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Welcome to the Bloomberg Daybreak Asia podcast. I'm Doug Chrisner. The US and China have agreed in principle to a framework for de escalating the trade war.
Now.
This comes after two days of discussions in London over nearly twenty hours. We heard today from Commerce Secretary Howard Lutnik.
I think we have the two largest economies in the world have reached a handshake, right for a framework. We're going to start to implement that framework upon the approval of President Trump and the Chinese will get their president cheese approval and that's the process. So once the President's approve it, we will then seek to implement it now.
Lutnik also said that export controls could come down if rare earths and magnet licenses are resolved with China. We also heard from u US Trade Rep. Jamison Greer. He said the goal now is to implement the framework speedily after it's been approved by both Presidents Trump and Chi. In a moment, we'll get some perspective on the trade war from the Bloomberg invest summit in Hong Kong. We'll hear from Matthew Mitchellini. He's partner and head of Asia
Pacific at Apollo Global Management. But we begin here in the States. Joining me now is George Schultze. He is the founder and CEO of Schultze Asset Management. George, thank you so much for making time to chat with us. Obviously, developments in the US China trade war will be captivating much of the market's attention going forward. I'm looking at the e many futures contracts right now. They seem to be a little subdued. Wouldn't you expect a more enthusiastic positive response.
Well, the news so far dog coming out of London is that you have an agreement to abide by the prior agreement to the Geneva cord as it were. So I guess it's good news because both sides are going to live up to what they agreed to do previous. What we're really looking for, I think what the markets are really looking for, more importantly, is a bigger trade deal. You know that resolves all these bigger open issues, tariffs
back and forth. You know whether our market's going to be open with China, and and you know it'll be a huge deal when it is announced. I don't think that's part of this deal. This deal, as far as I can tell so far, is really just an agreement to agree and not breach the terms of the prior deal, where China was basically opening up to allow the export of rare earth minerals to the US and in exchange it won certain concessions from the US. So it was a de thawing of a big tariff war that had
gotten really out of hand. But it's good that the sides are both talking and that it's good that they're both agreeing to agree, And I think what's what's going to happen next is most likely a broader trade deal, and the fact that you have news from Mexico as well is encouraging, and I think maybe the markets will absorb that and react a little bit more favorably tomorrow morning. But certainly a nice thawing from where we were in the past, I would say, Doug.
Now we know there's been tremendous volatility, driven largely by the uncertainty around tariff policy. We are in the middle of that ninety day truce before the reciprocal tariffs kick in, and that seems to be speeding up the process quite a bit. Would you be more comfortable taking risk now in the current environment.
I would say, you know, not just me, but but I think investors around the world are excited about taking more risk as you get you know, more of a thawing in these global trade wars. It's very interesting watching the negotiations. It's a multifaceted negotiation with so many different countries at once. But this would be big if you get a big deal with China. And you know, it's been back and forth. It's created a lot of volatility
right now. The markets, you know, the vix is down, you know, I guess below twenty in the in the dark days of the early part of the you know, tariff announcement announcements, things really went the opposite direction. And now we've had a pretty good recovery. I think. I think the worst of the trade fears, you know, related to these tah wars, is really behind us. Going forward, You're going to have more deals announced and more progress going forward.
I'm imagining that the FED is going to breathe a big sigh of relief too, because this has been a dark cloud I think overhanging monetary policy.
It is, but there's this interesting dynamic between you know, the Trump administration and Powell. So we shall see how it gets implemented. Right now, it doesn't look like, you know, any dramatic changes in Fed policy, although at least with regard to interest rates, but not many people are talking about the fact that, you know, quantitive quantitative tightening has
been reduced somewhat under Powell. So you know, the FED is accommodating somewhat during this uncertain time, just not dropping interest rates so dramatically as Trump would like to see.
So we get the CPI data on Wednesday for the month of May here in the US. If what we're talking about now is a little bit of relief in price pressure, I would think that tomorrow's inflation print aside, maybe we're going to begin to see more favorable news when it comes to inflation going forward, safe better or not.
