Mag Seven Earnings, The Fed Holds, China's Economic Outlook
18:05 Share

Capital Ideas, conversations with Mike Gitlin from Capital Group, features our top investment professionals sharing what drives them in today's market. Get stories and actionable insights. Subscribe wherever you get your podcasts. Capital Client Group, Inc. Meta's open source AI, available to all, not just a few. Here's Steve McCloskey, CEO of Nanom. With Meta's open source AI model, Lama, we built a tool to help scientists to discover treatments for diseases. Learn more at ai.meta.com slash open.

Bloomberg Audio Studios. Podcasts. Radio. News. Welcome to the Bloomberg Daybreak Asia podcast. I'm Doug Krisner. Lunar New Year celebrations continue across the Asia-Pacific. We've got market holidays today in China, Hong Kong, and South Korea, to name a few. And coming up, we'll take a look at the Chinese consumer with Shehzad Qazi. He's Managing Director of China Beishbuk International.

But we begin here in the States and let's start with today's Fed decision. And to help shed some light, let's bring in George Cipollone. He is portfolio manager at Penn Mutual Asset Management. George, joining from just outside Philadelphia. Thank you, sir, for making time to chat with us. I think Powell was pretty clear. The Fed does not need to be in a hurry to lower interest rates. Can you understand why or do you disagree with his position? Hey, Del, great to be with you. I completely understand.

His position and his standing. And I think there's one. So if you read through the text, there's one omission that's clearly important. And so the last statement was inflation has made progress towards the committee's 2% objective but remains somewhat elevated. That was from the last meeting.

In this meeting, they took out a lot of those words, and now they just say inflation remains somewhat elevated. And I think that's absolutely the most accurate way he could describe it. And I think that's the reason why they stood pat and sounded a little bit more hawkish than maybe the market expected because obviously we saw the stock market pull back right away, the bond market pulled back.

They've rebounded for sure, but I do think his stance is the proper one at the moment. And I'm just wondering, as I'm listening to that, whether a portion of that unease or ill at ease has to do with the fact that really we don't know whether or not there are going to be inflationary impacts as a result of some of the policies that we're getting from this new administration.

You're 100% right, Doug. And it's funny. We had some Bloomberg people in showing us some really cool functions on the system. And there's always something new. One of the big ones that we noticed from an economic standpoint is the word count, obviously, for what managers, what company managers are concerned about. And the tariff chart is just completely stunning and eye-opening. And that's what everybody doesn't know how to deal with yet because we don't know what the policy will be.

And if you look at inflation, the chart on inflation, we got really surprised there in December. If you think about just a month or so ago, how the market was ripping, the stock market was ripping and the bond market was pretty tame. And from a yield standpoint, everything changed at that point and at the last December meeting. And it needed to because inflation expectations resumed post-election. And so now we have a lot of uncertainty about, OK, will we get back to 2% inflation?

I know the Fed wants us to get there, but we're not there yet. So we're going to keep an eye on oil. We're going to keep an eye on commodities. We're going to keep an eye on policy. And I think, again, as we are right now, the Fed is in an uncertain point, and I think they made the right decision today so far.

Yeah.

Yeah, Tesla's an interesting one. So, full disclosure, I'm a value manager, and Tesla's not in our wheelhouse by any stretch. I think if you look at Tesla as an auto company, I think all the auto companies are facing a ton of competition from China, and we're seeing that across the board. You name the company, whether it's a European company, even some domestic companies. Now, Ford and GM are a little different because they have such a strong foothold in the U.S., but if you look at European companies,

automakers that sell into China, they are not doing well. And if you look at how strong Chinese EV companies have been doing, and that's a lot of competition for Tesla. So I understand why their earnings are the way they are. But a lot of people don't look at Tesla just as an automotive company. They look at it as a tech company, as a robotics company, as an FSD company for fully autonomous driving. And so they have that

buzz about them and so it seems like no matter what the numbers look like or no matter how bad they look like some commentary can always help give the stock a pop so again as a value manager it's not my favorite one to analyze because the fun

the fundamentals are so tough to work with. So let's go to Microsoft next, trading at around 35 times earnings, hardly meeting the definition of value. But this company is so closely tied to this AI revolution. Aren't you tempted to maybe put a little money to work at Microsoft?

So, again, as a value manager, I think one of the interesting things is we'll try to start with companies that maybe have more upside potential than some of the bigger names. So, the bigger names are doing great. And if you look at the numbers, they're really good. After hours, the market really isn't that satisfied with Microsoft. And the primary reason was the growth in their Azure business or their cloud business. And so, if you look at

what the commentary was, it was really, really telling. And this is going to go back to your point. Microsoft said its cloud computing business will continue to grow slowly in the current quarter as the company struggles to build enough data centers to handle demand for its artificial intelligence products. And then I'm sure we're going to talk about Meta as well. Meta's comments from a CapEx standpoint were,

pretty eye-opening as well, especially in terms of what we just saw Monday with DeepSeek and the fears that these companies were spending too much. That is the exact opposite of what the companies just said after hours. Going back to your point, Doug, I do think there are companies in the data center business that look really, really cheap.

relative to maybe some of these bigger names. I think they're underappreciated and I can't name each one just because I can't, but that's our policy not to do that in the media. But there are companies underlying that can supply those data centers that can help fuel that growth that we think are pretty cheap.

