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Welcome to the Daybreak Asia podcast. I'm Doug Chrisner. We begin today with a warning from the Bank of International Settlements the global economy remains caught in the cross currents of progress and peril. In its annual report published today, the BIS said an artificial intelligence bust, along with inflation and fiscal stress, are among the most alarming threats to global prosperity at the present now. This report also highlights
the risk linked to circular financing deals. For a closer look at the risks confronting markets and economies globally, let's bring in Oliver Shale. Oliver is investment specialist at the Rougher Investment Company, joining from here in New York City. Thank you, sir for being with us. How do you evaluate the risk right now in the current environment, And I'd be curious to get your take on how these risks are being weighted right now.
Yeah, High Dige, it's great to be with you. I think what we've got at the moment is a market which is baking in a lot of good news and hope and has coalesced around a very narrow selection of stocks and themes meeting a real world and fundamentals that are increasingly volatile and bifurcated. And I think specifically on the market front, you're seeing the perceptions around some of
the AI leadership AI build out shifting fast. Not least in that BIS report that you mentioned, the investors have becoming more skeptical about the adoption of AI, the genuine results that it might be bringing, as you say that as an increased understanding awareness of the circularity of earnings around the whole ecosystem, while companies are encouraging engineers to be more cost aware, moving to more token efficiency. So
a lot is resting on this revolution. A lot is resting on the shoulders of a handful of companies, and there is not a huge margin of safety in valuations, especially for those names, and that's something that we're always looking for ways to preserve capital and trying to avoid meaningful drawdowns in markets. So that's something that keeps us cautious.
We had an interesting story on the Bloomberg terminal today, in fact, talking about the surge that we have seen in market leverage. It seems like demand to borrow money has driven an unusual mid year spike and financing cost. I think they are now at about the highest level that we have seen since December twenty twenty four. To what extent is leverage kind of a defining theme for the market right now? And if it is, are you concerned maybe about elevated levels?
Yeah, I think that's so important. And you're seeing equity funding rates increase. That's driven by the huge amount of supply. The large IPOs that are coming to market is driven by a demand for those equities and for leverage, and
it creates a setup which is avalanche prone. The growth of or the use of leverage across trading activity, the growth of things like leathered ETFs again, which are focused on a narrow selection of stocks, can exacerbate moves in the market in both directions, and it really makes for a market which can be jumpy, avalanche prone, and vulnerable to outside or exogynists shots.
One of the big stories near the end of the last week was the fact that both Apple and Microsoft are having to raise the cost of their devices to compensate from higher cost of memory chips and storage. And today we are getting indications that South Korea is going to unveil a sweeping strategy aimed at driving the great leap forward. We've got names like Samsung SK Group involved with that, which sounds to me like it's a semiconductor story.
Where are we right now in this cycle and is there the risk that a name like Samsung or sk Heinez or SK Group were to add to its capex right now to try to build up even greater capacity at this particular moment where we may be at an inflection point if names like Apple and Microsoft are passing on higher cost of their components due to the fundamental problem with a shortage of men memory and how prices on that front have been pushing higher, is there the
risk that we could see some level of demand destruction and that that could ripple back and impact some of the memory manufacturers.
It's very interesting because it's sort of bringing into focus the question of who ultimately absorbs the cost of this AI build out and where do the benefits even accrue to. I think some of the headlines you mentioned bring in to focus a bit of a paradox where the revenue for these semiconductor and memory companies is ultimately a cost and a rapidly growing one for basically the rest of the market and certainly to the hyperscale companies that prop
up the market. So it's underscoring the kind of intensifying margin pressures that come with this booming demand for compute and in order to fund this capex cycle, we know that these companies are increasingly looking towards investors to finance their AI ambitions. They're tapping credit markets, they're coming to equity markets. The investors will increasingly ask to see returns
on those investments. And if at some point they begin to go worry, then and either the cost of capital starts to rise or the financing is simply withdrawn or not there, and the capex that build out has to slow.
So I'm curious about rougher strategy in the current environment. If you have to be exposed to that space somehow, anything that's related to artificial intelligence, whether it's the hyperscalers, whether it's the semiconductor manufacturers, is that necessarily true? And if it is, how do you protect yourself against downside?
Yeah, it's a great question. What we really look for and are obsessed with is asymmetry in asset prices. We like things that are not crowded, that have a large margin of safety and can produce strong COMICX returns when they work. Now we're completely in agreement that AI is a thing and we want to take the technology seriously. An area where we can get cheaper and more asymmetric exposure to that is through the Chinese technology sectors the
US economy. It's clearly extremely innovative that the models are superior, but the capability gap is closing, and there is a place in the world for cheaper, kind of good enough models, and there are signs that some consumers and businesses are even favoring these. So if those models begin to see adoption, and they may soon call into question the premium charge by some of the more sophisticated US labs. But it goes, it goes broader than this. These Chinese companies have very
strong business models. They train a much cheap evaluations at nine times earnings, with strong revenue growth and captive customer bases. So that's an area that we seek to get exposure to this narrative and theme without taking on so much of the valuation risk and the crowding risk.
