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This is the Bloomberg Daybreak Asia podcast. I'm Brian Curtis along with Doug Krisner, join us each day for the stories making news and moving markets in the Asia Pacific. You can subscribe to the show anywhere you get your podcasts and always on Bloomberg Radio, the Bloomberg Terminal, and the Bloomberg Business app.
Jonathan Gardner with US Chief Asia and em strategist at Morgan Stanley, joining us from the line city of Singapore. Jonathan, thanks for taking the time to chat with us. I was noting earlier that the MSCI China Index since that January low is up about twenty seven percent. A lot of this may be due to some rotation into cheaper valuations. Would you chase this move or do you think it's pretty much run its course?
Well, in a word, we wouldn't chase the move. We wrote a note on that last week, myself, Laura Wang, and the team. I think it's important to remember just how volatile China equities are now relative to the rest of global equities. They're about two and a half times as volatile, and we've seen some of these short bursts of performance within an overall secular bear market on a number of occasions in the past. I think the reason that the bear market ultimately resumes is the very weak
fundamentals that exist in China. And over the weekend we had some really quite bad numbers on the inflation side and the money supply and lending side, which really for US confirm our thesis that it's still trapped in debt deflation.
And you have US Gina relations as well, that sort of looms. Jennet Yellen gave kind of tacit confirmation that higher US tariffs and Chinese products are coming, Jonathan. She said, basically she hoped China wouldn't retaliate. Doubtful she'd be talking about that if this wasn't coming. But even if they do retaliate on the Chinese side, does this have real teeth for investors or is it more symbolic for both sides Domestic audiences.
Well, the China equity market is driven mainly by a domestic consumer stocks the big major internet e commerce names, so it doesn't have a lot of exporters directly in the index, though there are some large firms in the ashare market in things like electric vehicles and battery technology. So what really matters for the domestic stock market is just ultimately how weak the consumer continues to be. And there's plenty of evidence that the consumer's paying down mortgage
debt for the first time ever. Big ticket spending is diminished, and so people they're out and about and spending, but much more on smaller ticket items. And we just think this is in stark contrast to some other parts of our coverage universe, for example India, where the trends are almost completely different.
We were talking earlier on the program about the move on the part of Beijing to begin selling the first round of ultra long special sovereign bonds. I think the sale will begin on Friday, and we're looking at the first tranche of about one hundred and thirty eight billion. Do you think there's going to be strong demand for something like this.
Well, I'm not a bond market expert, but what I would say is that that number is not very large in relation to the size of the Chinese economy, which is around about eighteen trillion dollars, and we don't think that it represents an aggregate net fiscal stimulus. Rather, what's happening is the central government is in a sense backstopping some of the provincial local government debt to stop a sort of cascading default cycle spreading out of the property developers.
And that's the context in which this bond insurance is happening. It's not a net fiscal injection into the economy.
Jonathan, I wanted to ask you briefly about rate cuts. We haven't had a lot of action on that front. Bloomberg Economics is saying that without rate cuts, the PBOC is just pushing on a string.
It needs to be sooner rather than later.
Is that another thing that doesn't really affect equity flows that much or does it?
Well?
It is actually really key points. I'm glad you mentioned it in this sense. It's quite reminiscent of what was going on in Japan thirty years ago in the early part of their debt deflation bust. That the authorities are looking back with regret at the amount of leveraging up in the prior decade or so, and they're not choosing
to flood the system with liquidity at this occasion. There is an important difference, however, with Japan that may partly explain this behavior, and that is that ultimately China is not a developed market sovereign. It is ultimately an em sovereign in terms of its credit rating. And were it to slash interest rates, let's say, to zero, or try to launch a QE program, it would unlock probably currency weakness,
currency declines. And that's why those kinds of policies haven't been open to typical em in for example, that the past, whereas for develop markets, including for Japan, Japan was ultimately able to reflate because it found a path substantially neg of real interest rates finally over the last decade, but that may not be open to China.
So there's no way then that you see China repeating that kind of the lost three decades that Japan was miird in where you get in just so deeply entrenched in a deflationary cycle and just stagnant activity.
