Trump's Tariff Signals Gives Boost to APAC Markets
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Bloomberg Audio Studios. Podcasts. Radio. News. Welcome to the Bloomberg Daybreak Asia podcast. I'm Doug Krisner. In a moment or two, we'll break down the latest tariff news out of the U.S. following an up day on Wall Street. We'll be joined by Tim Pagliara. He is the chief investment officer at CapWealth.

We begin, though, with the Federal Reserve. The head of the Atlanta Fed, Rafael Bostic, sees just one rate cut as being likely this year rather than two, given the fact that tariffs could impede the progress on disinflation. Here is Bostic speaking earlier with Bloomberg's Michael McKee.

So I was at two, I moved to one, mainly because I think we're going to see inflation be very bumpy and not move dramatically and in a clear way to the 2% target. Because that's being pushed back, I think the appropriate path for policy is also going to have to be pushed back in getting us to that neutral level.

Well, some of your colleagues also move their dots down, suggesting that we might see more rate cuts, probably because they think the economy will weaken. What do you think the odds of an economy weakening because of fiscal policies are? Well, what I would say is I am hearing more concerns about the trajectory of the economy. That's undoubted.

What I also will say is the data that's come in to date has not actually shown that, and we've still seen a resilient economy. I do know that consumer sentiment has started to take a dip. And the question that we face right now is, is consumer sentiment going to be a leading indicator like it was pre-pandemic, or is it going to be something that doesn't really translate into actual observed behavior in the economy as how it played out for most of the pandemic? Right now, it's an open question, and it's one of the things I'm going to be

watching very closely in the months to come. That was the head of the Atlanta Fed, Rafael Bostic. For a look at how Asian markets are digesting the day's Fed speak, we spoke with Raul Chadha. He is the chief investment officer at Shikara Capital. Raul spoke earlier with Bloomberg's Paul Allen in Sydney.

Just want to start with those remarks from Rafael Bostic there. Potentially just one rate cut now in 2025. What's your outlook for what the Fed's going to do this year? Yeah, Paul, I think those projections seem to be moving. I mean, if you look at six months back, there was almost one towards the end of the year. A couple of weeks back, it was two or three beginning June.

And I think as the tariffs get a lot clearer and our sense is the tariffs are going to be a lot more narrower in scope, a lot more moderated, I think the rate cuts would be much higher than one. Our sense is still 203.

And in terms of the impact of tariffs, I mean, everyone's got an opinion on this. Are they inflationary? Are they not inflationary? Is it a one-time hit? What's your view on the impact? So the sense is here that, look, unlike 2018, where the US had a deflation issue, right now inflation is one of the biggest concerns, which is why the incumbent government, the Democrats, were voted out. And we've seen that.

in recent weeks with the current Trump administration also, they've been far more discerning about implementing the tariffs. So there's been a lot of noise, lot of escalation to de-escalate, but you've not seen large scale tariffs being implemented basically. In the terms of some reciprocal relief and maybe some carve outs for some of the more cooperative countries, look, the markets took some comfort.

Absolutely. So, if you look at it, I think what is going to be is buy more U.S. oil, buy more U.S. kind of a defensive equipment and other things, etc. Probably buy more treasuries at low interest rates or zero coupon, etc. So, I think that's the way. Or probably invest in U.S. pretty much like the Plaza Accord of 1985. I think that is going to be the way out. But the space evolves in the coming quarters. So, is that your approach to U.S. markets? Just buy more, full stop? Yeah. Yeah.

So I think the way we are looking at this is our view is U.S. kind of goes through this period of detox, two, three years of course correction. Look, coming out of COVID, most other countries cut back on the fiscal expense. They've kind of curtailed their fiscal deficit. But for U.S., where fiscal deficit is about 8%, the trade deficit is exceptionally high. And to fix all these structural issues, these issues cannot be fixed in a quarter or two. They require two, three years. And most investors were overexposed to U.S., whereas as you come to U.S.,

Again, emerging markets, China is doing all the right things from June of last year. They're giving the consumption stimulus. They're taking care of the local government issues. India has gone through this cyclical downturn, which kind of impacted the economy last year. So things should improve. I want to come back to the China-India story a little bit later. But if we can just look at the U.S. for the moment and get to our Bloomberg question of the day. Do you think it's going to be not too long before we see the S&P 500 notch a new record?

I think it's going to bounce around these levels. You see, the market is not cheap. It's kind of, most people are overexposed. So what we're seeing in U.S. is U.S. is kind of a sell on rice for at least this year. And what we're seeing in some of these Asian markets is they are buy on dip. So you continue to see China, India touching new highs where U.S. is going to jump around these levels. Right.

Rahul, you were mentioning a little bit earlier that you are overweight China, you like China. How do you feel about the car makers? You're buying BYD, Xiaomi? Yeah, we've invested in these car makers. And even when we were positioned in China prior to this rally, our view was the global champions coming out of China, the likes of BYD, Xiaomi, Pink Dodo, Strip.com are super, super attractive because these names were trading at almost 50% discount to the US peers, etc.,

And one could sense the product quality was getting significantly better than their international peers. And they were gaining traction in the global market. So I think that is going to be an interesting story for years to come. These new global champions from China. Obviously, though, China and the crosshairs of the U.S. vis-a-vis trade policy. But we've heard from the government saying it's preserving fiscal power for any impact.

