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Welcome to the Bloomberg Daybreak Asia podcast. I'm Doug Chrisener. So US China trade talks remain our number one topic, and today Treasury Secretary Bessett was saying that Beijing has not threatened to cut off pharmaceutical exports to the US. In a moment or two, we'll check in with Bloomberg Opinion for a look at how biotech is advancing in China. I'll be joined in a moment by Bloomberg Opinion columnist
Truly Ren in Hong Kong. Meantime, President Trump declared a trade framework with China has been completed, and he said Beijing will supply rare earth materials and magnets upfront. The President also said the US will allow Chinese students into American colleges and universities. Tariffs meantime for these two countries will be maintained at their current lower levels, but remember that number is still much higher than when the President
took office in January. Bloomberg's Jennifer Welsh says that Beijing has learned some things.
China now realizes they have this major hammer in the form of these critical mineral export controls that they can leverage, and I think that really dilutes the US ability to push China towards the deal that Washington says it.
Once Jennifer Welsch of Bloomberg Economics. By the way, presidents Trump and She must still formally sign off on this agreement. So let's take a look at the market action right now, maybe a little bit about tariff action as well. I'm joined by Zachary Hill, head of portfolio management at Horizon Investments. Zach, thank you for making time to chat with us. Could you weigh in on your reaction to what you've been hearing about this agreement that was reached in London a couple of days ago.
Yeah, dok. Great to be with you today.
You know, I think this agreement broadly kind of hits on all the points, and the market was already expecting, so it really seems like a status quo matt expectations, but to not exceed them, and you know the context of how much risk premium has come out of the market over the last month and a half or two months, you know, it wasn't enough to push equity and disease higher today, which kind of speaks a little bit to the fact that we're pretty fully valued here above six thousand of the S and P.
So Zach, I'm curious about how you're navigating the current terrain when it comes to tariffs, given what we know so far. It's interesting today on truth Social President Trump posted the US is getting a total of fifty five percent tariffs, China is getting ten percent. Now, so let's say that those levels do remain in place for a period. How is this going to impact your decision making when it comes to putting money to work.
Yeah, I mean those levels are pretty pretty large and are likely going to have to be you know, force companies to adjust in terms of their cost structure and in the way that they're sourcing you know, inputs, and so, you know, we do think that that's going to, you know, weigh on economic activity. It's it's not likely large to put us into a recession, but it is likely something
that we're going to feel a growth slow down. And so from a positioning perspective, we're trying to keep things, you know, pretty pretty tight and pretty close to home and keep a little bit of dry powder because we do think, you know, especially in the summer months after you know, a pretty exhausting period of trading UH to start the year.
That this low liquidity environment.
Is likely to uncover some opportunities for us to put some capital to work.
Let's change gears. Talk a little bit about what's happening in Washington with respect to the tax bill. I know that the Senate is now trying to negotiate a few things, and there is still concern about the level of deficit spending. I guess that we could say double line capitalist. Jeff Gunlock was saying today that America's debt burden and interest
expense have become untenable. The bond market at this point really doesn't seem to be as upset as it was a month ago or so it would appear when the House was negotiating its version. How do you make sense of that?
Yeah, I think you know, the way that we make sense of that is just this narrative volatility we've had on the macro front.
You know, tariffs come and go.
You know, doge was a thing that the market was talking about for quite a long period of time, and now it's it's no longer relevant. And the concern about you know, budgets and the deficit bill and long term interest rates has been something that's waxed and waned. You know, I would agree with you with that importance in the market. Narrative has has faded, and you know likely is not going to come back unless we see a material upside
surprise to the deficit. So, you know, nobody really thinks that we're going to be cutting the deficit from current levels. If we expanded in a really material way, that might cause them indigestion in the long end of the bond market. But it seems like a lot of that, at least in the near term, is already in the price and we've seen the curves deepen pretty.
Dramatically right to we're down today across the curve. Remember that we did have that benign reading on make consumer prices first thing in the morning and kind of goes to the notion that maybe we can get more than one FED rate cut in this year. I think the swaps market is fully pricing in twenty five basis point cut in October and now maybe a seventy five percent probability we get a cut in September as well. How are you feeling about the FED as a part of this story.
