Hong Kong High Rise Fire, Fed Cut Bets Continue

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Welcome to the Daybreak Asia podcast. I'm Doug Prisoner. We begin in Hong Kong, where rescue workers are trying to extinguish a major fire at a high rise apartment complex in the northern part of the city. At present, the death toll is forty four, although hundreds of people are still missing, and according to the Fire Department, blazes in four of the buildings are under control. However, three buildings are still burning. Bloomberg's midmen Low is on site.

I just want to tell you what it's like to be here, because the first thing you notice is the smell of the portrait smoke, and when the wind blows, I could feel the sting in my eye because this the buildings behind me are still billowing the smoke. And we are sixteen hours into this fire, which started yesterday at three pm. It was a level three fire at the time. It has upgraded within hours to a Level five,

That's Bloomberg's midmen Low. Now, Hong Kong police have arrested three people from an engineering firm on suspicion of manslaughter. At the same time, this fire has prompted renewed scrutiny of the city's use of bamboo scaffolding on major renovation projects. Let's turn to markets in the Asia Pacific, where equities for the most part are advancing after some gains on Wall Street, and we got perspective from Heartwood Issel. He is head of APAC Equities and Credit at UBS Wealth Management.

So Hartman talking fus about the most important central bank in the world, right, the FED and December being more or less baked and already. But we also have come quite far. Remember around the time of October, December seemed like a done deal. So what extent is there this certainty was that going to mean for Asia?

Now?

I think we have to assume and we have we had on our side assumed all along, also that December is coming when we think at least another one for also the first quarter for Asia, it's generally typically positive. Also when the dollar comes a bit softer, right, the US economy is doing okay, So yeah, we will have the entire Apec region on attractive with a couple of different markets that we highlight in particular.

Which ones in particular.

Yeah, I would mention three different drivers sort of speaking. They are all very different. That's why you know that that's also the beauty of the Apec region here, right, So you can diversify that pretty well. So you have the AI side, we would probably pick their China Tech right also come back a little bit.

That looks very very interesting as supposed to say South Korea, Taiwan, Japan.

Japan is for the for different reasons. I'd say Taiwan, South Korea, especially South Korea has has run up quite a bit, but if it comes down a little bit, we would also consider that. But probably right now, if we compare these, especially on the air side, probably the favorite right now is China Tech and the other ones we have is value A programs. So two I would like to mention here is certainly mentioned that Japan. If

Want to turn into Japan, but first let me stay with China, because is it still appealing to you when you continue to see the US China Trade engines, and you have the Pentagon continuing to add these companies to his blacklist.

It's not the first time that we're seeing some noise happening around in China or the China.

Stocks as well.

Look, I always take a step back on fundamentals, right, I mean, how many of these Chinese companies are really exporting anything significant to the US? Right, So then you could argue they don't really right, So these sort of maybe it's also part of a negotiation. I'm not saying we'll stop it here, but we have seen it before. It has never stopped really the Chinese stocks also from doing well as long as the fundamentals are doing well, so I wouldn't over interpret that part of the game.

Yeah, I mean you have a point, right. We are seeing this bifurcation when it comes to tech supply chains anyway, So what does it matter if the US continues to ban these companies at the same time for some of those Japanese names. If you see the bigger and sharper bifurcation of supply chains, what does it mean for the likes of Tokyo Electron that supply this equipment and cannot service their facilities in China for example, or even the South Korean chip makers that cannot sell to Beijing.

That has been something that influenced a couple of companies, including of course also European ones, right, So it's a general it's a wide phenomenon oftentimes, what we see because the demand for certainly on the aside, but even beyond aid somewhat traditional semiconductors, that's very very strong right now. Also what you sometimes see is that if something really happens on the China side with some restrictions, right then you're baked maybe a few quarters in where that takes

The drivers of Chinese tech in particular, what are you seeing in terms of valuations versus it's global peers and the prospects of growth, especially since we've just come through the earning season, we still have meet to one coming up of course.

Yeah, that is interesting And one point I would pilot in particular, especially on the China side, is the cloud area of it, right, because you have a bit like you had in the US with some similar names, I would say, right, so investors watching also e commerce et cetera, and there's one thing you can do, but ultimately we know that everything eventually shifted towards cloud or later on.

But there is a sense of a double standard, right if you look at some of the US players, Okay, strong cash flow, cap backs looks great, and when they spend more, they tend to get rewarded by investors. Sometimes that's not the case with the Chinese tech names. So what is your sense of what might shift the needle when it comes to global investors looking at Chinese tech stocks in particular.

I think one thing that is interesting if you also look at how long you know the period of you know, AI investments, thinking about AI has lasted right in US you could say easily maybe given takes three years, right, China probably more like like one year. Right, So that alone means that China right in every thing that that should follow is a bit early, and it's and it's stays here than the US already is. So that alone, in my view, is something that investors should keep in mind.

It's been really interesting Hartmouth, how sentiment has turned in recent days after the textile of earlier in the month, right, and now it seems that the driver's seat is also molnetary policy with more Dubvish FED speak. What does it mean for Asian markets?

If I look a bit further out for the landscape, let's say we will get a bit softer next year GDP growth, et cetera. Then perhaps is expected right now that gives a lot of the Asian Central Bank a lot more also room to come even further than we already think they would still go to some extent, so it buffers the downside on the equity side.

What does this mean for Asia local credit next year? If growth to your point about it being quite resilient, but we also have maybe some of these central banks have run up into the limits of how chazing they can do.

We see also the bit longer term with bond deals coming from certainly the US also going a bit lower from here right and then with a dollar especially maybe over the next six months, so also being a bit softer. That means here for apex, we prefer the IG side, but we also prefer naturally, I would almost say the local fax site on the bond site. These two are the ones we really like.

