US-China Trade War Casts Shadow on Global Markets
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Bloomberg Audio Studios. Podcasts. Radio. News. Welcome to the Bloomberg Daybreak Asia podcast. I'm Doug Krisner. Among the events this week for markets in the Asia-Pacific, the things that have to be discounted, I think, principally, is the story on U.S. tariffs. There's much to talk about here, and we'll do that now with Stephanie Leung, Chief Investment Officer at Stashaway. Stephanie joins us from Hong Kong. Happy New Year to you. Thanks for being with us.

I think it's fair to say that the threat of those tariffs was very well telegraphed. There may have been some very slim hope of a reprieve in the early morning hours of Tuesday U.S. time. That was after Canada and Mexico received a reprieve from their tariffs. But within seconds after the Chinese tariffs took effect, Beijing shot right back and said it would apply tariffs of its own. So what is your sense of this trade war?

Yeah, I think if you kind of take a step back and as we've outlined in the 2025 outlook, we call our outlook piece FAT is the new normal, F-A-T. F stands for fiscal policy, A stands for AI, T obviously stands for Trump. And I think these three are kind of the key pillars of

that investors need to consider or pay attention to for this year and perhaps in the next three years, three to four years. And within the Trump policies, if you kind of look at the broad buckets, now, of course, some of them are actually pro-growth, for example, tax cuts, deregulation, but also, I mean, two major buckets that are kind of risky to growth or would put risk to growth and inflation are tariff and immigration policies.

And I think if we compare these two, we think that the market is actually discounting much more the risk of tariffs, but perhaps not discounting enough on immigration. So perhaps we can talk about immigration later. But in terms of tariffs, I mean, our view has been that if you think about the whole Trump framework, he has historically used tariff as a tool for negotiation.

And I think, I mean, if you look at kind of his rhetoric, he sounds very, very tough. However, just from his track record, he always just wants to make a deal. And I think that's what we've seen kind of play out this week.

We know the situation in China is quite different from what it was during the last Trump administration. And I'm wondering whether Xi Jinping knows or feels that he has a much weaker hand to play right now. Yes, I think, I mean, to a certain extent, of course, the economic situation now is a lot weaker in China.

But I also think that there is kind of a change in the global view from both sides of the of the continents. Right. From a U.S. perspective, of course, if you ask the media in Fota a few years ago, they would be much more pro-China. Now, today, I think it's sort of just across the aisle. People are kind of seeing China as a threat, more as a competition than a friendly kind of trade neighbor.

Also from the China side, we have to recognize that, I guess the leadership from President Xi is basically that we have to develop our own economy, right? They can't rely on the external trade. They can't rely on a kind of global trade agreement.

anymore like they've done before. And therefore, there is a lot more focus on developing the domestic economy. And I think that's kind of where the government is focusing on. Of course, in the past few months, we've seen some gestures of stimulus, but I think largely

What the market wants is from the government to directly stimulate consumption and also investment demand. So far, we haven't seen that. So I'm trying to understand, Stephanie, whether or not this U.S.-China trade war will become protracted. OK, 10 percent may not be a lot initially, but Trump has already said that this tariff could go as high as 60 percent. And I'm imagining that that would inflict a lot of pain on the export economy in China. Yeah.

Yeah, I think if eventually 60% gets imposed and it gets imposed on the most critical components, then I think, yes, of course, it will dampen growth in China, given that export is still very, very important. But I think we also have to remember that also dampens growth and pushes up inflation potentially in the U.S. as well.

So if you look at the trade between the two nations, the biggest areas of trade is actually in electronics and some of these consumer-related products. These are your iPhones, TVs, things that go into the car, etc. So these are actually essential for the U.S. consumer.

And if you think about kind of 60% tariff, of course, China can fight back with some tools like currency depreciation or kind of like more domestic stimulus. But I think at the end of the day, tariffs actually hurts both sides. And I mean, Trump administration knows that.

Also, I think if you look at the US media voter, and I mean, there's a survey that was done asking voters what do they want to get resolved in the first 100 days of Trump's presidency. And they rank actually on the top inflation. I mean, we know that inflation is a big problem in the US, even with kind of inflation rates coming off, the level of prices is still way higher than what it was pre-COVID.

So inflation comes on top. Second, like kind of top of mind for people is actually not tariffs, but immigration.

And actually, if you look at tariff, it ranks very, very low. Indeed, it ranks kind of maybe the lowest, like kind of the second lowest priority that people want Trump to be focusing on. So consistent with that survey, I'm wondering whether markets are kind of having the same sentiment, right? The tariffs don't mean a lot right now because there is a level of confidence that there will be some resolution and there are more important issues to be concerned about and principally other drivers of inflation that aren't tariff related.

Yes I think indeed right if you look at the of course the equity markets reacted quite violently but we all know that equity markets are a bit expensive in the U.S. and also retail position has been quite high so I think there's been a bit of washout in terms of positioning.

