US Imposes 25% Metals Tariffs; A Look at China's AI Sector
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Welcome to the Daybreak Asia podcast. I'm Doug Krisner. On today's episode, we'll get an update on AI in China with Taosha Wang. She's portfolio manager at Fidelity Investments. And later, we'll be taking a look at the broader market landscape with Brian Kraus. He is president at Scharf Investments.

But first, to President Trump and the issue of tariffs. The president late in the day on Monday in the U.S. issuing an executive order imposing 25% tariffs on all steel and aluminum imports to the U.S. Now, over the weekend, he announced his intentions to do so. Not a big surprise. Joining me now for some reaction is Joe Doe, metals and mining reporter for Bloomberg News.

Let's talk a little bit about what's happening with the 25% tariffs on steel and aluminum. Thank you for making time. I'm sure it's a busy day for you. This really didn't come as a surprise. Yesterday, the president indicated that he would be taking this action, right? Yeah. He said on Air Force One that he'd be putting in 25% tariffs on aluminum and steel.

I think that announcement came as a bit of a surprise to the market. I don't think people thought he would be moving so quickly. You got to remember last week he said he was going to do across the board tariffs on Mexico and Canada. And when he pulled back on that, most people I talked to in the steel and aluminum industries thought, OK, great. That means we've got till about March 4th.

before we have to worry about tariffs again. So for him coming out and saying steel and aluminum specific over the weekend, right as he was on his way to the Super Bowl, took a lot of people off guard. So we're talking about countries like Japan, South Korea, Taiwan, Vietnam even. To what extent does the U.S. have...

steelmaking capacity to make up for any reduction in flow coming from foreign producers. It's interesting. I was talking to an analyst earlier today who was kind of giving me back of the envelope numbers, right? If you assume maybe you were short five to six million tons, there are places that you can start to make that up.

You have some capacity that could be coming online from restarted mills. You might also have some capacity that steel companies that exist right now have in their back pocket as a possibility but haven't really discussed it because the idea would not be profitable. Now this is something that could be profitable for them. So it does seem...

You could make up the net short, but it would also take a few years to get there. So in the meantime, you still need these imports. The timing is very interesting because Japanese Prime Minister Ishiba was at the White House Friday. One of the many things that was discussed, Nippon Steel's proposed acquisition of U.S. Steel. We know that's pretty much done.

And then news that maybe Nippon would be making an investment in U.S. Steel outright. Where are we on this? Yeah, this one's a little bit weird and people are still trying to get more details about it. And right now there aren't really any details. The president came out alongside the prime minister and said, yeah, Nippon Steel is going to be making an investment in U.S. Steel. There are

No clear numbers out there as to what those numbers are. The companies, neither U.S. Steel or Nippon Steel, have come out and made any sort of official comment about what they might be talking about. And honestly, the investors in U.S. Steel don't care about an investment. They care about an outright purchase. Because the purchase, the merger agreement still exists. And that merger agreement says each of those investors would get $55 a share. Right now, the stock's trading between $35 and $40. So if you talk to these investors...

When you hear, oh, well, guess what? You might get an investment from Nippon Steel. They say, I don't care. That's not why I own the stock. I own the stock because I want the deals. Do you think this is going to get litigated successfully or is it pretty much over? The feeling is that the litigation that's out there right now is a long shot.

The sense was if there is a chance of this deal getting done, it would be by Donald Trump coming to some sort of a deal or just overturning whatever the Biden administration had done in terms of a block. So if Trump doesn't come through and say, actually, I'm OK with this deal, the sense by the market right now is that that is kind of that was kind of the last hope.

