Australia Election Preview, Microsoft and Meta Earnings Beat
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Welcome to the Bloomberg Daybreak Asia podcast. I'm Doug Krisner. There are a number of market holidays across the Asia-Pacific today, but certainly no shortage of headlines. And we're days away from a national election in Australia. In a moment, I'll be joined by Bloomberg's Paul Allen in Sydney for a preview. Plus, we'll look at the latest eco data out of the U.S. That would include that first quarter GDP report. I'll be speaking with George Cipollone, Portfolio Manager at Penn Mutual Asset Management.

But we begin this morning with a few of our top stories. In China, a post from a CCTV-affiliated Weibo account says the U.S. has reached out to Beijing through various channels to initiate talks on the massive tariffs imposed on China. It cited unidentified people with knowledge of the matter, but it provided no further details. And it comes on the same day that Ukraine inked a long-awaited deal with Washington for critical minerals.

The U.S. will now be given privileged access to new investment projects to develop things like aluminum, graphite, oil, and natural gas. Now, this agreement is seen as critical in nurturing President Trump's goodwill toward Kyiv in ceasefire talks with Russia. After the bell in the States, we got blowout results from tech giants Microsoft and Meta. And we got reaction from Dan Morgan at Synovus Trust.

Meta and Microsoft both beat on just about every metric. And I think this kind of sets the tone because we're going to go in tomorrow, right? We're going to get Apple and Amazon. If they also can have really big beats, we can get some good momentum back into the tech space and hopefully get the tech stocks to rebound off of their lows.

That's Dan Morgan of Synovus Trust. Let's take a look now at what's going on in Australia with a national election happening this weekend. Joining me now for a preview is Bloomberg's Paul Allen. He is in Sydney. Paul, it's always a pleasure. Thank you so much for joining me. If I can, I want to begin with the presence of Donald Trump, which may be looming over this election in a way that it did during the recent election in Canada. Is that a fair statement?

Yeah, that's absolutely a possibility. And we have seen some evidence of that happening as well, Doug. The main opposition leader, Peter Dutton, he's the leader of the Liberal Party, started off this campaign with a suite of policies that appeared to be borrowed from President Trump and underpinned.

After what we've seen happen in the United States over the first hundred days of Trump's presidency, those policies have been swiftly kicked to the curb. And that really sped up after the U.S. imposed a 10 percent tariff on Australia, all imports from Australia, which nobody was expecting.

Because, of course, the U.S. runs a very rare trade surplus with Australia. So Peter Dutton initially had planned proposed Doge-style cuts for the civil service. He wanted to end work from home for the civil service as well. Both those policies got quickly axed and canceled.

Having early in the campaign said he could get a good deal out of President Trump on trade, there was one debate – we've had four in total here – and in one of the debates, he was asked if he trusted Donald Trump, and Peter Dutton answered, I don't know Donald Trump. And he said that a number of times earlier.

before swiftly moving on. So it was quite the reversal. So yes, President Trump has cast a shadow on the Australian election, absolutely. So on the subject of trade, I know that President Trump recently flagged possible talks with Prime Minister Anthony Albanese. Do we have any more details on that? We do not. We understand that Anthony Albanese has attempted to contact the president on a number of occasions. Those calls have gone unanswered.

The suspicion is Australia is some way down the queue behind the likes of China, obviously, Japan, South Korea and the European Union. Of course, the 10 percent baseline tariff, not particularly much. As I mentioned, the U.S. does run a trade surplus with Australia, one of the few countries to do so.

And also, Australia's got a very close defense relationship with the United States as well, and has just made a half billion dollar down payment on the AUKUS program, which will see Australia receive U.S.-made nuclear submarines. So there's a really close defense relationship there as well. Obviously, it eagerness on the Australian side to get something sorted out, but not

the same sense of urgency coming out of the US, it seems. So let's put this election in the context of how well the economy is performing. From what I understand, there is a bit of a housing crisis. Interest rates do remain a bit elevated. And we have seen some cost of living pressures in Australia. Do I have that right?

Yeah, very much so. We'll start with the cost of living situation because that's a familiar one to many democracies around the world at the moment. Inflation has really bitten hard. The price of eggs, something that's familiar to U.S. listeners, also an issue here in Australia. That was something else that came up in the debate. And Peter Dutton, the opposition leader, stumbled on that one, saying a dozen eggs was $4.20 Australian per

The Prime Minister Anthony Albanese got closer at $7. The actual price is closer to $8. But that does underscore the cost of living, very much an issue. And both major parties are going to this election with various flavors of tax relief. So whatever happens, life is expected to get easier for consumers. Well, let's see how that actually eventuates, though.