Well, I think there is a recentably high chance that China can remain in difficulties for the foreseeable future. We are in year four of this if you date the beginning of it to early twenty twenty one, when leverage peaked in the overall economy and property prices peaked, and there was also a mini stock market bubble, and there's very little sign that the macro is actually turning around again.
I just want to emphasize these numbers. At the weekend PPI minus two and a half CPI essentially zero aggregate financing negative month or month. That's very unusual.
I wanted to finish up on.
I know you look back at the last fifteen or twenty years or so of investing in these markets, and you drew some conclude in about thirty or forty seconds some what are among those chief among your observations.
I think it's really about the importance of quality in investing in an asset class that is quite volatile. So if you find business models that have superior are we and strong balance sheets versus their industry peers, and you control for valuation, that's really the answer to successful investing in a difficult top down environment that you often find in EM.
Jonathan will leave it there. It's a pleasure today have you on the program and benefit from your insight. Jonathan Garner is a chief Asia and EM strategist at Morgan Stanley.
Well.
Apple is getting set to sell its Vision pro in markets outside the United States, trying to see whether the roughly thirty five hundred dollars mixed reality headset has brought appeal. Joining us in our studios is Mark German, Bloomberg, Chief correspondent on Global Technology. So this is really the biggest, biggest device, or the newest big device for Apple in a period of time from your own channel, checks Mark,
what are you seeing? I mean, are people going to be willing to pay thirty five hundred bucks for this?
Yeah?
Thank you for having me. It's awesome to be here with you in Hong Kong. The Vision Pro. Like you said, it's Apple's first major new product release in nearly a decade since the Apple Watch came out in twenty fifteen, and at thirty five hundred dollars with limited applications technology that has very early appeal. It's a very much an early adopter device. It did really well out of the gate.
I'm talking about the first two weeks or so when people who wanted to get the device lined up for it, the first pre orders arrived, the first people walking into Apple Source to try it out and buy it. But since then it has really tapered out.
Right.
You normally see this when a new iPhone comes out, you get a ton of sales and it tapers a little bit, but there is still quite a bit of demand over the life cycle of the product. But I'd say Vision Pro sales have completely fallen flat. Some stores told me that they've had as many returns over the last three months as they've had purchases over the first two weeks. There are other stores who tell me they're only selling, you know, one to two or three units
per week. Some stories telling me they don't even sell one Vision Pro within one particular week. It's unclear for ninety nine point nine nine percent of people why you need one.
Of these things.
Yeah, the so are Apple devotees, right, I mean that the early adopters. When you look at the distribution of innovation, is this device manufactured by fox Conn? Are they the main manufacturing powerhouse behind the Vision Pro?
No, the vision Pro is actually not produced by fox Conn. It's produced by Quanta. Sorry, it's it's produced by lux Share luck Share Precision based in Taiwan, I believe, and lux Share Precision they have been working with Apple for some number of years on this device. The plan for Apple is to move some production over time to fox Con to sort of differentiate with a cheaper model at some point, and fox Conn likely would get in on that.
Maybe there'll be more suppliers like Quanta in the future as well, but it's still very early days for this product. And obviously, as we're talking about, the next big thing for the Vision Pro is expansion mark.
You mentioned in your story that it takes as much as four days to be trained up on this thing, so it's obviously a niche product. Is this meant to be like a lost Leader or do they actually expect to sell a lot of these?
What's the essential purpose of this?
You know, it's funny. When they initially were planning to release the Vision Pro, they were looking at a price point around three thousand dollars and that basically put it as no margin, and the idea was to get people in the ecosystem, eventually, bring the bill of materials down over time, get the cost down over time to build,
and then make a profit. But they priced it at thirty five hundred dollars and then you have a two hundred dollars up charge per additional storage capacity, and the margins on flash for Apple for storage is probably north of seventy percent, and so they're making a margin on this, so they are making some money, but it's going to take at the current rate of the amount of people purchasing this product, is going to take them a decade
to make a return on their investment. So they're certainly going to have to get the price down get more people buying it to get back on their investment.
Here.
The last time that Brian and I were speaking with you, Mark, you were giving us information. You're reporting on open Ai striking a deal with Apple for the iPhone. Looks like you were spot on there. What do we know?