In the US, it seems like you can't be discussing artificial intelligence without addressing the power issue. Is that a space that you're playing in right now? Do you have a view on that.
We don't play directly in that at the moment, but it's it perhaps highlights that we are we're moving to this world where countries companies need to shift from a just in time optimized model to one of resilience. You know, you can't guarantee that you have access to these commodities, power, the chips that you need at the prices you might have expect did and all of that is underpinning these shifts, something which we think is really important to a world
of higher and more volatile inflation. We're seeing this in trends like supply chain, on shoring, commodity stockpiling, a remilitarization, and I think that's a really important trend for markets in the coming cycle, that inflation is here to stay and we should expect more inflation volatility.
So what does that mean in terms of the house outlook for interest rates? Can you give me a forecast?
We are part of the thesis and the reason for fearing inflation volatility is that if you look at inflation episodes through time, they very rarely occur in just a single wave. They typically come in waves, and that's usually because the rus and the policies that are needed to quash inflation are not in place and not palatable after the first wave. And so that tells you a little bit about how we think about where interest rates heading.
That we think it will be difficult to meaningfully raise interest rates on a structural basis, and that allows the inflation impulse to come through. That said, it seems like the US Central Bank and Kevin Walsh have enacted a miniatry, mini monetary policy regime change and are leaning more hawkishly and markets are having to digest that. And it's very possible that we see tightening attempts and that could equally undermine the valuation basis of particularly US assets.
Oliver will leave it there, thank you so very much. Oliver Shale is investment specialist at the Rougher Investment Company. Joining from here in New York City on the Daybreak Asia podcast. Welcome back to the Daybreak Asia Podcast. I'm Doug Chrisner. South Korea will unveil a sweeping industrial policy later today. It's expected to focus on sectors including semiconductors, AI, data centers and physical AI and as a part of this plan, Samsung and sk Group are expected to announce
major investment plans. Korea Economic Daily says the value is expected to be one point three trillion dollars over the next ten years. And that's where we begin our conversation with Sean Cochrane. Shawn is head of research at Sidik CLSA. He spoke with Bloomberg TV host Paul Allen and Cherry on.
We talked about this rotation trade in the markets, right that sell off from tech South Korea very reflective of the jitters around AI spending. What will the announcements today have more investments to come in this sector do for the market in the long term.
Well, that's exactly the question the market is trying to resolve and why we're seeing the volatility, which is that it's very clear there's a very strong demand for memory and that's coming from this AI revolution that we're all witnessing unfold. What the market is trying to decide is two things. First of all, how much supply will come
and then how will that be consumed. The real challenge that's actually driving the end volatility is the market's trying to decide what's the true profitability of this memory that's been purchased for the purposes of AI, which will then tell us what's the sustainable nature of that spending.
And really, while we're trying to understand if this will pay off or not, we have seen this US exceptionalism narrative, continuous strength in the dollar as well, combined with what the effect could potentially do in a more hawkish narrative now on unfolding at the moment, what are the implications for Asia and economies that of course are also suffering from pressuring their currencies.
It's really interesting in that there's the growth element to it which is pulled around North Asia in that for those economies that are geared towards the AI capex boom and they're participating in what we might call this K shaped economic structure where economies are seeing strong capex which is holding up the economic growth overall. At the same time, the general population is not necessarily participating in so far as we're not getting pervasive jobs, it's not moving out
into consumption. At the same time, we have a new FED environment and the signal is relatively clear, which is this new FED is saying we will not provide strong guidance to the market. The market is actually a core source of intelligence for them, and then are more of a fact driven scenario. Is what the FED is signaling to us now, so the markets are trying to balance these mixed signals overall, This is a meaning that yields
are pushed up into this change in the FED. Overall, However, the long term meals are already quite elevated, and it's unlikely that the market can sustained very high levels of yields increases, especially at the long end.
Of the curve.
Yeah, in one of your recent reports, you say the end's looking attractive. This is even though it was hovering around forty years lows. So maybe a buying opportunity here. But what's your outlook for the currency for the US dollar? And is it intervention that's going to finally break the down trend for the yen or is it something else? Ideally, well, probably Bank of Japan tightening.
Right, So two very important questions. Let's unpack them separately. So if we look at the US dollar, we've been contrarian bullish on the dollar. It's been quite fashionable to be bearish on the dollar, and some time ago there was the view that there was going to be an engineered decline in the dollar in that certainly it's performed well and it's not cheap relative to global currencies. That said, the challenge has become the global economy has been very
much dependent on credit provision to continue this growth. We're even seeing this in the tech sector. Overall. This means that as credit conditions get worse, as the debt loads become higher relative to the sustainable cash flows, this increases demand for high quality collateral and over time creates demand for the dollar. The next phase for this is a deterioration in the credit cycle and more demand for the dollar. So tactically I would say we're bullish on the dollar.
