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Armholding shares stumbled around eight percent after the chip designer gave what was termed a lukewarm revenue forecast. And what we say in our story is that this could raise concerns that AI spending is slowing. And we're joined here by Kunjohn Sabani, Bloomberg Intelligence Senior Semiconductor analyst on the earning. So we got a couple of things going there, the broader market and then ARM itself. First of all, did you read the forecast as somewhat lukewarm?
I did. And the thing is, though we don't think the AI story for ARM had significant impact here, the likely drivers of sort of the myths versus what the street had. We're coming from networking and industrial IoT, which are not the AI markets, and this weakness has been very publicly has been visible across all other semiconductor companies coming into this earning. So this is something you know, market driven, not AI specific to ARM.
So when you look at their exposure to the soft the smartphone industry, I mean, how does that look to you, coin John, Again, the long.
Term story remains intact. Their percentage share of their V nine architecture, which have doubled. The royalty versus the prior gen continues to go up each quarter, growing five percent. The total person is the royalties every quarter, which we think they'll continue, and the biggest beneficiary that penetration coming
from actually the smartphone markets. So most of the premium in fact, almost one hundred percent of the premium smartphones run on our architecture, and that is the segment that is seeing relatively robust strength over the rest of the smartphone market. So they're really benefiting that the unit growth is slowing, yes, but they are getting corresponding esp increases again due to higher royalties there.
So the reason I asked you whether or not the revenue forecast was luke warm was that it was beyond the midpoint. It just wasn't over the high end of the range that they gave so you know, I think some people would say, well, it was sort of within the range, but we have to say that the stock maybe is not the best way to read really the health of the company, because stock was already up forty one percent this year following eight or nine percent. You know, is not the end of the world.
Is it. I know you exactly got it right. Look, it was not that bad of a miss. What you
have going is a combination of two things. Like you said, you know what we've seen this earning season, these high flying AI stocks who have benefited and from rich multiples because of their AI story, have just been priced for perfection, where every quarter investors are setting up high expectations of significant beats and rays and when that meets reality that look, which was again not AI driven, This is what you are seeing in terms of stock reaction, bringing them slightly
back to earth and back close to reality.
So we know that ARM is roughly ninety percent owned by soft Bank, and we had news tonight that soft Bank is in talks now to acquire this a British chip startup called Graphcore. Do you know anything about graph Core? And then kind of give me a sense, give us a sense of what's going on with soft Bank as it relates to semiconductors.
I don't cover graph course I might not be the most modest person to talk about it. I can just quickly allude to it is one of you know it, Graphcore is an AI sort of chip or a massive chip manufacturing company, and it would make sense, right. Software always is looking to invest in the next sort of gen AI, whether it's some semi conductors or a hardware companies, So that align with that strategy. That makes sense.
ARM has something of an unusual role in the semiconductor industry in that it licenses instructions that software uses to communicate with chips. Walk us through a little bit about what makes ARM unique.
Yeah, what makes this unique is it has this unique position within the industry where almost every player needs ARM, and it has a friendly relationship, which is not what you see across the board. Give you an example, most of the semiconductor companies use ARMS IP, so they are their customers and they prefer ARM. You know, that's good for ARM. Most of these semiconductor companies customers and customers, which are your cloud guys, your hyperscalers, also are ARMS customers.
So it.
Enjoys this really friendly sort of neutral position within the ecosystem which no other company has, and to be honest, in a lot of market there is no other option, like for example, smartphones, they have one hundred percent share. When you think about anything not X eighty six architecture, whether it's in PCs, whether it's in server CPO, there's only one name almost which is ARMED. So it just has this really good unique positioning across the ecosystem.
Do you think that there is still a little bit I want to say market access but maybe a little too much enthusiasm when it comes to semiconductors visa VI artificial intelligence, or do you think the market has it about right?
I think from a fundamental perspective, most of the estimates the market has it right. I can't speak to allusion because here Bloomberg Intelligence, we don't give price target, so I leave that up to it if the market has it right when it comes to the richness of the multiples that the some of these names are trading.
Atkonjohn, thanks so much for joining us, Kunjohn Sabani, Bloomberg Intelligence, Senior Semiconductor analyst. Taking a closer look at ARM earnings, well China's trade data for April are likely to show exports and imports swinging back to year on year increases after being negative in the last print. Joining us now is Eric Ju, Bloomberg economist on China and Hong Kong. Eric, why why do we swing back to positive?
I think so far this year we have seen some improving size on export and the March was actually, you know, probably a one off blip because we had a very strong growth lust and the much last year, so that's a very challenging basis fat. So we saw drop in the exports last months, but I think now the basil fat would be more favorable for April, and usually on seasonal you know factors, April would typically you know pick
up slightly from March. So both factors will support a better headline in April, and we would expect to see a small increase young year. So in this year's albunctionmen.
So when you look at exports, Eric, there are two components. In my mind, one is kind of the overall global economy and the extent to which they're a strong external demand. And in the case of China right now, as though it's been struggling with a weak currency. When you're dealing with an export part of the economy a week currency is going to be a big benefit.
