Bloomberg Audio Studios, podcasts, radio news. This is the Bloomberg Daybreak Aisia podcast. I'm Doug Krisner. You can join Brian Curtis and myself for the stories, making news and moving markets in the APAC region. You can subscribe to the show anywhere you get your podcast and always on Bloomberg Radio, the Bloomberg Terminal, and the Bloomberg Business app.
Well.
South Korea's economic growth accelerated to a pace faster than most optimistic forecasts had been around. Good news to President Yun sukyul. A bit late though, given the election setback, but anyway, GDP advancing one point three percent in the three months through March versus the previous quarter. According to the Bank of Korea, the economy grew three point four percent year on year, beating the forecast of two and
a half percent. Now in that environment, as k Heinez said, it expects full recovery in the memory market in chips, and also that AI demand was spurring the chip maker to its fastest revenue expansion since at least twenty ten. Joining us now for some discussion is Yu Kung Lee, Bloomberg Asia Stocks Reporter. On a closer look at heinez here. So I guess the best news here really for general investors would be that at least this company expects full recovery in the memory market.
Yeah, that's right. Well, the best news is also might be the best opportunity to sell the news, and that's how the markets are seemed to be interpreting the latest positive string of announcement from eske Heinis. The company reported a blue out earnings, Yes, and that demonstrates that the chip industry is in full recovery after years of slump and downturn, and thanks to this strong demand coming from
the AI and not just the AI. Some of the silver lining the eskehihneys highlighted also included us forecasting bullish demand for traditional membership, which means that the demand for smart phone and personal computer might be also finally recovery going toward the end of this year. So there's a there. Also, there are a lot of positive announcements from the company from today's earnings results.
Yeah, you might talked about kind of buy the rumors, sell the news. Yesterday the stock was up my more than five percent. So when we look at the memory chip market, I mean, if the company says to you maybe we are entering a full recovery cycle. Are they taking into consideration what the competitors are dealing with right now or is this pretty much from the company's point of view.
So when you talk about that in the memoryship, they are definitely taking into account what the competitors are doing. There's pretty much three memoryship supplier in the world when
it comes to dram the maturity of the memboryship. There's SAMs and Electronics, there's ESK Heighnis that, there's the US company Micron Technology, and all three of them have been in a have been reporting pretty bad results last year, but all three of them are expected to report pretty solid earnings this year and thanks that's thanks to the industry wide recovery that's helping the membership demand for all these three companies.
The announcement this week that Heinex would spend fifteen billion dollars in South Korea on a new plant, what does that actually mean for the company.
Sure, so that displays strong confidence coming from SKA Heinix that is pretty confident there will be strong demand. Ford is a high end membership called HPM that is a crucial for AI accelerators such as the ones made by Nvidia. So that was a really kind of type of news. That is that may be seen as a positive, but
also for some investors. Typically the membership industry is very vulnerable to the supply and demand situation, So therese upcoming increase in up could also be a negative news to some investor because that could raise concern about potential supply, although that may be a lot down on the road. So there is this is not all all the all the positive good news. There's also some some source of worry.
Brian was talking about that positive print on GDP walk about economics time. How is the South Korean economy performing? You're in the capital, right, you have kind of a viewpoint on what's happening in a major urban center, but you're very much wired into other pockets of the country and where manufacturing sites are set up for things like not only semiconductors, but automobiles as well. How is the economy performing in South Korea?
So, the South Korea economy is very sensitive to global trades and global demand, especially the global demand for the tech and consumer electronics because chips count for the huge part of the South Korea exports and to today's growth results also show pretty strong exports growth from the chip makers that is helping the growth for the for the
entire nation. However, this may not be entirely a great news for the stock investors, because we are also seeing speculations that the central bank in South Korea Bank of Korea may be considering delaying its own rate cuts because the economy is doing well. This is just like what's happening in the US, and the FED made postpone as raycut to the later this year, and that may also widen the interest rate gap between the US and South Korea. So the South Korea Central Bank may not be reducing
interest rate as soon as investors expected. So the GDP is not all good news.
That may not be a bad thing. I mean, there are some of us who believe that no rate cuts at all is actually the most bullish move for central banks this year, just in that once you start getting the cut, it's usually because growth is turned down or unemployment has started to move up. This is a pretty good environment that we're in. If you look at these stock chart of Heinez, it's amazing from the lower left
to the upper right. Noting though that it did sell off ten percent before yesterday's big bounce on the Capex move And like you said at the very beginning, and I'd like to hear more thoughts on this, maybe the best is already in.
