US Futures Pare Losses as Trump Weighs Iran Role
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Welcome to the Bloomberg Daybreak Asia podcast. I'm Doug Krisner. U.S. stock index futures are a bit lower after a market holiday in the U.S. In a moment, we'll take a look at market action with David Lott. He is the chief investment officer at Abound Financial. But we begin with geopolitics and the White House saying President Trump will decide within the next two weeks on whether or not to strike against Iran.

Now, the president has publicly mused for days about having the U.S. increase the stakes by joining Israel's strikes on Iran. Earlier Thursday, an Iranian missile struck an Israeli hospital, and at the same time, Israel struck at more of Iran's nuclear sites and warned its attacks could bring down the leadership in Tehran. We got reaction from Maria Roost-Rubli, professor of international relations at the University of Melbourne. She spoke with Bloomberg's Sherry Ahn and Heidi Stroud-Watt.

Great to have you with us. What would U.S. military action mean in this conflict? How much worse could the conflict get from here?

Well, there is a lot of pressure on Trump from Israel to get involved, because the only way to take out the uranium enrichment facilities in Fordow is with U.S. bunker-busting bombs. These are 30,000 pounds. Only one can be carried in a B-2 at a time. And so Israel can't finish the campaign against Iran's nuclear program unless the U.S. gets involved.

But if the U.S. gets involved, that means that Iran is going to – there will be a lot of pressure within the Iranian leadership to attack U.S. facilities. And if that happens, all bets are off. I mean, the U.S. will really – Trump has already threatened that if you touch our people, if you touch our facilities, that's it.

I do think that then, even though, you know, Magda really does not want to see more foreign entanglements, if there's an attack against U.S. facilities or people, then there will be just basically a war cry within the U.S. for a retribution.

We're hearing from experts that Israel cannot necessarily can actually hit Iranian nuclear sites, even without the help of the United States. How much capacity does Israel have right now to finish this conflict without U.S. involvement? I think you're alluding to the fact that Washington actually needs to be involved, especially if there is a need for regime change.

Yes. Look, I mean, Israel has already done a lot of damage to Iranian nuclear facilities. In fact, they just recently bombed some of the older closed sites. But there's this key site, the Fordow uranium enrichment site. It's buried under a mountain. And the only way to take it out would be bunker buster bombs. In fact, the U.S. would have to drop one

And it would have to drop another on top of it and possibly another on top of it. Israel does not have that capability. Netanyahu has just said recently in the past 24 hours that they don't need U.S. assistance to finish their campaign. So I guess that depends on what do they mean by their campaign. But we can pretty conclusively say that unless Israel is prepared to use nuclear weapons against Israel,

Iran, which is extremely unlikely. I mean, I think that's that's pretty much off the table that Israel cannot get the Fort Al Urim enrichment site on its own.

Maria, I think you alluded to this a little bit earlier about what we're now hearing, the potential for taking down the entire Iranian leadership in this next phase of the conflict. If that happens, what are the ramifications across the region, across the globe really? What does it mean for the Iranian proxies and what does it mean for the necessity of US involvement? Because at this point, where are we going to see that sort of global leadership come from?

Yes. I mean, that's a great question. Netanyahu has said, you know, that regime change could happen, but it is not the intent of his campaign. Of course, that's what he's saying. You know, he may indeed have other plans, you know, that he's not discussing. And Trump has also alluded to the fact that, you know, that assassination of Khomeini is possible. Of course, there are lots of U.S. executive orders against Khomeini.

the U.S. assassinating a foreign official. And so, look, if the regime was taken out, then sort of all bets are off. What's going to happen? You know, some people say that Israel clearly has, you know, people in mind, you know, potential, you know, Iranian

domestic groups that could step in that would, while not friendly to Israel, would be willing to back off the nuclear program. However, other experts are saying that if something like that happens, Iranian public opinion and the Iranian military, foreign policy elite, it's essentially going to really harden the need for Iran to have its own nuclear weapons to be able to prevent

future attacks on Iranian leadership in the future. I think it's interesting that the assumption and the rhetoric right now is that regime change or the toppling of the leadership is not the main goal here for Israel, for Netanyahu. At the same time, we've of course seen since the October 7 attack a real redirection of

what Israel's strategy has been in the region, right? The sort of, you know, deterrence clearly is being seen as not working. They've been a lot more aggressive and, you know, when it comes to multiple fronts at this point, do you think that changes the game when it comes to what we can expect from the Netanyahu government?

Yes, I think so. I think Netanyahu sees that he's been able to carry out things that previously he wouldn't have been able to. I mean, despite all of the, you know, protests worldwide against what's happening in Gaza and, you know, even, you know, certain...