How do you see this trade battle between China and the US shaping up? So I think unlike 2018 where China was caught by surprise and has been a lot more prepared this time around, if we see a lot of Chinese exporters who spoke to the US over the last five years have moved to ASEAN countries, have moved to Mexico. More importantly, I think the market's kind of pricing in this trade war.

And what is happening also is over the last six, nine months, the leadership in China is doing all the right things in terms of taking care of the local government debt issues, taking care of the real estate bubble, and then in a very targeted way, giving the consumption stimulus. So they're keeping their gunpowder dry at the same time, making sure the business and the consumer confidence comes back, basically.

Do you feel this rally that we've seen in China though feels a little bit uneven? Because if we take a look at the Hang Seng, it's done amazingly well. It's up something like 19% on year, while the CSI 300 is looking pretty flat.

Do you have any concerns about the confidence of retail investors in China and consumers as well? I think what happened prior to this rally was a lot of the locals were kind of positioned in CSI 300 because their idea was this is relatively insulated from the foreign selling. And if you look at HSAI, the values are very, very attractive. And bulk of these consumer platforms, the internet platforms are in HSAI. So when the founders returned,

it was bound to re-rate much better than the CSI. So, no specific issues with the outperformance HSCI has. I think the companies there are great, the valuations were attractive, it was under-owned. And you look at the inflows from the southbound, the inflows YTD has been recorded basically, if I'm not mistaken, more than $150 billion.

I want to talk to you about India as well, because you're also bullish on the outlook here. We did see some pretty heavy selling for the nifty towards the end of the year, but the last six days, it's really started to see that turn around. Do you feel that that's sustainable? Absolutely. So our view was somewhere around mid-Feb that India's bottom. See, what happened in India was, again, in H2 of last year, you had RBI, which was tightening. Again, there was a Forex reserve drawdown of about $60 to $80 billion.

Domestic liquidity was tight. RBI was worried about the unsecured lending. Look, government had run out of this, all these infrastructure projects. So all that kind of turns better now. What we've seen, YTD's RBI's cut rate by 25 bps. We've seen government give some bit of a fiscal handouts, 12 to 13 bps.

billion dollars to the people and the economy is kind of a bottom and is improving Q and K and India is a structural story. See something we've got to understand is with whatever China is doing, growth is not going to be beyond 3 to 4%. So you've got to buy market share gainers in China. You've got to buy global champions in China. But India is a story of 9 to 10% nominal GDP.

And when a three and a half trillion economy grows at that, that creates a whole bunch of opportunities. That was Rahul Chadha, Chief Investment Officer at Shikara Capital here on the Daybreak Asia podcast. This is Doug Gottlieb for the Doug Gottlieb Show. The Toyota Tundra and Tacoma are designed to outlast and outlive backed by Toyota's legendary reputation for reliability.

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Welcome back to the Daybreak Asia podcast. I'm Doug Krisner. So we had a rally in the equity market today on signs U.S. tariffs will be more targeted than anticipated. And in addition, a solid reading on the U.S. services PMI seemed to embolden risk-taking. Joining me now is Tim Pagliara. He is the chief investment officer at CapWealth. He is on the line from Franklin, Tennessee. Tim, thanks for catching up with us. I'm curious to get your take on the price action to begin with.

What did you make of today's trading? I think that this is, you know, there's still a lot to be unwound with the nature of the tariffs. I think, you know, there's still a lot to learn about how that's ultimately going to unfold. But I think we're still in kind of a reset of the valuation issues that have kind of plagued a lot of different securities in the market, especially, you know, the MAG7 market.

As we start looking forward to maybe little lower levels of economic activity, not as compliant a Federal Reserve as we'd like in terms of the ability, their ability to lower rates as they keep an eye on inflation. So there's a lot of things out there beyond just tariffs, but tariffs are certainly front and center right now. And

I wouldn't get too excited about the rally today. Okay. Well, we had equity strategist from JPMorgan Chase, Morgan Stanley, Evercore ISI, all saying the worst of the recent downturn in stocks is likely over. I'm getting the sense that you don't agree with that.

Well, I think it comes in waves. It depends. It depends on how inflation continues to respond. It depends on the resiliency in the economy. Look, we still have a lot of debt to refinance. We're very, very dependent on stability in the financial markets and global markets to refinance that debt. So I don't know.

why anyone would say maybe the worst is over with. I think you still have to make a case for how you can continue to justify valuations at this level, as we're faced with moderating levels of economic activity. One of the things I think that's been hanging over the equity market is the health of the American consumer. Tomorrow, we're going to get a reading on consumer confidence

from the conference board. Some of the Michigan data shows an increase in consumer expectations for inflation. Give me your sense of how you're reading the American consumer now. Well, we're writing a white paper and the title of it is, Have We Built an Economy No One Can Afford? And so I think it's, you have to go beyond just consumer sentiment and you've got to look at the things that