So let's get back to the tariff story on steel and aluminum. From what I learned, Trump is considering maybe some exemptions from Australia, unlike other companies. And this, I think a number of companies were hoping for this. Maybe Australia does get an exemption. Why would the U.S. exempt Australia? What's so special about Australia? Well, it's a it's a pretty great trade partnership, right? I mean, the the

The U.S. kind of looks at places like Australia and Canada, the U.K., as these really important allies. And that's dating back to the post-World War II era. As to why Australia specifically might get an exemption, I'm not sure. I mean, one of the things that was very clear from the CEO's sign today was...

We're doing these tariffs because way too many exemptions were given by the Biden administration. Let's remember that a lot of the exemptions given to the tariffs were also given by the first Trump administration, Canada, Mexico, the EU, Japan. So I think what this might point to is that the idea that they won't give anyone exemptions

Maybe that's not fully true with the idea that Australia at least is saying that maybe they will get one. So like anything else with Trump, it does seem like maybe a lot of this could end up being transactional. Joe, thank you so much for being with us. Joe Doe there, metals and mining reporter for Bloomberg News, joining us here on the Daybreak Asia podcast.

Let's change gears here on the Daybreak Asia podcast and turn to artificial intelligence. It was on Monday here in the U.S. that the head of Google DeepMind, Demis Hassabis, addressed the recent breakthrough in China's DeepSeek.

is exaggerated and a bit misleading. So what's really happening with AI in China? For some perspective, I'm joined now by Taosha Wong, Portfolio Manager at Fidelity Investment. Taosha joins us from our studios in Hong Kong. Thank you for making time to chat with us.

I know you're well aware of the debate that's been happening here in the States over how R1 was developed and whether or not that the chatbot from OpenAI, ChatGPT, was somehow used. There are also some investigations here as to whether or not DeepSeek had access to some of those advanced computer chips that were under U.S. export controls. Can you help me understand where China is in the race with the U.S. over artificial intelligence?

Well, thanks for having me. Definitely, I think that the recent debut of DeepSea has put China in a very competitive spot with the U.S. Not that it wasn't before, but certainly this has drawn a lot of attention. There is controversy, but there's also a lot of excitement as to what has been accomplished, not just by AI in China, but

by open source model in the world collectively. So, yeah, I think controversy, excitement, a lot of actions, a lot of sentiments. Can you help me understand whether there are more startups like DeepSeek in China working in artificial intelligence? And how many are there?

I believe so. I believe there are a lot of them. There's a lot of effort at the major internet companies. Incumbent tech companies in China are making a lot of efforts in this regard as well. I think the fact that DeepSeq has made it more accessible, significantly lower in the cost of using AI, has just

open the gate to allowing more people to participate and contribute to AI research to advancing the progress there. You don't have to be backed by deep pockets in Silicon Valley, venture capital, to

essentially work on this front, work in this very exciting area. So, with some of the established players, I'm thinking Alibaba, I'm thinking Tencent, they have deep pockets. You mentioned venture capital. To what extent is the government involved in any of this?

As much as we know, DeepSeq wasn't part of any of the government initiatives. It wasn't affiliated with the big incumbent Tencent Alibabas of the world. It really shows that technological innovation can be a bit of a spontaneous. Where exactly do you get a breakthrough? Exactly from who?

can be pretty spontaneous. But obviously, this is in the environment, in the context that a lot of people are making efforts towards the same common goal. I mentioned a moment ago that there is some concern that perhaps the R1 chatbot was developed using these advanced chips. We know that the NVIDIA chips are under export controls. To what extent is China making advancements in the semiconductor space?

Well, I think Nvidia has come out to say that the chips that they use are export-restriction compliant. So, I mean, that's the extent that outsiders like us know. I think DeepSeq represents mainly algorithmic improvement in how to use the incumbent chips, rather than coming up with advanced chips that all of a sudden can do new and beautiful things. I think that

Efficiency gain is really the breakthrough here. And that efficiency gain has been shared to the world, and a lot of people are amazed, so to speak, by the significant

algorithmic improvement. No doubt about that. I guess I was asking whether concurrent with that, there were also some advancements being made in Chinese semiconductor manufacturing. Do we know? Not necessarily. I don't think it's implied from the DeepSeq product. So, it's not implied there. But are they concurrently making progress?

