that

dip buying that is emerging. You talk

about exports. Talk to us about the risk

in the back of because this week as

well, in terms of tariffs,

you know, we're seeing the 122

expiration. Do you think there is, you

know, something on there that we need to

be paying more attention to?

>> So, you're right. You know, over the

course of the week we could likely get

the expiration of the Section 122 tariff

and Trump administration will try to

replace that with sector specific and

country specific tariffs. Now, our

assumption is that the overall effective

tariff rate

will remain close to the pre-Supreme

Court ruling level and that's manageable

for the market but simply because the

mechanics of replacing the universal

tariff with these sector and country

tariff is quite complicated and

potentially has, you know, some

disproportionate negative impact for

significant sectors in different

countries. We think we'll definitely

have to deal with some volatilities down

the road due to this dynamic but it's

important to understand that, you know,

from our perspective

it's not going to be easy for the Trump

administration to replace, you know, or

actually raise the effective tariff

rates significantly from what we had

before the Supreme Court ruling. But

meanwhile, for the market, you know,

this week we could potentially get

another positive development in China AI

space and also more pro-growth and, you

know, constructive signals from the

Politburo meeting in China. So, there

will also be some positive offsetting

events and ultimately we simply have to

wait for the uncertainties to clear in

the Strait of Hormuz. That's another

factor that we need to keep an eye on.

>> That is Homan Lee, senior macro

strategist at Lombard Odier, speaking

with Bloomberg TV host Avril Hong,

bringing you their conversation here on

the Daybreak Asia podcast. [music]

>> [music]

>> Welcome back to the Daybreak Asia

podcast. I'm Doug Krizner. Crude oil

prices are higher in Asian trading after

the US and Iran engaged in a series of

tit-for-tat attacks. And for the

American military, it was the ninth

consecutive night of strikes. At the

same time, we know that more US

warplanes are being sent to the Middle

East. Now, Tehran is vowing not to allow

oil or gas to pass through the Strait of

Hormuz without coordination and

permission. So, as geopolitics continues

to buffet markets, we checked in with

Iliana Jain, international economist at

Westpac Banking Corporation. Iliana

spoke with Bloomberg TV host Paul Allen

about how the oil story is impacting the

Asia Pacific.

>> Look, the situation in the Middle East

seems to be changing every single week,

but one thing we can be certain of is

that any sort of geopolitical calmness,

if you can call it that, or

or any sort of indication that oil

supply and energy supply will be

normalized, will be well received by

policy makers. When it comes to

countries like Indonesia, they are

massive energy um

they they consume a lot of energy when

they're producing all of the goods that

they're producing. And for them, energy

costs are absolutely central to how the

economy is going. And so, if we start to

see a bit more energy stabilization,

it's going to be good news for

most of Southeast Asia and South Asia,

because we'll see that income squeeze

created by those energy costs start to

come down. And again, that also helps

support domestic demand at a time where

industrial policy needs to catch up a

little bit.

>> So hard to predict though because you

know at the start of this month the oil

was sort of settling around the $70

mark. I think perhaps a sense of

complacency had set in. No more of

course. Um

in Japan's case I mean we'll get the

June CPI numbers but what are the

implications for the Bank of Japan and

the yen as well? I mean have we seen a

floor for the yen yet?

>> Look when it comes to the Bank of Japan

they're focusing on a broader set of

indicators beyond just the CPI. For them

it's about coming to a place where they

consider is neutral and normal for the

economy that they are inheriting right

now. We know the Japanese economy is a

vastly different place to where it was

prior to the pandemic and it needs an

interest rate that is higher than where

it was prior to the pandemic. And the

Bank of Japan's coming to that end point

that terminal rate. And so while

inflation is important it's about other

things like how much domestic demand is

going to lift and how much of these

inflationary pressures are domestically

driven. When it comes to that CPI rate

the one thing I'll be paying very close

attention to is that services component.

Is it staying around that 1% mark that

it has been over the last couple years?

That tells us that there's a lot of

domestic pressures within Japan as well.