Treasury Secretary Besant focused on in an interview last week. You can't confuse or you can't convince the American public into thinking things are great when the price of everything has gone up.

and real estate prices are moderating, cost of home ownership has skyrocketed, whether you're looking at interest rates for first-time home buyers or insurance costs or maintenance costs. And so the consumer confidence is one thing. It's what can this consumer afford? You know, when you look at, for example, the Florida real estate market right now, as the true cost of home ownership

in these coastal areas and other areas subject to these storms, you know, prices and inventory, prices have come down and inventory has skyrocketed.

throughout Florida, especially in the high-rise condominiums that are older and are facing tremendous maintenance issues. So you alluded to stubborn inflation there. I don't want to put words in your mouth, but that's the sense that I'm getting. One of the critiques that you're offering right now and whether or not the Fed is going to be able to

kind of ease going into a period where we may even see inflation spike as a result of these tariffs. Rafael Bostic was speaking with us earlier today, the head of the Atlanta Fed. He's penciling in just one rate cut as being likely this year. How do you see the Fed factoring into everything that you're describing?

Well, if you believe what they say and they are still very data dependent, then it will unfold quarter to quarter. And I would probably be more in the camp of maybe one rate cut.

this year but you know rate cuts aren't necessarily a good thing either because they represent you know kind of a real softening in the economy and the people that want more than one rate cut

The consequence of that is deteriorating GDP. And then you have the circular problem of tax receipts going down before you can actually get budget expenditures under control. So again, I've described it as kind of a financial whack-a-mole because every time you get one part of this under control, whether it's a moderating dollar,

Then you've got something else that's popping up, like a tariff or instability in the Middle East or Ukraine not going quite the way everybody wants it to. So there's a lot there. And I think it's very prudent.

at this point to be cautious. I'm curious as to whether you see upside to tariff policy under the Trump administration. Here we had today at the White House, Hyundai Motor undertaking a significant expansion in the U.S. They're going to be building a new steel plant in Louisiana. And I think

Through 2028, Hyundai is planning to spend about $21 billion in the U.S., expanding vehicle production. They're going to support some other projects as well. And the company was talking today about creating 14,000 jobs. Is this something we should kind of correlate to Trump administration tariff policy, do you think? Or is there something else at work?

Yes. No, I think that's part of it. It's like Taiwan's semiconductor last week, $100 billion investment. You know, so it's kind of a—I call it the three Cs. You know, there's chaos, then there's capitulation, and then there's compromise. The president is addressing longstanding trade imbalance issues related to tariffs. That's painful in the short run, but in the long run, as you're suggesting—

I think it's good for America. I think it's good for our national defense.

And I think it's also good for working people because, you know, the quality of those jobs are going to continue to improve. When you look at trying to take American-produced goods and find markets for those goods offshore, one of the things that I think could be an issue is a strong dollar. Is this something that the administration is going to have to address?

Well, you know, everybody wants a strong dollar, but they don't want it to be so strong that it impedes, as you suggest, our exports abroad. You know, so I think a moderating dollar from where it was, you know, Europe and that should happen. Europe is, you know, they're getting their act together a little bit more often.

We were really alone in interest rate policy and trying to address inflation, and they were...

you know, they were really behind the curve. And so, you know, Germany has stepped up with defense spending, and they're trying to, you know, address their issues. And so, as they improve, the dollar should moderate a little bit. It shouldn't be as strong as it is. So, we've covered a little bit of ground here, and I'm curious, given everything that we've been talking about, how are you formulating an investment strategy going forward?

We are about 20 to 24 percent in short-term treasuries. We're slanted towards the

value side of the market. We're looking at non-correlating assets to the market special situations. We've got a big investment in Fannie Mae and Freddie Mac preferreds, for example. As you have probably heard, there's talk just about every day with reprivatization of Fannie Mae and Freddie Mac that will be very, very favorable for that, for the preferreds of Fannie and Freddie.

And so that is not dependent on anything in the market. In fact, if anything,

The market is driving the recapitalization and release of Fannie Mae and Freddie Mac at this point. They've been in conservatorship too long. And, you know, some of the investment banking folks like Milstein today in a podcast suggested that the government's interest, you know, could be worth close to $300 billion. And that's just smart policy, right?

consistent with what the Trump administration is trying to do. So a moment ago, you spoke about Europe getting its act together. How do you want to be diversified right now away from the U.S.? What markets look attractive to you? India looks attractive, you know, on a long term basis. That's a really interesting discussion, too, potentially about the tariffs, because I think as Treasury Secretary Besant said, the Chinese have built the

the most imperfect, imbalanced economic system in the history of the world. So India having to confront reciprocity and tariffs and opening their markets and our markets being open to them, I think will help them build a much better, sustainable economy long term, unlike the Chinese. So, you know, that's exciting. And then I think just, you know, generally in Europe, I would

favor large cap value indexes in the European markets at this point. Tim, we'll leave it there. Thank you so much for joining us. Tim Pagliara there. He is the Chief Investment Officer at CapWealth. Joining from Franklin, Tennessee, 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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