Right, It's some benefit, but I won't say it's a big benefit because I think even from policy makers view, I think that the fundamental think driving export was still the external demand. It's not really the currency issue unless you have very you know, a big depression in UM. But I think it's marginally it's going to help, but I think it's not a fundamental driver.
We saw a big jump in South Korea's exports, right, is that sort of presage what's happening here?
Yeah, but you have to remember South Korea, it's kind of different in terms structure of the exports. You know, for health career, it's more on the chips, I think their strands this year it's it's more driven by a big rebound in the chips shouldment. But I think China is a more broad, you know, a goods basket, so I think it's more depending on the overall you know, a stabiliation of the manufacturing in demand.
So when we look at Chinese imports, how is domestic demand right now?
I think if you look at iports so far this year, it's it's still so so so we haven't seen a very clear sign that domes demanded picking up. So we still expect a small year on year creamy imports in April. But overall we'll say we haven't seen a very good sign of some coming point in the domestic demand. I think that's still something is confusing departy makers. They have to do more, you know, to try to estimulate domestic demand.
We've heard a lot from the United States and from Europe about overcapacity in various industries in China. I'm interested in your take on that and the impact that it has on, say, the domestic economy.
Yeah, and I think for this question, I think there are two sides both arguments, I think, But from a e commics view, I think sometimes it's it's it's not really about overcapacity because right, it's it's just a free trade that's a two hundred years of theory. Right, It's not like every country producing based on your domest demand. Right, we have a free trade word. So if there's a demand outside of countries, so that doesn't mean you cannot produce, You still can produce.
Well, I hear what you're saying, although we just were talking about this new move from the government in China, new rules drafted it slowing the expansion of the domestic battery industry. So, I mean, I hear what you're saying in terms of free trade, but are there perhaps segments of the manufacturing economy in China that that have a strong issue here when it comes to overtire past.
I think it's it's sometimes it's also you know, even within China there could be some over compathitive problem, you know, UV or batteries, because I heard from industry that the domest demand for electrick vehicle is really you know, it's close to four So every producer that are trying to go outside because there's no much more demand new demand
left in China. So I think in terms of that, you can say, yeah, we are producing more than what domestic consumers can buy, but there's still a big, huge overseas market. But the thing is now they face more and more trade proper frictions on that front.
Yeah, the reason I asked you just briefly is that I wonder whether or not it kind of adds to deflationary considerations when you overproduce at home.
Yeah, it's uh, but I think the disflationary story. I think we did look at the inflation data well decompos into supply or demand factors. I think since the second half of this year, the weak inflation was still mostly driven by the weak demand side. It's not supply side. So I think it's still for China, it's the main reason is to people are not willing to spend. The consumption is too two week.
Thanks very much for joining us here in our studios, Eric Juwe Bloomberg economists covering China and Hong Kong. Joining us now on the program is Julia Wong, executive director and global market strategists at JP Morgan Private Bank. Julia, thanks very much for coming into our studios. So when in a bull market, it would take a brave person I suppose to say, well it's over now we're going the other direction. But I put this question to you, are are traders at the moment are we seeing from
the caution in markets? Are they driven more by FOMO than they are about having confidence in the fundamentals?
Well, I think that if you think about the incredible gains for the aquity market in the US and also you know some parts of the world, since basically late last year is you know, many markets were up ten twenty percent over the last three four months, so I think that it was it was it was natural, almost expected, a healthy adjustment as we had, you know, into April to have to see a pullback in resentiment. We saw
some rebalancing our flows. We saw some investors adjusting their positions here and they're just to make sure they're not overly uh, you know, attached to one one sector or one theme. But we do think that the fundamental thesis for equities have not really changed and they're still quite positive. You know, you talked about the fat. The fat is you know, maybe they're not going to cut so soon, but they're not hiking. The direction of monetropolo still unchanged,
so that factor is still there. And then you have the structural changes in the global economy artificial intelligence. I mean, you can debate the speed and who's going to Wigan and who's going to lose, but the structural change is there. So we still think that. And of course the economy globally, particularly in the US, continue to hold up and the rest of the world is a little bit softer, but
it's not quite recessionary. So we do think that the overall map backdrop it's still there, and that's why we do think that the risk asset equity market in particular will probably recover from this consolidation phase.
Julia, can we talk a little bit about what's happening to the Chinese equity markets. I mean, this has been a pretty remarkable recovery so far. This here, how are you reading this? What do you understand it's about?
So we think it's a tactical recovery from an oversold position. So if you think about coming into the year, Chinese
market were down. You know, Homesong market was down to nearly below fifteen thousand in late January, when the rest of the world was powering ahead, and of course then the investor were after three months of very strong gains in the US and the rest of the world, investors wanted to take some position away to diversify, and China meantime did not fall further because the economy seems like it was holding up, even though we debate the the
sustainability of that. So I think that led to a return of flows to this part of the world, which is the reason, alongside and demanding valuation that drove over recovery in markets. So we do agree that, you know, the recovery probably was overdue. It was an oversold market in January. But we do think that fundamentally the economy still does face challenges. There are still uncertainty you had,
So we do think that it's probably the rally. Probably most of that probably already happened, and that's where we are.