I'm sure they're trying. I'm sure they are too. But there are export controls when it comes to some of the lithography, some of the machines that are manufactured in Europe that are used to really produce some of these very sophisticated high-end chips. I know that. But talk to me a little bit about your thesis on the overall technology industry in China. Is this something that you're bullish on right now to a great degree?

Yes. I think the market is certainly – the short answer to your question is yes. I think there's more reason to be bullish about the development there. I think there are two sort of arguments to be made there when evaluating the China tech in the context of global tech with its relationship to the U.S. tech.

No. 1 is that I think DeepSeq will have to prompt a careful reassessment of the US chip export restrictions. Certainly, the risk is that if you continue to maintain such a strict restriction, then the US risk being cut off from the technological progress made in China, which now proves to be pretty significant.

And also, there's the balance of payment argument. So, that is certainly, I think the risk of whether the arguments for and against the export chip, chip export restriction has become more balanced than the market is currently pricing. And the second

And the second part is just that I think the US and Chinese tech communities are finding their interests more aligned after DeepSeek. So for example, all the US major cloud providers have hosted DeepSeek on their cloud platform. And the more popular this model gets, the more cloud services revenue they get. That's just simple math.

But also there's, you know, we're arguing that with the significant drop in model cost, more value is going to be created from, you know, AI applications. And the U.S. is abundant, you know, opportunities for these value creation. So, you know, cheaper model is like lower raw material cost for, you know, AI application companies. And that's just, you know, a line interest right there. Also, there is the goal for, you know, AGI, et cetera. And then the fact that TikTok is potentially becoming a JV.

opens the door for finding common ground despite tech rivalry between the two countries. It's not just tech rivalry. I mean, the threat of tariffs now and from the Chinese side, antitrust investigations into major tech players, there's a lot of tension here. And I'm wondering whether or not the deep seek is only going to exacerbate that to some extent.

I don't, I mean, I think the two countries have gone through, you know, a few years of decoupling, escalating tension. It's not going to be sunshine overnight. But I think, you know, through two step forward, one step back, maybe. I think that's just the possibility of striving for a common ground is, I think the possibility is a little bit greater after the deep sea revelation. Last question before you go. You mentioned TikTok. Do you have a sense of how this is going to get resolved?

I have no idea, actually. I'm not an insider. But only to speculate. I think that the simple fact that a JV is being talked about and seriously contemplated, it was unthinkable just months ago. Yeah, joint venture between the U.S. and China on the tech front, specifically as it relates to TikTok. And we know what a sensitive topic

That is for sure, especially in the States. Taosha, thank you so much for joining us. Taosha Wong there, portfolio manager at Fidelity International, joining us here on the Daybreak Asia podcast. OK, business leaders, are you playing defense or are you on the offense? Are you just excuse me? Hey, I'm trying to talk business here.

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I'm Alpine skier Michaela Schifrin. I've won the most World Cup ski races in history. But what does success mean to me? Success means discipline. It's teamwork. It's the drive and passion inside of us that comes before all recognition. And it's why Stiefel is one of the fastest growing global wealth management firms in the country. If you're looking for success, surround yourself with the people who will get you there.

At Stiefel, we invest everything into our advisors so they can invest everything into their clients. That means direct access to one of the industry's largest equity research franchises and a leading middle market investment bank. And it's why Stiefel has won the J.D. Power Award for Employee Advisor Satisfaction two years in a row.

If you're an advisor or 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 Daybreak Asia podcast. I'm Doug Krisner. Markets are now shifting their focus to this week's eco data here in the U.S. I mean, consumer prices and retail sales. We'll also have congressional testimony this week from Fed Chair Jay Powell. For a closer look, I'm joined now by Brian Krause. He is the president at Scharf Investments, joining from Los Gatos, California.