Israeli officials being sanctioned by countries such as Australia. Essentially, Netanyahu sees that he's been able to carry these things out. And now with Trump's implicit approval, or at least not disapproval, being able to carry out these strikes on the Iranian nuclear program. And so Netanyahu may feel like now's the time that he's got the freedom to do what he wants.

And, you know, the real question is, is if this is about Iran's nuclear weapons program, which it does seem to be, you know, you can't bomb a country out of its nuclear program. I mean, you can set it back, but unless you're going to sort of erase the universities and industrial capability, countries can always build back and they'll learn to build back in much more secret ways. Of course, there are ways to detect something.

secret nuclear programs as we've seen with Iran. That's how we found out about the Gordo site. But really, the question is, is this effective? And that's why European countries

You know, several European countries are sending diplomats to meet with the Iranian foreign minister today in Geneva to say, you know, how can we fix this before this ends up? You know, we have a conflagration across entire Middle East, which is going to affect, you know, petrol prices. It's going to essentially affect the cost of everything even more so than the Ukrainian war.

That sort of goes to the crux of what happens next, right? Not just in the next two weeks, you know, depending on what the US does, but kind of in the next, I guess, generational sense. How quickly could Iran potentially recover when it comes to the damage done to the nuclear program? And does this sort of attack...

potentially strengthen the domestic narrative that it needs to have those capabilities? Yes, I mean, that's a good question. So essentially what Israel has done, they've only set back the physical infrastructure by

maybe three or four months. I mean, they have, they've taken out the, um, above ground uranium enrichment facility at Natanz, but they haven't taken out the underground facility there. And of course they haven't taken out Fordo. Um,

They have taken out, though, in terms of personnel, a number of key nuclear scientists from the reporting that we've seen. But psychologically, look, the question is, you know, will this harden the Iranian leadership and people? You know, the best way to prevent this type of attack against, you know, from a nuclear weapons state, which Israel is, is to have your own nuclear weapons system.

And so Iran is in a bit of a hard spot here. They have enriched uranium, but it's not highly enriched. However, they could get there in, some people say, two to three weeks.

But highly enriched uranium by itself does not give you a deliverable nuclear weapon. I mean, you've got to convert it from gas to metal. You've got to then turn it into a bomb. And then you have to be able to deliver it. And the only realistic way for Iran to deliver a nuclear weapon to Israel would be on missiles.

And then that means you have to miniaturize nuclear weapons, which is really hard work. And in fact, you know, it took, for example, North Korea, you know, several tests, nuclear tests to do that. And Iran hasn't done any nuclear testing at all. So for the Iranian position is to be back off.

Essentially, this is where diplomacy comes in to say, look, Iran is not likely to give up enriching uranium, but if we can come up with a deal that says you can only enrich to 2% to 3%, which is what you need for civilian nuclear power, and have really strict inspection arrangements so that we can make sure they're not cheating, and if we can keep

keep that in for a while, that could actually then help the Iranian population to say, okay, well, you know, so sanctions are lessened, you know, things are getting better, and could potentially give time for domestic sentiment to change, say we actually prefer engaging in the international economy and international society over

over being hell-bent on a nuclear weapons program, that's just going to turn us into an ugly rogue state like North Korea. Maria, really great to have you with us. Maria Rostrup, who's the Professor of International Relations at the University of Melbourne.

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Welcome back to the Daybreak Asia podcast. I'm Doug Krisner. As expected, the Fed held its policy rate steady at this week's meeting. Let's get some reaction now from David Lott. He is the chief investment officer at Abound Financial. David is on the line from Granite Bay, California. Thank you so much for taking the time to chat with me.

A moment ago, we were talking about the Fed, the downgrade of the estimate for economic growth this year, while at the same time, the Fed is projecting higher inflation. It seems as though this is kind of a stagflationary type of scenario. Is that the way that you would understand it and make sense of it?

You know, I'm not an economist, but I have to say I was at a conference, one of the top conferences in the country about a week and a half ago. It's called the NorCal Financial Planning Association Conference. And one of the most premier economists in the world spoke for an hour. And he spent an hour telling all of us in the room things to be concerned about. You know, he saw maybe even inflation going to 4% later this year, a lot of things that would discourage an investor.

But in about the last 90 seconds of his conversation, he said, but hey, look,

investor sentiment's pretty negative, and that's usually a great time to be investing money. And so I think it's such a great representation of being an equity or bond market investor, and then looking at this economic forecast component. Because at the end of the day, prices move first, then earnings, then the economy and vice versa. And that's why we've seen prices

reflate so quickly, even though the economic outlook is still uncertain. So I would actually encourage investors to say, hey, let's look at prices, let's look at statistics and what happens during these types of market environments. I think that that gives us much more line of sight into what happens versus a Fed who's just trying to be careful, trying not to make a mistake.

and trying to really forecast the weather that could change at any time. The market is really desiring clarity on many issues. There is the tariff situation. Obviously, there is the conflict between Israel and Iran. The path of interest rates going forward and whether or not the Fed is going to be in a wait-and-see pattern because of the Fed's concern about maybe a stagflationary type environment.