But I think the real gauge is actually in the bond markets. I don't think so far we've seen much reaction from the bond market for the trade tariffs because if the market is taking this quite seriously then I think we should see bond yields much lower.

And indeed, bond yields have been just in a tight range. And I mean, I think there's still a risk that bond yields would actually increase should trade tariff kind of settle down. So I think the real gauge is actually how the bond market reacts to it.

I know you, Stephanie, as an expert when it comes to artificial intelligence, and I'm very curious to get your take on what we learned last week when it came to DeepSeek. Certainly from the U.S. side, a lot of questions on how this model was developed. What's your sense of what's happening here? Yeah, I mean, of course, things in AI develop, I guess, changes. The narrative actually changes on a daily basis. But I think the significance of DeepSeek is...

It's not the fact that it's so cheap. Of course, people focus on how it got developed with 5 million versus the billions that OpenAI has spent on it. But I think more importantly, there's two major things stood out for me. Number one is that I think the surprise was actually how closely Chinese models are following the US models. Because I think before DeepSeek, the common consensus was that

Chinese models are, in terms of AI technology, China is probably six to 12 months behind. If you look at how DeepSeek has been following ChatGPT, now the timeline has been pushed to three to six months, which is a much, much closer race than people had consensus on before the release of DeepSeek. And I think the second more important point is that they actually released DeepSeek in open source.

And I think this actually puts the open source versus closed source debate much more kind of tilted towards in favor of open source. And indeed, if you look at the recent statement that Sam Altman put out, he is also saying that even within open AI, they are considering the possibility of going the route of more open source. And I think that actually brings quite a bit of a stir or changes in how the whole ecosystem develops.

I think this is great news for the application layer, for developers using AI to develop various applications and usage. But I think it also poses questions on a lot of the initial investments into LLMs, right? How quickly these LLMs are actually commoditized and what is the business value in just having a proprietary LLM model?

Before I let you go, let's talk a little bit about the Chinese consumer. From what I've been reading, they were setting records for travel and movie attendance during the Lunar New Year holiday. And I'm just trying to get a sense of whether or not we're beginning to see some green shoots in China where consumer spending is concerned. Is that your sense or is it too soon to make that claim?

Yeah, I think one very good gauge is actually to look at the property prices in China. And the great thing about this is that there's a very, very timely data that comes out every month.

And I think the-- because if you think about the Chinese, I guess, the Chinese population or the average Chinese consumer, a lot of the wealth is actually in the housing market. And I mean, it's quite-- actually, in the US, a lot of wealth is in equity markets, same thing. The wealth effect of China actually depends on how the housing market does.

I mean, we would love to see a stabilization in the housing market or even some recovery. And that would give us a lot more confidence in the Chinese kind of consumer recovery story. Stephanie, thank you so much. Stephanie Leung there, Chief Investment Officer at Stashaway. Joining us from Hong Kong here on the Daybreak Asia podcast. You worked hard to lay the foundation for your contracting business.

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Success. It's discipline. It's teamwork. It's the drive and passion inside of us that comes before all recognition. It's the best in each of us made better by the best in all of us. Whatever success looks like to you, Stiefel is invested in yours. That's why Stiefel is one of the fastest growing global wealth management firms in the country. So when you're ready to chase success, our financial advisors are ready for you.

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If you're an advisor or an investor, choose Stiefel, where success meets success. Stiefel Nicholas & Company, Inc., member SIPC and NYSE. For J.D. Power 2024 award information, visit jdpower.com slash awards. Compensation provided for using, not obtaining the award.

Welcome back to the Bloomberg Daybreak Asia podcast. I'm Doug Krisner. I think it's fair to say that we have certainly seen a whipsawing of markets recently. No shortage of factors driving the price action at all. I mean, there's been uneven economic data, trade tensions galore, and questions around the spending on artificial intelligence.

For a closer look, I'm joined now by Zachary Hill. He is head of portfolio management at Horizon Investments. Zachary, thanks for making time to chat with us here. So I listed a couple of factors that may be influencing the market's behavior. Is there one that you think is predominant right now?

Yeah, Doug, thanks for having me. We really have been playing narrative ping pong for this year, just back and forth between different things. I think I think two things are really important right now. One, obviously, is tariffs. Quite frankly, we're a little surprised how well the market is hanging in with 10 percent tariffs on all of Chinese exports.

But expectations have been that that's going to get rolled back relatively soon. And so we'll see how those things evolved. And then the second major theme that we've had going on over the last few weeks is just a rotation within the AI theme. Not really...

bringing down the overall theme in terms of importance, but accelerating it in terms of monetization. And so we do think that's important for investors to consider. What do you think about the quality of earnings that we have had recently from some of these mega cap companies, names like Alphabet?