Sure. So if you look at the earnings outlook and the fundamentals of Esquhiinis, there are may be more legs for the rally in the share prices which is hovering near the highest level in twenty four years. And you see the similar movements for the in the share prices of other chip makers Nvidia, TSMC, Samsung, they are either near their peaks or breaking their peaks, and then in recent weeks they've been falling more than ten percent into.
The correction level.
So that's why this season is going to be really interesting to see whether or not the earnings is strong enough to get everybody powered higher. YUKIONG Lee joins us Bloomberg Asia Stocks reporter from Seoul. We're joined by fanchuk One Asia CIO of HSBC Global Private Banking and Wealth to take a closer look at markets, and we have had a lot of up and down here of late. We talked about the big drop in Meta shares today, but we also had Texas instruments surging, Tesla surging. We
also had gains in Visa. So it's very much day in and day out a different picture on how the equity market might be performing. I suppose a lot of that is tied up into the individual companies and what they're doing, and also the forecast on interest rates. I note that you believe that the big central banks are on track to start cutting interest rates this year. You're sticking by that.
Yeah, we still expect Divado Macas central banks will start with the Montreal easing cycle later this year, but of course market reprising for slower fed rate cuts have gone quite far. Uh and now to the points that now market actually push out the rate cut expectations in the US towards the Q four this year, and in some forecasts project no rate cut. We think these have gone
too far. So at XSBC, we currently still expect free US interest rate cut this year, but the risks are clearly skewed towards a later start, so we may see the fat cuts to come in the second half of
the year. It's compared with our current projection of a June start, so we think the reprising have already taken place, and importantly, we think there's very high probability that the European Central Bank will kick start with monetary yeasing in June, and there's also debate whether there would be another July rate cut.
So with.
Interest rate sign code turning, we still thinks that is important for investor to put in cash to work because investment risky asset should deliver better total return compared with cash. When central bank now reversing the monetary cycle.
Fun I want to ask about you. Yeah, well, I want to There's a couple of things there. One, I mean, if the ECB begins to ease, then maybe risk assets in Europe are a bye. But I'm also, as long as we're talking about central bank action, curious on the Bank of Japan's decision, which is happening Friday. What's your sense of what's going on not only with the economy in Japan and the rate of inflation, but whether or not it's an opportune time to put more money to work in Japanese equities.
Yeah, we are bullish on Japanese equity, so we stay overweight on Japanese dog We don't think the BOJ will for the increase interest rate in this week's meeting. But given the growing expectations for slower fat rate cuts, and this also created room for the BOJ to raise interest rate earlier than expected. So currently we expect the BILJ will likely raise interest rate again in the third quarter of this year and we project two more rate hike
in twenty twenty five. And given the significant weakness in the end and now yen hits more than three decades low, so the BILJ would also have the incentive to raise policy rates before the end of this year. Uh and this would also help to curb the extreme weakness in the end.
What do you like most about what Japanese companies bring to the table at the moment.
I think this more sustainable refras trend in Japan would both well for corporate earnings outlook and the Japanese equity market is substantially exposed to the tech cycle. Given the global AI investment boom is also driving strong capital expenditure spending in Japan on digitalization, automation and AI technology to mitigate the structure had went from aging demographic so Japan is also a very attractive play on the AI investment boom.
And on the other hand, the accelerating corporate government reforms also so prompt more listed companies to introduce corporate actions to enhance shareholders value, including increase in diffidend payout and share buyback. So this will well for our OE enhancement in the medium term. So there are actually a multiple driver upon equity market in Japan misfund.
So much of what happens in the APEC region is driven by economic activity. In China. We know that and clearly the economy is struggling. We're waiting for some type of turn. Maybe it's happened, and we won't know that clearly for a few months. Now, what's your sense on China and whether or not there are opportunities to put capital to work there.
We currently have neutral allocation to China equities, but we adop a most selective positioning given that the recovery out of remain divergence. So the property market stress remain a key on the economy. But looking at the Q one China GDP report, infrastructure spending actually came in better than expected. On the other hand, industrial protection growth and retail sales actually came in weaker than consensus estimate. So this is clearly a mixed picture in terms of the recovery outlook,
So this would imply divergent corporate earnings performance. So we see more resilient financial performance from the surface consumption sector.
So you have to be a stock picker, yes.
And focus on the resilient sector.
Yeah. I want to go back to a comment you made at the beginning of our conversation, which I think a lot of people would take heart from. I mean, they would say, you're right that right now there's the risk of fewer interest rate cuts than more, and so as a money manager, you have to be very cognizant of that. So that would augur for being pretty careful here. You said that you think it's a great time to take advantage put money to work in the stock market.