It's interesting that you mentioned Microsoft and Meta when it comes to AI. We know that Microsoft and OpenAI have that partnership with ChatGPT. Meta's AI model is Lama. And this week's shocker was the story on DeepSeek and how its AI model can rival ChatGPT.

I think it's important to point out that we are learning that Microsoft is now looking at whether a group linked to DeepSeek may have taken a large amount of data from OpenAI in an unauthorized fashion. More to come on that. But the DeepSeek model known as R1 is open source.

And Meta's Lama AI model is also open source. So I'm wondering whether the real story of the week is the impact open source is having on these AI models. Let's set that aside for a moment. I'm wondering about whether some of the second order impacts of the AI story are still intact, like electric power, for example. Are they?

You're 100% right, Doug. I mean, if you think about the ripple effects of AI in this CapEx spending, I think as long as you could tie it back and if that CapEx is sustainable, it's going to create a lot of demand for land and buildings that are close to or data centers

and land that's going to be close to power sources. It's going to help increase if you look at a chart of potential natural gas demand, that should go up. And then again, it's funny because the ripple effects work both ways. And a lot of those companies that benefited over the last year from this

AI buzz all got hit on Monday pretty severely. So again, I think Zuckerberg's comment was pretty telling as well, saying his consumer AI offering is going to be one of the most transformative products that we've ever made. And that's a pretty big statement coming from Zuckerberg in terms of a huge product like

comparing it to something that might be even bigger than Facebook. So yes, to your point, there are going to be a lot of names that should do really, really well. That CapEx is going to have to hold up, though. That's going to be the key. So Apple will be reporting tomorrow after the closing bell. Are you optimistic? So Apple is challenging. So if you look at all these names...

So, for example, if you look at Meta's quarter, they earned $8 this quarter. If you compare that to 2022, they earned $8.59 in the full year of 2022. So, this was an outstanding quarter. Apple, just about all of their return last year came from PE expansion and not from earnings growth.

So, I think there's a very big question. Each of these companies, obviously, they're in the Mag7. Some people may look at them in a very homogenous fashion, but they are all different companies. And I think Apple needs to prove that they can continue to grow. And I think where these other companies have, if you look at Meta, for example, over the last year, their revenues went from $135 billion up to $165 billion.

And Apple's kind of stayed steady. They've grown, but not at this pace. And given the fact that their PE is where it is today, it's 30% higher than it was last year, for example, they have to prove it now. They have to prove it once again that they can grow at this size of a company. Can they continue to grow it with headwinds like

China, for example, staring at them in the face. George, we'll leave it there. Always a pleasure. Thanks for making time to talk with us today. George Cipollone, he is Portfolio Manager at Penn Mutual Asset Management, joining from just outside Philadelphia here on the Daybreak Asia podcast. Capital Ideas, conversations with Mike Gitlin from Capital Group, features our top investment professionals sharing what drives them in today's market. Get stories and actionable insights.

This show is sponsored by BetterHelp. BetterHelp has been revolutionary in connecting people to mental health services. Using BetterHelp can be as easy as opening your laptop or your phone and clicking a button, and the session begins.

Clients are able to choose in what way they would like to communicate with me, whether video or on the phone or chat texting. BetterHelp is there when you need it, and that's what makes all the difference. Visit betterhelp.com slash podbusiness to get 10% off your first month. Therapists were compensated.

Welcome back to the Daybreak Asia podcast. I'm Doug Krisner. Many countries across the APAC region are enjoying Lunar New Year holidays, so markets will now be keenly interested in the high-frequency data tracking consumer spending across the region. For a closer look, I'm joined now by Shahzad Qazi. He's Managing Director at the China Beige Book International. Shahzad, thank you for making time to chat with us. Let's begin by talking about consumer behavior. What are your expectations?

Well, look, I think the consumer data actually look quite positive. You know, and I think a lot of the credit, the reason goes to the Lunar New Year spending. You got travel doing well. You got the hospitality sector showing sales improvement. You even have restaurants showing sales improvement. You even have retailers actually ramping up hiring. So I think the expectation is that consumers are going to come back and spend more money,

you know, this year than they have in the last probably couple of months, maybe even compared to last year. So how are you evaluating, let's talk about China here, the overall Chinese economy at the moment? What does it look like to you in terms of its strength or perhaps weakness? Look,

- I think the beauty is very nuanced right now. The economy is certainly not shooting upwards to the moon, so to speak, but it's absolutely not falling apart. You've got a story where there's a lot of semblance of stability, a word, of course, that the Communist Party loves,

compared to where things were a year ago and an improvement over what was a weak December and an all around slower Q4. - So the latest PMI reading is, as I recall on the manufacturing side, continued to show contraction. Isn't that concerning to you?