Yeah, I mean, obviously the market didn't like their earnings today. But, you know, broadly speaking, we do think we've seen a pretty healthy earnings backdrop overall. We've had above average surprises on the top line and the bottom line. And so that's something that's pretty healthy. And, you know, going into this year, really the thing that we're most watching for is just the earnings from the rest of the market to see if that can catch up to the yawning gap

that the top of the market was able to deliver in 2024. And that's something that's really important for market breadth. Many participants in the market have been looking to the Fed for some type of direction here in terms of the interest rate environment. Although I thought it was interesting today that in an interview with Fox Business,

Treasury Secretary Besant was saying the administration is focused really on the 10-year Treasury yield, not so much on what the Fed is doing with their benchmark policy rate in the short term. So if you look at the 10-year here, we're under 4.5%, 4.42% now in late New York trading. Is that kind of aligned with your thinking? You really want to pay attention to the longer end of the yield curve right now more than what's going on with the Fed?

- Yeah, I would agree with that. We do think the Fed is on hold for the near term, and so that means longer term it's about growth expectations, and then the thing that we've been talking about on again, off again for the last two months, term premium.

We definitely had a little bit of a scare in yields in the middle of January, and that is all but reversed now. And so we're back now basically to where we were in the December FOMC meeting. So things seem pretty fair here for long-end yields. And, you know, we would echo Besson's comments, um,

The longer end of the curve is where more people finance rather than the short end. And so we do think that's more important for the overall outlook, both for the economy and for markets in 2025. Well, speaking of the economy, we get the January jobs data on Friday. If you look at a couple of the data points that we have had this week, I'm thinking about the ADP private payroll survey.

The services PMI, some of these data points are really showing that employment is quite strong still. Do you think we're going to get a blowout number Friday? How do you think the labor market is performing? It's hard to say what we're going to get on Friday in terms of the non-farm print. We've had some noise back and forth within those numbers over the last few months, particularly

related to strikes and the weather and that type of thing. And so, you know, last month surprised at the upside in a really material way. And so getting a handle on what exactly we're going to see on Friday is kind of challenging. But I think broadly speaking, you know, the totality of data is telling us that the consumer is in really good shape and the job market is in a really good shape.

And more to the point on potential market reactions to Friday, the Fed has told us that, look, they're more concerned about inflation as opposed to growth in the labor market. And so that's something that we're focusing more on. And we think Friday's non-farm number is likely to be a non-event, just like the Fed was last week. Where are you finding value right now in the U.S. equity space?

Yeah, I mean, we have a kind of interesting view on U.S. equities right now. We still like the AI theme, and that is some of the mega caps in the top of the market and large cap growth in general. But we also think you need to be moving a little bit down the cap spectrum towards some of those smaller cap growth companies and some software names that stand to benefit from the acceleration of the monetization of AI that we've seen with cheaper models likely coming in the very near future.

At the same time, we think some parts of the market that are more cyclical have some interesting tailwinds from a deregulatory and business sentiment perspective. And so the two areas that we like the most are small caps and banks in the U.S.,

We're staying away, though, from some of the more China-dependent, more value-y parts of the market like energy and materials. We don't think it's an environment, especially with the tariff overhang, that those offer an attractive risk reward. Well, speaking of China, I'm curious as to whether or not you're seeing opportunities offshore right now or whether you remain focused solely on what's happening in the States.

I mean, we're looking at what's going on overseas for sure. But, you know, our main focus is within the U.S. You know, there just aren't as many, you know, favorable kind of narratives and things going on in the rest of the world. And also just from a U.S. dollar perspective, if we have threats of tariffs looming, that is something that is going to tend to underpin the dollar. And so, you know, we'll be a headwind to international allocations. And so, you know, so far this year, we've seen a really strong move in European stocks.

both in local currency terms and in dollar terms. That's something that seems to us like it's running its course and not something that's going to continue. But certainly we're keeping an open mind because as we saw in year one of the first Trump presidency, expectations were not what was realized in market performance over that time.

I mentioned the Besant interview a moment ago. One of the other points that he made during that conversation was his support for making the 2017 tax cuts permanent. Now, those cuts, as we know, are set to expire at the end of the year. To what extent has the market already maybe discounted the fact that these cuts will indeed be permanent? Or do you think that is still up for debate?

I think it's up for debate. I mean, there's a lot of disagreement within the Republican coalition, especially around anything that involves potentially increasing the deficit. You know, the majority is pretty narrow.

And so I do think that's something that will come to bear in those conversations. And we're certainly seeing some rumblings of that already in Washington about one bill versus two bills. And so, you know, I think that's clearly the policy priority of the Treasury secretary. It remains to be seen if that can be passed into law. And so I don't think the market is really banking on necessarily a continuation or a further tax cut from here.

Zachary, we'll leave it there. Thank you so much for joining us. Zachary Hill there. He is head of portfolio management at Horizon Investments. 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 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 Krisner, and this is Bloomberg.

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