How do you reconcile those two thoughts.
Yeah, we actually don't think a lower start of the FED rate cut is a negative development because the key reason accounting for this trend is stronger than expected US growth and this has been reflected in earnings expectation. We expect our market projection for US earnings growth to further improve, so this will actually support further broadening of the US equity rati in our opinion.
All right, thanks very much, Ms Vanchukwan there Asacio of HSBC Global Private Banking and Wealth. Us A Takeda, portfolio manager of the Hennessey Japan Fund. We talked about a number of issues that we would raise with you. Massa Takaida, thank you very much for being with us. Let's start off with possible intervention. Would it be a little weird for the Ministry of Finance to intervene in these two days when the BOJ is meeting.
Well, it's hard to say what and when the bog might do something, but I do think that chief Jpy Japanese yen is here to stay because of several reasons such as real interest rates still negative for Japanese in I think, what's one of the few currencies, if not the only one.
With negative interest rates.
And also trade balance that has structurally changed in the last twenty years, so there's a very there's so much less purchase nowadays.
So tomorrow it's not just the BOJ meeting, although that's clearly center stage. Tokyo April CPI data and I'm curious, can you help me understand what the inflation story is right now in Japan?
Well, so it's been trending above two percent for I think the last two years now, And initially in twenty twenty two.
I thought that Japanese inflation would be transient.
But as time went by, I came to realize that there's a little much structural element to it. So at first it was the you know, the Fed raising rates and appreciated Japanese yen and increased import prices.
But now it seems like the botton is being.
Passed to more structural reasons, like you know, labor shortage arising from shrinking population. So our feeling is that Japan's inflation will stay higher for longer.
Yeah, and with inflation high and the currency week, they kind of feed off each other, I suppose, and it's not good for people. I mean you probably heard me say Japan Airlines CEO's who go to Tori said, it's a big problem. Who is it the most big the problem? Who is it the biggest for?
Well, definitely how sports are feeling the pinch and also you know importers. But I think, you know, as Japan is now finally coming out of decades long deflation, I think this should start virtual cycle where you have higher inflation which leads to higher interest rate nominal interest rate, while the overall monitor policy is still being accommodated, and that should change the consumer's mindset and that should produce a positive feedback loops.
So I think the trend we're generally moving in the right direction.
So what does it mean massive for the equity market in Japan.
Well, obviously, if you have negative interest rates, that's good for equities. Although as an investor, we were also focus We always focus on, you know, companies with durable economic modes, with strong pricing power, and so we are macroagnostic and benchmark agnostic.
So some of the governess changes that people speak so highly of for Japan, things like being able to offer dividends and and allowing more buybacks and and making better governance decisions, is that something that you see can be sustainable.
Yeah, I think so.
I mean, I think the key thing is not the shareholder shareholder return policies. I think that it's about raising awareness around you know, returns on capital, cost.
Of equity and so on.
Because they had they hadn't, there was there was no capitalism in a Western sense, you know, ten, fifteen, twenty years ago, and now with the government initiatives and activists and even mister Buffett or Bookshire halfway. I think companies are becoming more and more conscious about, you know, improving capital efficiency, and I think that's sustainable thanks to all these external pressures.
Masa.
We have talked on this show a great deal about how companies are diversifying manufacturing and supply chain operations away from China, resharing of semiconductor manufacturing, let's say here in the United States. How is Japan benefiting from this drive if at all?
Oh, yeah, definitely. So first of all, it may create extra demand coming from other parts of the world, you know, by moving away from China, although that might create supply glood at some distant point in time. But Japan and Japan is definitely benefiting from being in a geopolitically neutral position.
And then also, you know, Japan is.
Now cheap country, so you know, it's smcs of the world. They can hire high quolitic engineers, are very affordable cost and also the cost of construction is everything is is becoming quite quite attractive in terms of the cheapness.
Mars, you're a PM for the Hennessy Japan Fund. You mentioned a number of companies in your list, companies like Mitsubishi Electric and Hitachi. What's your best pick at the moment?
Why, well, right now, I think that some of the financials. And by the way, it's not Mitsubishi Electric. We have our Mitsubishi Corporation and MITTSBECI EFH Financial Group. But we like insurance companies in Japan because it's polygopolistic, three players controlling only not only three player s contry in ninety percent of the market.
Yeah, all right, well we'll put that as as a jumping off point for our next discussion. Masticated their portfolio manager at Hennessey Japan Fund.
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 app.