That was hartwood Issel, head of a pack equities and credit at UBS Wealth Management. He was speaking with Bloomberg TV host Sherry On and April Hong here on the Daybreak Asia podcast. Welcome back to the Daybreak Asia podcast. I'm Doug Chrisner. The US equity market advanced in the last session on rising expectations for FED rate cuts. We had the S and P gaining ground for a fourth

I think there's two big risks that the market is focused on right now. One is obviously valuation, So valuation is very frothy when you look at history. Things like the buffet indicator are hitting an all time high too, standard deviations above where they usually are. So the buffet indicator is just GDP versus what this stock market value is, right, very simple indicator, but a powerful one.

And then the other is rates.

So I think we're getting more clarity that there'll be cuts coming.

After the last meeting, we had.

A lot of fed chairs saying that, you know, we wasn't necessarily a certainty that we would be getting a cut in December. I think the odds are now favoring a cut and potentially a couple more in the second half of next year. But if that story falls apart, if all of a sudden, you know we're pausing for longer we view that as a pretty big risk to market, especially with where valuations currently are.

So we had the Beige Book today from the FED, and as a part of this report, multiple districts including New York, Atlanta, Minneapolis on the list. They all reported spending among higher income consumers was resilient. However, low and middle income households are tightening the belt. This goes to this ke shaped economy that we've been talking about. It doesn't seem to be changing at all, does it.

It doesn't. It's the story of two economies.

And to your point, I think the folks on the lower half of the income spectrum are getting hit harder from things like tariffs, right and inflation. So you got to think about what that consumer has been through over the past five years. They've seen rates go from two percent to you know, well above five and now.

Back down to around four, right.

But they've also seen skyrocketing prices and fuel, food, you name it. So they've been through quite a lot when you just look at their wallet right now, the top half of the income spectrum can weather things like that, it's not as big of a blow to them, but that's not the case for lower income households, so we have to see how that plays out for more cyclical names, things like retailers and such.

So if expectations are calling for a FED rate cut in December and many more in the year ahead, maybe as many as three for twenty twenty six, I'm curious just to get your take on the effectiveness of lower rates and helping to address this ke shaped economy.

That's that's a very tough question.

I think that you know, if you have lower rates, there's a reverberation across markets. I don't think that that's the only thing that we need to do in order to correct that. It's a much more difficult problem to solve, in my opinion. One, you need strong earnings to come through so you can continue to have job growth, income growth, and that sort of thing. And I think the S and P is now pricing in around fourteen percent on earnings growth next year, which is largely due to AI.

I think the big story.

Around earnings growth next year is that the bottom four ninety three need to deliver. Right, so everyone knows that the Max seven is doing very well. They're profiting from AI. You're already seeing the underlying impact of their balance sheet,

Right.

If we don't see a broadening within those four ninety three, that's a big risk for markets. And in fact our view is ironically, if we don't see a broadening within the four ninety three, what's even more at risk than those names decreasing in value as the MAG seven themselves because of the concentration within those names. So in the S and p as, I think it's over thirty percent

So we know that the equity market has been challenged recently with a fair amount of skepticism when it comes to the AI trade, especially where megacap Tech is concerned. Trading has been pretty choppy over the last couple of weeks, although now it seems as if the market has found some solid footing, does that necessarily mean all questions have been answered, particularly as we look ahead to the new year.

So I see a definite split on the street when it comes to your viewpoint for next year. Right, I mean, at the beginning of twenty twenty five, there's a lot of bullishness out there that has very much changed at the end of twenty five, where you see almost an equal amount of bears. I think the big inflection point for next year is does AI monetize in the way we think it will?

Right.

If it does, great, you.

Know, the bulls win that argument, and the bull market can continue as long as rate cuts come along with that. If we don't see monetization next year, I think that's when the chickens come home to roosts, so to speak. I think that next year is that inflection point the show me market, so to speak, where AI truly needs to show its benefits.

Because now we've.

Been rallying on what three years of this news, So if we don't see the underlying impacts hit to earnings, I think that investors aren't going to start aren't going to give as much rope as they gave this year, right, and we'll sell that news. So because of that, we're a little more cautious next year on that story, and we want to see how it plays out.

How are you feeling about markets offshore right now? Foreign markets, particularly those in Asia.

EM has had a phenomenal year, right, a banner year. We see momentum going into next year. I think obviously, if the US market gets hit, you know, if the US market sneezes, everyone else catches the cold, so to speak. Right, But I do think the story can continue in EM next year as long as rates come down. I think a lot of that has to do with the story

So a lot of momentum.

Has been built up over there, and I think it's going to be tough to kill that within the next six months.

So we've seen the dollar hold up pretty well recently, even though there's been a lot of conversation about impending FED rate cuts, and if the dollar continues to remain firm, yes, markets in Asia may benefit. But I'm wondering about the point where the dollar's fortunes begin to change. Is that something you've thought about.

It's been a strange macro story, Doug.

I mean, look at gold.

For example, gold has rallied with stocks, so I think you know, one of the things that investors were concerned about is usually the gold market will sniff something out prior to the equity markets, and all of a sudden you see the gold markets rep higher. It's definitely cause for I won't say a concern, but pause. Right, So, all year we've seen gold rally with stocks. I think a lot of that has to do with concern around valuations, concern around debt, central banks, so on and so forth.

Right, So we own.

It as a hedge one and then two obviously capital appreciation, But if all of a sudden that head story falls apart, we're really going to have to rethink our thesis on that.

Okay, Patrick, we'll leave it there. Always a pleasure, happy thanksgiving to you, Patrick Kennedy, as founding partner at All Source Investment Management, joining us here on the Daybreak as your 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