Possibly so. But remember if inflation does tend to be sticky, I'm sure you remember, Douga, how long it took, you know, to increase inflation during the times when we had very you know, record low interest rates. So you know, these things don't seem to happen overnight. But sure, if if
you get a big thaw in these trade wars. Most likely, you know, the path would be downward with regard to inflation, and you know, maybe that would slow the urgency, you know, or at least increase the urgency that the fat can maybe reduce rates from here.
One of the things that was popular during the Biden administration insofar as investing was concerned, was the move into green energy. The Trump administration, right now, we are learning, intends to scrap some of those Biden era climate may that may happen as soon as Wednesday, and they require power plants to kind of curb greenhouse gas emissions. If we see the EPA start to unwind a lot of the limits and perhaps provide a little bit more fuel
pun intended here to conventional power generation. What does that do to your thinking when it comes to kind of the green energy trade, or maybe you've already been dialing back from that.
Yeah, I think there's some interesting opportunities to short cell companies that were really built up around the green energy trade. Obviously, this is good for you know, regular non green energy oil and natural gas. You know, remember Trump brand on the drill baby, drill platform. But I think it will happen the dialing back of you know, power plant emission restrictions.
You're also seeing it in the big beautiful bill, you know, with with you know, the proposals as drafted and passed from the House by the House already will reduce a lot of the tax incentives for or solar companies, and you know, it's really a gutting of that industry. And you know, no matter which side of the earlier on, it changes the dynamic tremendously for companies in those sectors. So that'll be something worth definitely watching. At the minimum,
it's going to dramatically change business plans. But more likely some of these companies that have too much debt that operate in those sectors, like we saw Sonova earlier this week file for bankruptcy. There is risk of bankruptcy and distress for those companies that are overlevered facing that kind of dramatic change.
So we're talking about power generation. Obviously, the demand from US data centers has become a major component in this discussion. We've seen very robust building nationally of AI data centers. Are you a little concerned that perhaps this build out has become a little too aggressive?
I do get a little concerned about it, Doug. I mean, to be fair, I gotta admit we had a big investment with Vistra com Stock and that company was really benefiting from the AI you know, build out. But if you look at it a step back and look at the whole picture, there's only a few companies that represent most of the demand for those new data centers, and
there is a concern. I don't think it's really been fully talked about yet, but there's a concern that maybe some of this is getting ahead of itself and you know, maybe we have more capacity than we need ultimately in
these AI data centers. We saw a correction earlier this year when you know, new technology was announced in Asia that would maybe reduce the demand for so much energy with you know, with very rapid chip computing, and maybe that's just a crack on the surface or a sign of worse things to potentially come.
George, thank you for making time to chat. That is George Schultze, founder and CEO of Schultze Asset Management, joining us here on the Daybreak Asia podcast. Welcome back to the Daybreak Asia Podcast. I'm Doug Chrisner. Financial markets are closely watching to see if the world's largest economies can find a way to de escalate the trade war. Now economists are saying it's already tip the global economy into a downturn. For more on today's top story, we cross
over to the Bloomberg invest summit in Hong Kong. We heard earlier from Matthew Mitchellini. He is partner and head of Asia Pacific at Apollo Global Management. He spoke with Bloomberg sivon Man.
Let's talk about just overall what we're seeing in the macro outlook in the light. It seems like public markets at least are really gripping themselves on over what's going on with trade. How much visibility is there in the private space right now, the companies that you own and the investors that you talked to.
It's actually been the trade of volatility has actually been a positive for private capital or private credit at least out in Asia for a couple of reasons. Because I travel around the region, and I go to Japan, I go to create, I go to Australia. Before the tariffs they were going to US one hundred dollars into the US. They're now doing one hundred dollars and they're now doing
seventy dollars into the US thirty dollars somewhere else. Most of that somewhere else is Southeast Asia, it's India, it's Australia.
Have you seen these signs of stress at least, I mean, obviously tariffs that don't weigh on borrowers or anyway.