You know, I don't buy that the economy actually was in any kind of outright contraction heading into the beginning of this year. To be honest, Doug, I wouldn't be surprised if a lot of that is just lagged weakness from late last year finally being reported in official data.

How are you understanding the risk of tariffs to the overall manufacturing sector in China right now? Yeah, I think, you know, overall, if the economy is doing all right, that brings down the pressure on Xi to do large scale stimulus. The big risk factor then is what happens with tariffs. If they do get hit with tariffs,

you know, then, of course, they are going to have to step it up to provide additional support to the manufacturing sector, which already, of course, gets quite a lot of help in terms of subsidies, zero interest rate loans and so forth. But Beijing, I think, will step up.

the support for its factories. Today in the U.S., we had news that the Trump administration is exploring additional curbs on the sale of certain NVIDIA chips to China. This would be kind of a continuation or maybe a deepening of some of the export controls that were initiated under the Biden administration. It seems like, certainly in the area of high technology, things are maybe going to get a little bit more tense between these two powerhouses and not any less so. Yeah.

That's absolutely correct. But here's the reality. We can talk a big game here in the US, but the Chinese are still being able to access American chips, including high-end technology. So export controls are incredibly complicated, to say the least. And the administration, if it's serious about export controls, is going to have to figure out what the game plan is and learn from the lessons of the last four years, where clearly a lot of stuff leaked through.

Yeah, we have also news today that Microsoft and OpenAI are investigating the actions of a group that was linked to the Chinese AI startup DeepSeek. Now, this group may have taken large amounts of data from the company OpenAI in an unauthorized fashion. That seems like it's just going to fuel this tension even further. I mean, what is the risk here between the U.S. and China when it comes to technology, away from semiconductors?

Well, so technology theft, of course, is an everlasting problem in the US-China relationship. This may be just the latest example of it.

I think the question is, is the current administration going to take any of this seriously? And really, it just boils down to the president. Is the focus there? Is this going to mean much? Or is the focus just going to continue to be on things like the trade imbalance? Because that will lead to two very different types of policy prescriptions and actions. And of course, tariffs are not going to necessarily solve this problem, which, as we said, requires vast amounts of export controls.

and uh you know things of that nature more than just tariffs i think it's a well-worn narrative this deflationary pressure that china has been enduring for a while now it feels as though it's been a couple of years

And it also feels as though it's becoming a little bit more protracted. And I'm curious, does that concern you at all? You know, we're going to start getting more and more concerned if we see these low levels of inflation persist. You know, one thing I always like to point to is that consumer inflation has not yet been hit by inflation.

by outright deflation, unlike what has happened on the industrial side, if that happens again, the pressure on the Communist Party, and I think Secretary Xi goes up to figure out what to do. And guess what? They are not very good at, and I'm not sure they even know how to do consumer side stimulus, real consumer stimulus, which means that the

you know the economy could get into some serious hot water isn't that what's really necessary right now to try to find an effective way of stimulating domestic demand

They have to do some amounts of stimulus. They're not in so much trouble that they need to necessarily do these sort of big bazooka style spending. But again, here's the thing. Xi cares much less about the stock market and, quite frankly, much less about economic growth than he does about national security. I think he's made it very clear that it's the national security aspects that he's going to focus on.

whether it's independence in the tech sector, whether it's military dominance within the region and so forth. He may be willing to live with a low growth figure as long as he can pursue those goals. Do you see a policy prescription on the horizon, anything that the government may unveil or initiate to try to address some of the problems that we've been talking about?

I think they're taking a piecemeal approach, which again makes sense because they're not trying to post these large GDP growth figures anymore. They know it's easily sub 5%. They'll live with something closer to 4% as well, even if they announce larger numbers.

So I don't see anything on the horizon for a big, the so-called big bang stimulus that markets have been cheering, you know, every few months now. So I'm looking at the offshore currency right around 726 or so. Is this something that you expect will weaken in terms of the yuan's relationship with the dollar? I know that they use the basket in a lot of the waiting when they set the daily reference rate, but I'm just talking about the yuan's relationship with the dollar right now. Are you expecting that to weaken further?

Look, we could get additional yuan weakness. They're going to be very careful about that. They don't necessarily need the yuan. They do not want the yuan to weaken too much. And they also want to be very careful about anything that starts to look like it's a currency deval. So they are not looking to antagonize necessarily the administration right now. And if the yuan weakens too much,

on top of all the other problems that the administration could point to, currency manipulation could rise to the top very, very quickly. We'll leave it there. Shehzad, thank you so much for being with us. Shehzad Qazi, Managing Director at the China Beige Book International, 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.

World-class journalists, global leaders, influential thinkers, cutting-edge data. January 20th to 23rd in Davos, Conversations at Bloomberg House will provide the context you need on the biggest stories that will shape the year ahead.

From AI and the future of tech to geopolitics, markets, sustainability, inequality, and more. Join us in person or watch live. Visit BloombergLive.com slash BloombergHouseDavos to learn more.