Can you give me a sense of the various parties in Australia and how they seem to be represented right now? Well, there are two major parties, although within that there is nuance. The Labour Party in power right now, led obviously by Prime Minister Anthony Albanese. They have a very slim majority in the lower house. The House of Representatives has 150 seats. The Labour government is

has a very narrow majority of just two or three seats. And of course, I won't get into the nuances of it, but they also appoint the speakers, which reduces their count by one vote.

The opposition Liberal Party is in a pretty much a perpetual lockstep coalition with another party called the Nationals, which represents rural Australia. So you often hear them referred to as the coalition. They are some distance behind with just 53 seats. So they need to pick up more than 20 electorates to win power. So the road to government, very, very difficult for Peter Dutton and the coalition.

And what has made it harder for them is that the last election, they lost a whole series of very wealthy seats. And it's wealthy voters that typically vote for liberal coalition to a loose grouping of independents that have come to be known as the teals, a teal being a mixture of blue and green. And this is made up of wealthy voters who are very frustrated with

with the coalition's policy on climate over the years. The former Prime Minister Scott Morrison, for example, once took a lump of coal into Parliament House. Another former Prime Minister, Tony Abbott, once labelled climate change as, and I quote,

crap. And then we had the devastating bushfires of 2019. And that really started this teal movement, which has eaten into the coalition's base. So a big challenge for them is to try and first win back all of those seats and then try and make some inroads into Labour's majority. I'm wondering about the younger voters in Australia and the degree to which they may influence the outcome. Is that likely? Yeah, a tremendous level of

frustration about the situation with housing that you mentioned earlier and that is a perpetual feature of the Australian electoral landscape house prices in this country are out of control the median house price in Sydney now well over a million dollars the other major cities of Melbourne and Brisbane knocking on the door of that as well the rental market is incredibly tight getting rental accommodation is extremely expensive as well

So young voters are really trying to flex their muscles on this issue. There is something being offered by both parties for this group of people. The Prime Minister, Anthony Albanese, has pledged to spend $10 billion to build 100,000 homes, went to the 2022 election with a similar plan and not a great deal of progress there. The opposition, meanwhile, is saying they'll make mortgages tax deductible for five years. But

That doesn't really address that affordability problem. It doesn't make life any easier if you can't amass a 10 or a 5% deposit for a $1.5 million house. So the housing issue is a red hot potato here. And yeah, the youth are expected to vote along those lines. And this is why you see a lot of the youth vote starting to go to the Greens, which is starting to cut into Labor's support base as well.

So, Paul, we started the conversation talking about the impact President Trump may have on the Australian election. One of the things that we've been dealing with here recently in the States has been Trump's criticism of the Federal Reserve and subsequently the pushback that came from the market that the Fed needs to remain independent. What is the relationship between the government and the central bank in Australia? Is there the same aspiration of independence?

there is that same aspiration and there is a lot more respect on the political side towards that independence. I don't think you would find, well, you don't find either major party

are really wading into Fed policy at all. And every year, at least once a year, I have an opportunity to speak to the finance minister, the shadow treasurer as well. Whenever I utter the acronym RBA, Reserve Bank of Australia, they immediately default to, we will not comment on monetary policy. The Reserve Bank is independent. It is important that we protect that independence. These sorts of talking points.

So no appetite at all from either party to erode the independence of the central bank in Australia. Paul, we'll leave it there. Thank you so much. It's always a pleasure. Bloomberg's Paul Allen joining us from Sydney here on the Daybreak Asia podcast. Want to understand trends shaping the global investment landscape?

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Welcome back to the Daybreak Asia podcast. I'm Doug Krisner. Stateside, we got key earnings after the bell. We heard from Microsoft and the company reported better than expected sales and profit for the latest quarter. The bright spot was the Azure cloud computing unit. It posted a 33% jump in sales.