Yeah, So about two months ago, I reported that Apple had held discussions with open Ai about integration into the iPhone, and then about three weeks ago it appeared that Google was in the lead for a deal with Apple on Ai with Gemini integration into the new iPhone this year, and I reported that talks are back on with open Ai, and then just last week they reached the deal. And so open Ai will be part of the iOS eighteen launch later this year, and we'll be supporting features like
a chatbot. Whether that's integration into Siri, into the Spotlight search in the phone is to be seen, but open Ai is going to be a part of the new version of iOS, alongside large language models in GENAI tech from Apple itself.
I suppose it doesn't rule out a deal with Gemini of Google down the road. But in terms of AI and its application, if we go back here to the Vision Pro, is there any AI functionality in this?
Yeah?
I mean they say that the Vision Pro uses a lot of artificial intelligence to do on device processing, to mirror your eyes to create a virtual representation of you, And sure that is AI, but that's not the AI we're talking about the AI or anyone cares about right now. I would anticipate they get some GENAI features onto the Vision Pro, maybe a couple of features this year, but I would say that's probably more of a next year
thing or the year after. The priority first and foremost is to get jenai based into the iPhone, then the iPad, than the Mac, then the Apple Watch, and then I would say Vision Pro comes last, probably alongside the Apple TV and the App Store. There. The big news I
think though, regarding the Vision Pro itself is expansion. So it's been in the US now for about three and a half months, and so they're now bringing in employees from its retail stores in Asia and in Europe and Australia to come to the US to learn how to sell the Vision Pro, how to pitch the Vision Pro to customers. And so you'll see the Vision Pro launch after early June in places like Japan, Korea, China, Hong Kong, Singapore.
You'll see France, You'll see Germany, Australia, and I anticipate you'll see Canada and the UK at some point this year.
As you know Marca, China is a big market when it comes to gaming. Is there an intersection here between the gaming environment and the Vision Pro? Very quick?
I think the Vision Pro most interesting market for the Vision Pro is probably China because of the gaming interest there. But Apple really needs to boost its gaming capabilities for the device before it really will take off there.
The Apple Watch had a slow start.
Does the Vision Pro eventually get there or does this one fail?
I think the first model the Vision Pro, will be recalled as a failure, but I think if they get the price down in half, it'll ultimately be a very successful product for Apple.
All right, Mark, thank you very much for coming in. We could talk a whole half hour. I suppose even longer. Mark German, Bloomberg chief correspondent on global technology. Joining us now for a closer look at markets is Victoria Bill's chief investment strategist at Bantery and Capital Management. Victoria, thank you for joining us. We're seeing a lack of direction
in US equities for sure. Elsewhere as well, what's rally the most of late has been and Hong Kong equities, US utilities and staples, So hard to find a thread through that other than you know, those are the most bombed out sectors late last year, and people have been selling megacap tech and have been buying there.
When are we going to get some direction?
Yeah?
Direction, honestly is very hard to come by these days. I think a lot of what we are seeing in the market right now is just if we try to create a single thread. There's a lot of noise when
it comes to what the markets are looking at. For example, ETFs are a very common resp solution for the comment for the average investor and for the average consumer investor, and whether that's ETFs or whether that's through volatility trades particularly, there's a lot of noise in terms of what we're seeing just from the consumer side of the market now.
If we're looking at fundamentals, or if we're looking at different types of industries in particular, I think a lot of the common threads that we should be looking towards are within the technology sector, specifically within AI, web three, machine learning, and so those are a lot of things that I'm looking for to or the things that I'm looking to when it comes to market direction at this time.
So talk to us a little bit about the way that you play artificial intelligence. Is it through a company like a chip maker, let's say Nvidia obviously maybe to a lesser extent some of the memory chip manufacturers, like if Samsung, or do you go to a company like Alphabet or Microsoft, or are there upstarts maybe publicly traded companies small market cap focused on AI that could be acquisition targets. I'm trying to understand the way that you evaluate and put money to work in this space.