Yeah, you know, the Fed has been kind of on the sidelines for a while because of all the uncertainty around you know, what the economy, how the economy is going to involve, and how inflation is going to involve. And it's actually interesting, the you know, end of year interest rate implied in the futures market is about the same as it was to start the year, so about fifty basis points worth of cuts.
And so, you know, one of the.
Things that we're watching is the potential now that we've had a few good inflation prints in a row after a series of bad inflation prints to end the year and to start this year.
To see if that emboldens some of the doves.
You know, in this in this vacuum that we have right now to start pushing for the idea that interest rates are too high. That's not our base case scenario, and the economy seems to be doing.
Just fine with interest rates above four percent.
But from the way the Fed looks at things, they do still think that they need to be cutting at some point, and so that's something that we're going to be paying quite a bit of attention to over the next few weeks to see if that narrative of the FED needs to start acting, and they're not going to act this summer because it's too soon, but they could potentially act pretty forcefully in the fall.
And so that's something that we're going to be watching, you know, as the news flow evolves.
So President Trump was saying that he is very very close to releasing the name of a nominee to replace FED shared J. Powell, and a number of market participants we're saying the probability of Trump appointing someone that is uber dubvish is very very high, given mister Trump's stance on being pro growth. What would that do in your mind if we get an uber dubbish FED chairman.
Yeah, I don't think that would be good for market sentiment generally speaking, because it's going to cause you some pretty material steepening in the yield curve and that's going to be felt in equity valuations, and similar to some of the price action that we've seen, you know at parts of this year, you know, higher long term interest rates that we met with a lower dollar and not not a higher one.
As the typical relationship would hold.
And so you know, we don't think that would be good for markets, and there's a potential, you know, like you said that if we get an announcement you know, more in the in the near future, we could have that shadow fed chair idea, which is something that investors have not ever had to deal with in the US, and so, you know, I don't think that's something generally speaking that would be well received by by the market.
Let's talk a little bit about the equity space right now. Are you still constructive on US stocks?
Uh?
We are constructive on US stocks, but not nearly as much, you know as we were to start the year. You know, actually, our favorite in our highest conviction call that we have is that we're likely to continued dollar weakness, especially against you know, large uh, you know, international economies like Europe and Japan and so, you know, markets is a part
of the global equity universe that we favor. And within the US, you know, kind of keeping things pretty neutral and not going on the defensive side of things, maintaining some tech exposure and playing offense in the in the domestic financials and the banks, as we think that's the area of the market that has the clearest de regulatory tailwinds.
Are those the same things that you would employ if you went offshore financials in tech, Well.
The composition of the offshore market's a good bit different, and so you know, a lot of our you know, favoring international markets more than we have over the last few years is due to the dollar dynamics that we
think are can continue to be in play. You know, the sector composition of those markets is a good bit is a good bit different than what you get in the US, and so we do think, especially in this kind of environment where risk is higher than it has been in some time, that international stocks are going to offer a lot more diversification.
Than they have in the past.
You know, US investors have been pretty disappointed with the benefits of global diversification really for the last ten plus years. But we do think this is an environment where that's going to continue to pay dividends in terms of reducing overall portfolio risk and potentially improving returns.
I'm curious as to how you're thinking about Chinese equities right now. Obviously, the deep seek moment was a big one for the equity space. In a moment we're going to be taking a look at what's going on with biotech in China. How do you view Chinese equities.
Yeah, I mean, China is one place in terms of equity market composition where you can actually get a lot of high growth tech names. The problems there, you know, are are potentially existential.
However, in terms of.
You know, the few between the US and China, which while it seems to be on a better page today, you know, two and a half months ago was in it was in a very very dark place. And so you know, we're a little bit cautious on EM as as a whole, and we don't necessarily think that that kind of dollar weakness trend that we expect is going to going to extend across the EM universe more broadly, and so, you know, not really embracing the EM trade.
We prefer develop markets.