Meta Platforms posted first quarter sales above estimates. This could be a sign the company's ad business is so far weathering the ongoing trade war. For a closer look now, I am joined by George Cipollone. He is Portfolio Manager at Penn Mutual Asset Management. George, thank you so much for

It's always a pleasure. Let's talk about the Mag7 results that we had today. Are you optimistic now that maybe anything that people were kind of wringing their hands over has subsided or is there still a bit of risk here? Great to talk to you again, first of all, Doug. And yeah, so coming into this and you know it, I mean, the amount of volatility and the historical precedent

precedences that have been broken over the last few months have just been incredible. So coming into this earnings season, what did we see at first? We saw companies backing off guidance. We saw a lot of companies miss or just talk about the uncertain environment. So we really needed a few good earnings reports from some big companies. And we got them tonight through Microsoft and Meta, which was great. And you mentioned the Azure business doing really, really well. The comments related to

AI growth and capex are just eye-popping, and they're pretty stunning. And the market really needed something like this. We also had the GDP report today showing the economy here in the U.S. declined at an annual rate of 0.3% to 1%. That sounds maybe troublesome, but I think it's got to be placed into the proper context here, because we had a

big jump in pre-tariff imports. Companies were really scrambling to secure a lot of merchandise ahead of the expanded tariffs. So if you look at that buying, it essentially subtracted about five percentage points from GDP. Where are you right now in understanding the U.S. economy and the potential risk that is still out there vis-a-vis these tariffs?

This is a great conversation to talk about right now, Doug, because everybody wants to talk about the soft data and how soft the soft data has been. And they're waiting for more hard data. And we just don't have it yet. But it's going to come soon enough. I do think, look, what the administration is trying to do is pretty historic.

Nobody's really tried to institute tariffs and tariff policy in this fashion in a very, very long time. And so my biggest concern is that we end up in a trade war because that will just shrink the entire global pie. And we don't want that. And then what are the actual tariffs that are implemented? What's that going to mean for companies? What's that going to mean for earnings?

We just had Jack Pacific, a company we don't own, but a toy manufacturer, and they just said, hey, look, there's no magic wallet out there. These costs are going to have to get absorbed. So that's what we're looking at as bottom-up stock and bond pickers. We're looking line by line, looking at companies with good operating margins and companies that can defend their operating margins against these costs. So we had the monthly reading on the Fed's preferred measure of inflation today, core PCE for the month of March.

unchanged. That was shocking, right? The tamest I think we've seen in nearly five years. How do you understand that? And more importantly, is there a risk that inflation could begin to reaccelerate?

And I think that is ultimately the biggest risk. Because again, one key piece of the soft data that I just mentioned is the fact that if you look at the surveys, inflation expectations of consumers is skyrocketing. And if you look at consumer confidence, it's going in the opposite direction. It's sinking like a rock.

And that's a pretty bad combination. So then you enter that world of potential for stagflation. And that's not a really positive world from an economic standpoint. So yes, we would. So we are starting to see oil pull back. We are starting to see gas prices pull back. But they're starting to pull back for the wrong reason. They're starting to pull back because there's recession concerns. So hopefully, again, hopefully we can kind of clear the decks here. Hopefully the administration can help us with some trade deals, with some certainty that

just so we can get on with this. I think the longer this goes on, this period of uncertainty,

the worst the possible outcomes tend to be. So it's like, let's just move on with it. Let's stop talking about talking and let's sign some deals and let's just move on and deal with it. Well, it's interesting that you make that point because we had a report today that the U.S. has been proactively reaching out to China through various channels to begin discussing trade. So that from the U.S. side. And then if you look at the PMI data that we had in the last session in China, the manufacturing economy on the mainland is now in contraction. So it's

It seems like we've reached a critical point. I think we have, Doug. I think you're absolutely right. I do think there's pain on both sides. Now, the pain in China is factories shutting down. The pain that we might see, and we're starting to see it in the shipping statistics, is the potential for clearing out of some shelves. I don't think empty shelves is good for anyone politically. I don't think factories shutting down in China is good for them politically. So we enter this...

You know, the trade war turns into more of a political war of contrition. And that's that's where we're going to end up being. So hopefully we don't get to the worst case scenarios. I really think they just need to sit down and talk. I will say, look, you know, the trade imbalances that we've had, I get it. Very noble imbalances.

very noble cause to try to straighten those out from a U.S. perspective. China, from the very beginning, has said, "Look, let's just sit down and talk." And we just haven't gotten there yet. So, again, let's just get down to it, sit down at the table and talk like adults and make some deals. So, if you look at the action in the bond market today, we had a drop in the yield on the two-year, a little bit of buying at the short end of the curve. The notion here is that everything we've been describing is going to set up a Fed rate cut maybe as soon as June.