I think there's a a few different ways or a few different scenarios of which you can talk about or
do all of the companies that you're talking about. So, whether that's a data play when it comes to Meta or Alphabet, data is a crucial component when it comes to AI and machine learning, and especially when we think about like the transference of that data and information from larger computer systems to individuals, individuals stant hands or even through like individual means, if you want to do a computer or a microchip or a GPU play, I would
say that that's definitely a Nvidia or even a Samsung company. The thing about Navidia is that they manufacture majority of the GPU chips that are used in AI as well as in sorry I'm thinking I'm blinking out in the world right now, but sorry crypto plays as well. So when we're thinking about companies that are within those spaces, those are some of the primary industries that we're looking at. And then the other thing that I like to think
about is machine learning. And so again we're looking at Navidia or even Samsung a lot of the chips that they're creating right now, and especially if we talk about Samsung or even Nvidia, Samsung particularly the they're hopefully going to like further their partnership with Nvidia and provide some of the some of the chips that they're using for
their Web three and AI plays. So Samsung only has an upboards or upworts tailwinds to gain from continuing to partner with companies such as Nvidia right now, well.
There's so many derivative bets on this. So we mentioned that companies like Nvidia and Broadcom are well off their highs, so people have been selling that and they've been buying into some of these derivative plays, even utilities. You know that raises a few eyebrows, but you know, these data centers need a ton of electrification, so you know people have even spread there. They're buying HVAC companies because you know, you need cooling systems for all the all the power that AI needs.
So there's been a lot of bets. I'm wondering.
You know, some of those companies have gone up even more in the last month or two than the NVIDIAs of the world. So I'm thinking that maybe now money flows back into the peer plays because have already spread out.
I mean, that's definitely it. I remember back in last year in November, I was very much pro super Microcomputer, and that company was originally in the small cap like small cap index, but now it's trading at almost triple or double what I would recommend in terms of a price for purchase. So when it comes to small cap plays or even companies that are like I would say, more fairly priced in this arena, there's a very slim picking in terms of companies that you could look at
to get into the AI world. And going off of what you were saying earlier, a lot of this requires like a lot of manufacturing power in order to create these microchips in order to create these processors semiconductor processors as well, which helped to process that data. So I honestly that's where the larger plays come in, because these are the companies that are well equipped in order to create those processes and create that data, create that information.
Brian raised an interesting point. They're talking about the demand for electricity to power a lot of this processing, whether it's you know, a server farm or you know individual companies that are set up to kind of run AI applications. Is that a play that interests you in any way? I know it may sound boring to put money to work into utility, but maybe it's not a utility. Maybe it's something connected to a form of energy that attracts you.
Oh. Absolutely, The thing is like energy is going to be the energy is the number one resource when we think about the play that's going to be in the AI and machine learning space, Like these are very high energy intensive processes in order to not only just create these microchips, but also to run them and operate them. So whether you're thinking about crypto mining, that is a
very energy intensive sector. But the chips, for example, that Nvidia creates for like GPU process as saying, those have additional cooling factors that allow for them to not process as much energy. But with the crypto having that happened last month, essentially what happens is that the supply of crypto, for example, has now gone down, so that means but still continuing with the demand.
That we have.
So therefore the logical explanation is that either these crypto mining companies need to add more additional computers and processors in order to meet that demand, or it's just kind of you're just going to resign yourself to the fact that maybe you're not going to be able to mine as much crypto as you might have been able to in the past.
But let's get to the broader market briefly. People are worried about, you know what's out there. The market near all time highs would seem to be telling us that six to nine months out things will still be okay. It's the nervous commentators that are suggesting that stagflation is a risk this year. The market seems to be saying, sure, anything's possible. Stagflation is not happening anytime soon. Your thoughts on that, I.
Thinks stiflation is happening anytime soon. I think that again, labor markets remain pretty strong, and while inflation rates are pretty high, but there's no reason to believe that CPI and PPI particularly won't come near or close to the consensus that we currently have right now. When we think about what the Fed is doing, we're basically in a process right now, or in a race to try and temper inflation or temper consumer sentiments in order to basically
combat that inflation. What we've seen, however, is that consumer savings has gone down overall for the past quarter. I believe consumer spending has also gone up. And then the other part of that is that wages have also have not matched savings, but they're basically they're not outpacing consumer spending. So what we're seeing, so the overarching message of that is that what the FED is doing is working.
Okay, Victoria, thank you so much for being with us here. Enjoyed it, Victoria Bills, chief investment strategist, said vander and Capital Management.
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.