So it's not on your conviction call list. You're talking about buying on the dip in Japanese equities and US equities as well. And then as you already talked about some of the secular themes like artificial intelligence and semiconductors, let's pivot quickly to Japan, although I do actually let me ask you about Hong Kong first, and then perhaps
you can pivot if Doug is willing. There was an interesting story that we looked at today that's tied to a conference that is actually today that Hong Kong is organizing, Hong Kong Exchanges and Clearing is organizing with the Saudidol group and they're looking for, you know, some extra support for the Hong Kong market. Do you see Hong Kong as having the ability perhaps to move ahead if China doesn't.
I think from an economic cycle perspective, is increasingly tied to China's economic cycle, so I think that. But I do think from a market structure perspective, there are all these longer term adjustments that you know, the regulators here can make that will make that will you know, further make the market more resilient. I do think that these are, however, quite long term, and they're probably not the factor that really explained why the market rebounded the way it did.
I do think that to see a more sustain the recovery in the market from in this part of the world, you do need to see a turnaround in China's growth outlook or a clarity or turnaround in China's policy direction, and neither of these two things have really changed at this point.
Before we get to Japan, and we'll get there in a moment, I want to talk about the earnings that were likely to get next week Big Now Games out of China tencent Ali Baba JD dot com by do what what is your sense of what we're likely to get next week?
So I'm not.
Equity expert by far, but I think that you know from what we can what we can see from a broad perspective, I do think that investors sentiment towards big tech in China has already warmed quite a bit or particularly you know, you mentioned Tens and all these big names. There are things that we know, like gaming, for example, the regulatory process worked a little better. So all of that gradually has you know, dripped through to market and
probably are enterprice at this point. So we do think that earnings, of course are important, but you know, we do need to see a sustained turnaround in their guidance over the next few years of the market to do even better from where it is today.
Okay, to Japan, we we do have a little bit of a mix in the market. I've heard recently a few commentators saying that they don't really buy into, you know, the structural reform and the whole bull market story on Japan that you know, they've made all these improvements and such. Others are sticking with that and see a lot of potential for the Japanese market going forward.
Your thoughts there, Yeah, so I think that there are two big structural changes. One is actually what's happened in the global economy, the global supply chain shifts the rival of AI, and as I said earlier, we can debate the pace of it, but it probably is a secular change that will be with us for next five, ten, type or even a decade. So that's one thing that japan industry is just in a position to benefit from. They didn't create this, but you know, they're on the
supply chain, they're monopolies, they can benefit from it. The second thing is we do think the reflation story is taking hold. There is a rise in household and business expectations for prices and wage growth for the first time in thirty years. You can see that in the range of data. So I think that this will take time to play play out. It's not a one night or you know, even one year story. But they move away
from reflation since seems surreal. So for those two reasons, both of which are very structural and are not so tied with the day to day moving the effects market or resentiment, we do think that Japan is an investable market again for thirty years, and that's a very different position from where it was in the last decade. So globally invested in so underweight this market, but suddenly it's investible, So we think that this is this is a real shift that's happening.
Julia, how do you understand the reliance that Japan has on a strong Chinese economy? Is that still the case right now?
So if you look at bilateral trade, you know, China is to the biggest trade partner for Japan. Japan is maybe third or fifth biggest trade partner for China. So bilateral trade is strong, and China imports a lot of robotics in high end equipment from Japan. And while China has this long term goal to be self sufficient and move up the value chain, in the process through which they get there, they rely a lot on Japanese technologies
and businesses. So I think that the ties will stay and that is actually a small positive for Japan as well, because that's you know, an area of demand that they will see for the next couple of years.
So if you really boil it down with what's happening in China, is it's safe to say that we've seen a cyclical upturn, but we still have secular headwinds.
That's one way to one way to put it. I think cyclical stability is another way to put it. In a sense. The stability allows investor to take the tail risk off the table or at least reduce the probability of that happening. Together with what's happening globally with the diversification of flows, is what I think drove the market recovery.
But we think that the concerns, you know, next six to twelve months are you know, housing market is still declining by sharp right every month, and there is a constraint of what policymakers can do on a stimulus front. All of these are still concerns.
All right, Julia, thanks very much for joining us. Julia Wong, Executive director of Global Market Strategist at JP Morgan Private Bank.
This has been the Bloomberg Daybreak Asia podcast, bringing you the stories, making news and moving markets in the Asia Pacific. Visit the Bloomberg Podcast channel on YouTube to get more episodes of this and other shows from Bloomberg. Subscribe to the podcast on Apple, Spotify, or anywhere else you listen and always on Bloomberg Radio, the Bloomberg Terminal, and The Bloomberg Business.
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