Aside from that they'll also be watching

closely to see how wages are responding

to the

changes in the economy thus far. And if

we see that continued pressure on wages

we see that structural

tightening in the labor market

continuing to feed through to wages

we're likely to see the Bank of Japan

hike twice more um coming to a terminal

rate of 1.5% by the end of next year.

>> In terms of the energy side of things uh

are you willing to predict and it is so

hard to predict where we might be with

this conflict later on this year because

certainly there'd be a political case

for Iran uh to push this through to the

US midterms. Can you see this

uncertainty lasting until then?

>> Look it's hard to say, you know, I'm not

a geopolitical analyst, but for the

economy, I think the sooner this

resolution comes into place, the sooner

we start seeing more stabilization in

oil prices, the sooner we start seeing

that closing of the gap between

Northeast Asia, which has benefited from

the tech sector and has been able to

buffer against those energy implications

for the economy, and South and Southeast

Asia, that's been more exposed because

of their higher um their higher share of

the economy contributing to agriculture

as well as um a greater energy reliance

on imported energy.

>> And just to underscore what we're

talking about, we're just getting news

from CENTCOM, it's begun conducting a

new wave of strikes against Iran

as of 7:00 Eastern time today. This is

the ninth consecutive day that we've

seen attacks. Now, look, another country

in the region that's obviously very

dependent on energy in South Korea.

We're going to get those second quarter

GDP numbers later on this week as well

in anticipation that we might see some

slowing growth here, but is it a more

nuanced and difficult case for South

Korea? Not only is it energy dependent,

but we have this AI story, the enormous

volatility we've seen around that

ecosystem. What risks do you see ahead

for South Korea?

>> Look, I just talked about how the

region's really bifurcated between that

Northeast tech very heavy sector versus

the South and Southeast. Within Korea,

it's the same sort of trend that's

playing out. So, the Korean economy has

been powered by this tech sector,

powered by the strength in tech exports,

and that's really lifted all

predominantly the tech industry. But if

you look outside of the tech sector,

Korea's economy is starting to show

signs of weakness. Domestic demand is

pretty weak if you compare it to

pre-COVID. The labor market outside of

the tech sector has been quite weak as

well. And so, right now, we've seen that

policy makers, particularly the Bank of

Korea, are willing to lean on that

strength in that Korean

uh

sector to hike rates and help ward off

some of those inflationary risks. But,

they're also very cognizant about the

rest of the economy that's not

functioning as well. So, that risk is

definitely there. And if we start to see

the tech boom start to slow down both

within Korea and outside of Korea, those

weaknesses are start going to start show

up even more.

>> Can we throw another wild card in there,

too? Over the last 3 days, you know,

we've seen new models from China, you

know, the Moonshot uh Kimi 3, uh Q U Q N

from Alibaba, as well. What are the

broader implications for the that big

ecosystem that's growing up around the

AI story?

>> Yeah, certainly. And look, there are

many players, and China's one of them.

And we've seen that when China decides

to do something, it does a lot of it.

We've seen that excess capacity play out

in China. We've seen that overproduction

occur in China. And I don't think that

tech side will be any different. But,

the one thing to note here is that the

advantage of buying Korean technology is

that for a lot of countries,

particularly in the West, it comes with

a

geopolitical security lens. So, that's

one place where

Korea can benefit immensely. They are a

more secure partner to deal with than

China, particularly when it comes to

technology. And so, when we're thinking

about those risks for Korea, at least in

the near term, they have that playing

for them. Over the medium term, as China

builds its confidence with with the

West, this might deteriorate a little

bit.

>> That is Iliana Jain, international

economist at Westpac Banking

Corporation, speaking with Bloomberg TV

host Paul Allen, bringing you their

conversation here on the Daybreak

[music] Asia podcast.

Thanks for listening to today's episode

of the Bloomberg Daybreak Asia edition

podcast. Each weekday, we look at the

stories [music] 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 Krizner and this is Bloomberg.

>> [music]