That's exactly how we see it, Doug. So if you think about a number, so we have a pretty big number now of expected rate cuts from the Fed. And if you talk to economists, they might say two or three. If you look at what the market is pricing in, we're looking at three to four. And so, yes, I do think it's going to come sooner rather than later. I do think June should be the date. And if it's not, we all know what's going to happen to Powell in the media. Trump's going to beat him up.

pretty good, right? So yeah, hopefully they come sooner than later. And again, hopefully we can get some more positive news flow going. So do you, on that notion, do you put money to work in the bond market and do you look for capital gains? Or do you hold back and think, all right, maybe there's a big question mark right now over the equity market. I'm just going to go to the short end, keep some powder dry, wait for a pullback, and maybe put a little bit more money to work in the stock market later. Yeah.

Yeah, this is a perfect lead-in, Doug, because I do think right now we're pretty much barbelled. We do have some money on the front end, super safe, protected. We're not really concerned about it. And then we'll move out. The belly of the curve looks really good, maybe after 20 years, for example. And then we've seen a lot of credit

moves over the last few months. And we've seen a lot of bonds get hit pretty good. So, yes, as bottom-up, again, stock and bond pickers, one of the big things we like to do is take advantage of those periods of volatility, take advantage of those drops. And we're looking at, we have a super long-term view, which is great at Penn Mutual. And so, when we get these pockets of value, we have to take advantage of them. We have to see through the fear of

I call it right now, we're going through a fog of tariffs. We have to see through it. We just have to as investors. Again, focus on good management teams, good balance sheets, and maybe some of these price declines are just a really good opportunity from a long-term perspective. So we always need to keep that slightly positive bent, even in a world of negativity. So how are you feeling about high yield in the current environment? Is this something that you want to avoid given maybe greater default risk right now? Or do you want to try to capture that higher yield

on the notion that the Fed is going to prevent things from getting much worse. Yeah, that's a great point. So, within high yield, I really think, so, obviously, it's called junk for a reason. I think we want to avoid the junk and really focus on the higher quality high yield companies.

That's been our bread and butter at Penn Mutual for a very, very long period of time, and we're going to stick to that. Now, I will say, when we get these spread-widening events, the market does not tend to differentiate between the good and the junky companies, the high-yield and the junk.

our job as investors is to focus on the good, higher quality, high yield. Companies that may have seen spreads blow out, but guess what? Their fundamentals and their earnings held up really, really well. And there are a bunch of companies that just reported where we've seen some really tangible, solid operating improvement. And

We've seen leverage ratios go down for some companies, management teams that are paying down debt. Those are the ones that we'll focus on here as we saw these spreads widen out. So I know you focus primarily on the fixed income space, George, but if you had to put money to work on the equity side, can you give me a strategy that you think would be effective in the next six to nine months?

Sure. So, with our fund at Penn Mutual, PMEFX, we do and we can buy dividend-paying stocks up to 40% of the fund. We can own dividend-paying stocks. I do think, again, going through this period and the amount of downside volatility we've seen

We're seeing huge divergences in actual operating performance. And so I think there's two really good tacks to take here. And number one is to focus on companies that don't even have to worry about tariffs. We have a company, I can't say the name, but a company

a commercial HVAC company that just reported tonight, great earnings, great backlog. They are a domestic HVAC company. They make here and they sell here. That's easy. They actually may benefit from tariffs because their competitors are going to be faced with them. Or ADRs, for example. We own this technology company. It's a web browsing company that's based in Norway that has a fantastic balance sheet and a great dividend policy. So again, that's the non-tariff

expose companies, but then we're also going to have to. So you have to think in a contrarian fashion. There may be companies that have suffered recently from direct tariff hits.

that were, if we get positive tariff news, they're going to be the ones that are going to rip and come right back. So we also are looking at that bucket as well. That bucket's a little trickier, I will say. The other bucket, the non-tariff exposed is a little bit easier right now. Kind of like a coiled spring. George, thank you so much. Always a great conversation with George Cipollone. He is Portfolio Manager at Penn Mutual Asset Management. 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 stories 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 Krisner, and this is Bloomberg.

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