Brian, thank you for making time. I'm curious to get your take on where we stand with inflation. The markets may have received a bit of a sigh of relief today. The New York Fed's estimate on inflation expectations for the next year and the next three years were both unchanged in the month of January at around 3%. Where do you think we are now in this inflation cycle?

I mean, thank you for having me. The inflation cycle is interesting. You had a real big spike post-COVID. That obviously was a big deal in the election, even though inflation had been coming down going into the election. But unfortunately, a lot of the kind of gains have already been seen. And now we're sort of stuck at a certain level. And then you throw in all this Trump

tariff volatility, and it's going to be tough for the Fed, potentially, as CPI may stay higher than they would like to see. It's interesting. I was looking at data from Goldman Sachs showing that hedge funds recently emerged as some big buyers of U.S. stocks in the most recent week. Is this the time that you want to take a lot of risk on? We think you still want to be a little bit cautious. However, I would say, again,

you can pick your spots. What's really masked, the big tech is really masked, there's some other values out there. So stocks are probably still a good place to be, but you gotta be a little bit more cautious.

And, you know, they're probably going to be a better place to be than bonds, given our expectation that rates are going to be higher than many investors are thinking. We were talking a moment ago about the new tariffs the president launched today, 25 percent on all imports of steel and aluminum. And the metal producers were in the spotlight in the equity market today.

I think U.S. Steel was up more than 4.5%, Alcoa up more than 2%. Would you want to be long material producers in this type of environment?

Well, I think you want to be diversified. Material producers are certainly one area. One of the interesting things that we've seen in our study is that if you look at the 10-year treasury when it's above 4%, value stocks tend to outperform, and things like steel is certainly in the value camp. But when rates are below 4%, you get growth outperforming. And we've just been through...

a good 15 year period where rates were below 4% almost the entire time. So investors have really gotten used to, oh, I just buy tech and forget about it. We think going forward, investors are gonna wanna look in all kinds of other areas, not only like industrials and materials type companies, but also other areas like financials and healthcare

and energy, we think, are all good places to potentially be outside of technology. So on Tuesday, it will be the first of two days of testimony from Fed Chair Jay Powell. He's expected to say that the Fed has time to assess the impact of Trump's new tariff policy. Immigration is obviously a factor on the economy right now, as are any type of tax cut that we may see in the future here.

broadly speaking how do you think powell is going to thread the needle so to speak well i don't have powell's job he has to thread the needle among a number of things first he's got investors to keep happy second of all he's got to you know pay attention to the new president who's obviously gonna be watching what he says i think what he's gonna do is he's gonna thread the needle by saying hey we're data dependent we've made a lot of progress uh inflation's come down a lot from where it was a couple years ago but we still don't know uh

but we don't know, and so we're going to have to just sort of play it by the data. And I think that's what he's going to do. Markets will probably be okay with that. Six months ago, they might not have been, as investors are really expecting rates to come down a lot. But I think

many investors have gotten comfortable with the fact that the Fed is not going to do five or six cuts this year. So if you had to give me a sense of where the bond market may be headed in the next 10 months or so, am I looking closer to a 5% yield on the 10-year? Yeah, we think so. That's not obviously where the 10-year is today at around 4.5%, but we think ultimately...

It's not so much the tariffs themselves, although those could cause inflation. It's really the volatility that could spook investors a little bit, particularly if they don't see CPI coming down. So we wouldn't be surprised to see the 10-year Treasury closer to five or even above five. And again, we think that'll help.

value stocks at the detriment to growth stocks. Doesn't mean stocks have to be a bad place to be, but we'd say temporary expectations, we've just come off two 20%-plus years, and so it's going to be tougher to get that kind of return. But relative to bonds, we still think stocks will be a good place to be. Brian, we'll leave it there. Thank you so much for chatting with us. Brian Krause there, President at Scharf 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 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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