There hasn't a little bit on the cross border for companies that are serving the US. But they're rethinking their supply chains, and that's actually created an opportunity for US to finance the supply chains, especially as they get overweight with product and they need to put factories in different countries, and so as everybody rethinks their supply chain strategy, it's actually been a big positive for private capital.
What is that lee evaluations?
Then?
Should I assume that things should be adjusted high or lower in the region.
It's hard to say on the equity side, because most of our focus is on private credit or on senior equity. But on private credit, we're still seeing good spreads and we're putting a lot of money to work in Australia, We're putting a lot of money to work in Southeast Asia, and comparable spreads to what we're finding in the US, US, in Europe.
There are some naysayers out there that say, you know, the glory days of private credit are over. You're starting to see fundamental headwinds, a global slowdown, possibly here in the face of this trade war, and coming at a time when public and private markets are seemed to be converging in some ways, where the pricing of direct loans is moving closer to public. Are the glory days over?
You think, well, I don't think the glory days are over, And I think what the trend you're talking about is direct lending or sponsor lending in the US, where it is going to be a cyclical business, and it is a cyclical business. But the private capital trends out here are actually more structural factors benefiting our business. I was
shocked when I came out of here. I would have not guessed that we would have had a large partnership with the Japanese bank to buy assets off their balance sheet, but we do because private capital out here is finding the productive way to partner with banks, with companies and a sponsors. So it's actually a structural factor where private capitals filling a gap that the banks can't fill today.
Do you need to subscribe a certain premium on private markets over public now in exchange the loss of liquidity?
For in Asia, there is less liquidity in the private markets, and I think what you're seeing evolving in the US there you do earn a premium for being private versus public.
Yeah, what is that gap right now?
Anywhere between one hundred and fifteen to hundred braces pas.
Okay, Okay, you know what if it is a downturn right there's there's a lot of talk about this asca class saw a rapid rise when global rates were essentially as zero. It hasn't been test proven in a way. When things slow down in the world economy, what happens then to private credits.
Well, I think you're already seeing it. There's some recent stats about amending extents going up, the amount of pick going up, or the amount of pick is going up in underlying funds. I think you're going to see increased defaults and restructurings. But private, A lot of these private credit lenders are going to have to look at their
book and see how they underwrote it. If you are a twenty twenty twenty one vintage loan and you underwrote a deal with low rates and low inflation, You're going to have a much different terminal value and cash flow profile when you go to refinance that loan than some of the later vintage loans.
Something that's also a trend that's happening in Asia is that you know some I guess as the managers are tapping into retail investors to get into the private credit space. I mean this is as you say, you liquid not a know how really, how does that change the dynamics of this market if there is a domestic or retail investor involved.
Now, yeah, you haven't seen other than in Australia. You haven't seen private credit managers in Asia tap that retail market. It's really been for global product and it really depends on the underlying manager. For us, where we buy everything onto our own balance sheet that we buy for retail, of that we buy for institutions, our job is to
protect that capital. But what you saw out here in Asia, as you saw a rotation from local equities and local real estate into private credit because you can get ten percent yields in theory with low volatility and low default and low default risk. In one of our flagship direct lending products has sold very well because of that, and they like the fact that we're buying these loans right alongside them.
And Macha, I know you're spending a lot of time all over the world. You're going to be about to talk about Japan and the credit boom that we're seeing there. In terms of geographies, where are the sort of the untapped sort of opportunities now.
So I was in Australia yesterday talking with some of the government officials and they have no idea where the long duration capital is going to come to support the industrial renaissance that we've talked about, which is a global theme, and same thing in Japan. You look at the average loan on a Japanese bank balance sheet, it's three years in duration and all in yield is about one hundred and seventy five basis points. So it's really really high
quality and really short term. And these countries are running with fiscal deficits and they're asking themselves where does the private capital, Where does the capital come to financi's longer term projects, And that's where private capital is going to step in. But I'd say right now, in Japan, Australia and a bit of Southeast Asia.
Matt mcgaullia there, but thank you so much for joining us. Thanks long, Matt, Matt, Michael Dy there from Apollo here at Boomberg invest Hong Kong.
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 Prisoner and this is Bloomberg