Is there something that is predominating your thinking when you think about the greatest risk right now that's overhanging markets?

I'll say the greatest risk and then I'm going to just share something that I think will be food for thought. My concern, if I had one, is that longer term rates are going to continue to float higher. It is not hard, it's not rocket science to pull up a 30-year chart of the 10-year treasury and see that we're headed in a different direction than we've been headed in many decades.

And so that becomes challenging for people who are trying to create stability in their portfolio to generate income from it when they're trying to position conservative, intermediate and long term growth buckets to generate that income. And so, you know, we may have to start looking at different ways to generate stability in portfolios outside of buying intermediate bonds.

And that's something that is a bit of a head scratcher. One thing I will say that I think would surprise people, you have all these topics, you mentioned stagflation, wars, tariffs, geopolitical uncertainty. But let me just pose this to you. In the last three to five years,

The MAG7 has accounted for 50% of the equity market returns. Six months ago, those companies had PE ratios in the mid-30s. Today, they're at 27%. So when you think about that, and you think about what those companies do, largely technologically oriented,

You really have to consider all those things we just mentioned. How does that impact Facebook's ability to sell ads? How does that and Google's ability to sell ads? How does that impact, you know, in video or Microsoft's ability to have AI be infused into companies, businesses and allow them to grow their margin? So, you know, sometimes it's not quite as complicated to get higher in the market as it may seem. So that said, would you be overweight those names, the Mag7 right now?

Well, they led the market lower, and now they're leading the market higher. And I personally would be overweight anything that's leveraged to rates coming down, short-term rates in particular. So what are some of those asset classes? Well, you just mentioned large growth is one. Why? Because it's a long-duration asset. It generally doesn't pay you any income today. And so it tends to do better when rates are falling. Oh, by the way, so does gold.

So does cryptocurrency. So do small caps and mid-cap growth companies. So I think there's a lot of opportunities to leverage your portfolio to falling rates, which, by the way, we had the market and Fed align around two more cuts this year. That's where I think the ball is going to continue to roll. And oh, by the way, tech stocks aren't as expensive as they've been in the last five years. We're not even close to the highs of priciness from a valuation standpoint that we were closer to 2020. That's

That didn't even that failed comparison to where they were out in the late 90s. So I think that there's a lot more room and a lot more, you know, frankly, if we want to talk about economic tailwind around those names. What about opportunities offshore? We're talking here about stuff that may be domestically driven. I'm wondering whether you're seeing anything internationally that has sparked your curiosity or piqued your interest.

Well, there's no... I was teasing my brother today. We're going to have the opportunity to go skiing in Canada here this next winter. And he's been waiting to pay for the second half of his trip to see if maybe the U.S.-Canadian dollar exchange rate might work in his favor. It has not up to this point. So what's the story? The story is that...

With the dollar weakening, which may be another beginning of a trend, that of course is going to give some buoyancy to international profits as they're repatriated. So sure, in general, and okay, valuations has been a conversation for years and years. It really hasn't moved the needle. I think that the dollar weakening is certainly starting to move the needle with international markets. I'm still going to be oriented on the tech side, and I prefer to look at China.

I'd prefer to look at a place where the government can come in and make a radical change to the economy with stimulus. And oh, by the way, the United States economy's biggest

booms in the last 10 years have been from our government doing stimulative things, right? So when I look overseas to China, I say, wow, they seem to be leading in EVs. They seem to be doing darn close to leading in AI. And oh, by the way, they're also selling more Huawei phones than Apple iPhones over there with a population that's tremendous. So I am interested where I am at

internationally invested is going to have an overweight to those Chinese tech names. Talk to me a little bit about the themes that you're avoiding right now. I mean, to maybe call it herd mentality, we talked about the Mag7, but are there corners of the market that you feel are kind of overrated right now and that you would be looking to either lighten up on or to avoid altogether?

I think that if there's anybody talking about a bear market rally still that you're listening to, you might want to change your favorite, uh, station or, or commentator. Um, I, I would not be anywhere in the defensive space. Uh, I'm just not that interested in, uh,

utilities or staples, of course in times of uncertainty like this, those tend to have a little bit of a support, but I really would lean into, I mean look at consumer discretionary, half that index is Amazon and Tesla.

both of which got really beat up and probably are going to be turning higher. That's an easy place to look for opportunity. Obviously within the tech stack, the semiconductors are a lot more interesting. So it just doesn't pay to bet against the market long term, and it would take a tremendous change

for the market not to hit new highs within the next few months. David, we'll leave it there. Thank you so much for joining us. David Lott is the Chief Investment Officer at Abound Financial, joining from Granite Bay, California, 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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