Certainly I'm personally bullish on the dollar. The end is very interesting in that the END is a net creditor, a very strong economy in terms of the amount of capital letter has to deploy, often deployed offshore, and so in an environment of tightening credit conditions, you'd normally see en capital repatriated home, which should put upward pressure on the END. What's fascinating is that the END has been weakening for some time, whereby historically its monetary conditions were
too loose relative to global conditions. They've been seeking to tighten and the market is yet to respond. And obviously there's inflationary pressures that have built in Japan that is unusual in the historical contexts. Base case would be that the end can find a flaw here and can rally in tightening credit conditions. If that doesn't happen, that would be a major change in the way that the market is looking at the end.
There were some ideas that the weakness of the Japanese yen and the extra pressure that we're getting on the currency was because also Japanese starts were rallying at the same time. So when you have foreigners hedging the gains in the NIKE, you have to rebalance and that will actually lead to huge en selling. How does the pressure on the en affect the equity space net net because
you have some of those big exporters. But at the same time, when you have a weekending economy, won't that dampen demand?
Right?
So certainly, from a cause of perspective, the most likely thing I could see investors having conviction is the idea that as long as the the end is weakening, it creates an environment where equities as a real esset provide a natural inflation heads and as a result, a weakening of the end creates an increased risk of future inflation, and investors will therefore be more inclined to be interested
in equities because that provides the natural hedge. Combined with the fact that Japan as an economy has been performing reasonably well, and there's clearly the value up theme that has increased the investor's conviction that equity can deliver value given that Japanese equities are not expensive in a global context, albeit equities as an asset class and not cheap right now in a long term perspective.
Sean, I just want to get back to this AI story because we had a very interesting report over the weekend from the Bank of International Settlements warning of a potential AI bust and the short term but in the longer term the utter hollowing art of the middle class, and they point out that this is not like other tech revolutions. AI can pretty much handle any new job up or down the value chain near term, medium term,
long term. Do you lose any sleep over these kinds of themes and how do you play them?
Certainly I've done markets a long time, and the one thing that you learn with enough time in markets is we don't know anything for sure, and so we need to be extremely open minded. That said, the long arc of history suggests that usually technologies create more jobs than they destroy, and that would be my base case until
there's very strong evidence to the contrary. Now, what we're witnessing right now is a peak concern around job destruction or the replacement of humans via machine solutions, simply because it's a slightly naive application of how these models should
be applied. What do I mean by that? If you think of how models are being applied right now, some of the most advanced front team models give us a PhD level capability in certain context, think of us as having our own children from the Big Bang available to us at call. The challenge becomes that rather than asking this individual to help us solve string theory, where sometimes
asking this individual to solve simple problems. The market's slowly going to figure out that we need to apply the right technology in the right context, and that will give us a better solution in terms of the cost involved and how this will be evolved in terms of how companies actually apply it.
In the meantime, while we get to that equilibrium, will we see more of that key shaped recovery that we talk about within economies? Among economies we have seen this inequality leading to protests in South Korea, for example, between chip workers and non chip workers. And what does that mean for investors that are trying to really bet on the next big sector?
Right?
So, certainly, as long as the market remains focused on capex driven growth, which is it oriented than this case, shape phenomena will continue, and you will have this bifurcation between those that participate in that and those that don't, which will create political tension if we think about what's driving that. The core dynamic for now is the market is looking forward to the potential of AI. We don't know exactly how companies will make money from my AI,
that is the core question. As a result, capital markets are playing a crucial role. What we're witnessing is a lot of private companies that are a large part of the purchasing where this capex is coming from. The money that's funding that is typically through equity and to a lesser extent for the private sector debt raisers and certainly
for the public sector for debt raisers. As we come into the process of some of these companies listing, that should reduce the ability for consistent aggressive equity capital raisings, which should slow the capics. When that happens, it should then slow the orientation on AI and the market's focus will move to other sectors which can either broaden or slow the economy.
That with Sean Cochran, head of research at Sidik CLSA, speaking with Bloomberg TV host Sherryon and Paul Allen, bringing you their conversation here on the Daybreak Aasia Podcast. Thanks for listening to today's episode of the Bloomberg Daybreak Asia Edition podcast. Each weekday, we look at the story shaping markets, finance, and geopolitics in the Asia Pacific. You can find us on Apple, Spotify, the Bloomberg Podcast YouTube channel, or anywhere
else you listen. Join us again tomorrow for insight on the market moves from Hong Kong to Singapore and Australia. I'm Doug Prisner, and this is Bloomberg