Zach will leave it there, thank you so much. Zachary Hill is head of portfolio management at Horizon Investments. Joining us here on the Daybreak Asia podcast. Welcome back to the Daybreak Asia Podcast. I'm Doug Chrisner. China has offered a few deep seek moments so farthes here, and it really shows the country is more than just the world's
largest factory. China has clearly demonstrated it can compete with the US on the technology front in areas from artificial intelligence to military defense, and now Chinese biotech is having its day in the sun. For a closer look, I'm joined by Bloomberg opinion columnist Julie Wren. She's on the line from Hong Kong. Shuley's been writing about how China's biotech industry is gaining momentum. Surely it's always a pleasure.
Can we begin by having you give me a sense of scale here, perhaps a few examples of how biotech in China is advancing.
Well. The revelation came really just a month ago when Pisa agreed to pay a record one point two seven sorry, when Pisa agreed to pay a record one point two five billion upfront to license an experimental cancer drug from a Chinese company costs three is bio. Two weeks later, Bristol biosquib said it will pay Biointech another one point five billion to license a similar cancer drug, and that
cancer drug was an acquisition from Biointech. That cancer drug was bought by Buyotech from a Chinese company just lay last year for eight hundred million. So what we're seeing is that the Big Farmer are paying billions of dollars licensing Chinese drugs.
It's interesting because when we think about our official intelligence, obviously military defense, I think these are areas where the government is kind of working with the private sector to accelerate a lot of development. Is the same true in biotechnology? Is the government involved in some way?
Not really? I mean, biotech is having a winter globally, right like. What we are seeing is that the biotech companies in the US are not getting that much to venture capital funding. And the situation is even dar in China. I mean, venture capital has lost its shine since the government crackdown on big tech starting twenty twenty one. And what we are seeing is that the biotech startups are basically coming up with innovative drugs on their own.
So are we to understand then that this pace of deal making and a lot of the appetite for biotech in China is going to last? Is it durable? Do you think?
I think so? And I think President Donald Trump's unpredictable economic policy plays a huge catalyst. I mean, look at Big Farmer. Trump has talked about cutting a prescription drug prices by fifty nine percent at the minimum right, and his big beautiful tax and spending bill has Medicare and Medicaid cuts. What that means is that big farmer are just not going to be as profitable as before, and that gives them incentive to outsource research and development to cheaper destinations such as China.
So within China, give me a sense of how the labor market is supporting the biotech industry. Are young college grads moving into the field, are their.
Opportunities absolutely In China, there is this popular phrase called the engineer difend, and basically it talks about in the last decade or so, China has been producing a ton millions of the stem science students, for instance, like engineering medicine are two of the most popular degrees for graduate
school studies. And all these young and fresh engineers, bioengineers, medical students, they're coming to market right and they are going to come to work for biotech startups for pretty cheap prices compared to the US.
When you look at the way in which some of these stocks have been performing, perhaps on the mainland or in Hong Kong, have they been doing remarkably.
Well, remarkably well The hands in bioteching deck is up sixty percent this year. By comparison, SMP biotech in Decks is in the red right. And what investors are banking on is that the Big farmer are not only going to license billion dollar deals, they're also going to buy
equity stakes in those biotech smaller biotech companies. For instance, the Pisor deal one point two five billion, like a licensing deal with the three Spile, they're also putting a one hundred million dollar dollar investment equity investment in the Chinese company.
When I think about R and D drug development in this country, I think about the Food and Drug Administration. What is the regulatory regime like in China? And if you had to compare let's say Chinese standards versus US standards, what conclusion would you arrive at.
I think the Chinese are also quite strict with approving drug use, and the Chinese regulatory body is actually pretty open minded about introducing Western drugs because they do see that Western drugs are often seen as better quality. So in a way, for the Chinese biotech companies to go to market, it could be just a little bit better for them to partner up with the US Big farmer surely.
We'll leave it there. It's always a pleasure. Thank you so much, Bloomberg opinion columnist July Wren. She's writing about how China's biotech industry is gaining momentum. And you can read Chuly's writing if you have a Bloomberg terminal. The function is OPI N go shu Ley Wrenn joining us here on the Daybreak Asia 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 Chrisner, and this is Bloomberg