This week on Leaders with me, Francine Lacqua, I speak to tennis legend Rafa Nadal about how he stayed competitive despite injury. I was able to enjoy the victories probably more than if I will not have this issue. One iconic match. In my mind was, I am almost dead. And whether he misses playing. I don't miss tennis because there was nothing else to offer. Listen and watch Leaders with me, Francine Lacqua, on Bloomberg Television or wherever you get your podcasts. Bloomberg Audio Studios. Podcasts. Radio. News. Welcome to the Daybreak Asia podcast. I'm Doug Krisner. South Korea's equity market is back from a long weekend with a bit of a shock similar to the so-called deep seek moment. At the end of last week, China's AI pioneer Moonshot introduced its Kimi K3 model. Now, this is an open weight model, meaning its parameters are publicly available and can be customized by the user. Last Friday, Moonshot said Kimi K3 rivals some of the best offerings from U.S. labs. Here is Bloomberg's Anthony Stevens. So there is a lot of software innovation in there in what is objectively a very large model. So the first thing is the ambition and the scale of the model is a step further. And that's probably why it has caught the U.S. models on the frontier front. But the second most important aspect is the resource optimization around the model. It is very memory efficient. In short, there are proprietary innovations in there to also help with the usage of HBM and GPUs, where China is obviously constrained. And the fact that this model was trained with those constraints in mind is the important aspect to markets here. That is Bloomberg's Anthony Stevens. And now we're being told that Moonshot is preparing for a public listing, perhaps within six months. We're told Moonshot is in the process of wrapping up a funding round that may value this three-year-old startup at more than $30 billion. Demand for Kimi K3 was said to be so great over the past 48 hours that Moonshot temporarily paused new subscriptions. It appears China is closing the AI gap with the U.S. And that's where we begin our conversation with Hong Min Li, senior macro strategist at Lombard ODA. He spoke with Bloomberg TV host Averill Hong and weighed in on the current market dynamics regarding AI. So in the long run, the real threat to the memory bottleneck trade in South Korea comes from China. And in the second half of the year, we're going to get a bit of narrative shift in favor of China's AI and semiconductor ecosystem. You know, that leads due to all the mega listings that are on the horizon, which it now seems the authorities are quite supportive of. So that's going to support the Chinese story relative to South Korea. But for South Korea itself, we start to feel that maybe this levered, you know, retail leverage impact is beginning to progress quite substantially. And the fact is that the bottleneck still remains in the near term. And these memory makers have locked up their prices through long-term agreements with the buyers. And U.S. export controls, et cetera, still keep the dominant position for these names. So it is true that this week we have a confluence of a pretty negative event. But given the valuations and the unwind of the leverage trade, maybe the trajectory for the rest of the year, despite the volatility that we see now, is maybe higher before the end of the year. And that's one of the reasons why we're still keeping constructive view on the medium-term trajectory of the market. But China's story is definitely something that's worth keeping an eye on for the investors in the second half of the year. How much does it exactly, you think, sap away from the South Korean story? so we have seen the shift from the hyperscalers and the the ai a service story in north america you know to memory makers in past year or so and and you know we're not going to get a complete conclusion to this debate or pendulum swing between the the ai suppliers and ai themes for the foreseeable future simply because no one has an absolute clarity and who will emerge as the winner in this ecosystem But it quite possible that you could actually get, again, once we emerge from these headwinds related to home moves and the monetary policy cycles and the capital flows, you're going to get maybe a positive market dynamic for both South Korea and China. For the investor's perspective, simply because China has been a relatively neglected market, maybe it's worth having that as a hedge alongside South Korea trade that will probably go through a bit of turbulence, but ultimately still grind upward once these headwinds fade. Might it not make sense now though, I mean to your point about how far they've run up to take profit on chips. I mean we are also seeing in the background there seems to be rotation to financials. So in fact the financial sector is one of the sectors that we like. The valuation is quite compelling. The sector has been able to deliver a fairly substantial recovery since last year. and the fees from the M&A activities and trading continue to be pretty strong, not just in North America, but the markets around the world. So relative to the other sectors that have seen some froth and maybe excessive momentum, this is the sector that probably delivers that nice combination of slight defensiveness, evaluation, appeal, and the earnings stability down the road. So alongside the other kind of a favorite batch that we have, including emerging markets, financial markets, a financial sector is definitely the sector that we like as we head into the second half of the year. For the big AI spenders, though, it looks like it's increasingly difficult to justify their valuations. How do you weave that into your investment thesis? So when you talk about valuations, when you talk about software or the semiconductor segment, actually the valuation has become quite compelling. I mean, if you look at the South Korean memory makers right now, for the entire silicon layer, due to the sell-off that has taken place in the past few weeks, now we see forward P multiples trading close to six or seven for some names. And that's quite compelling for the medium to long term, especially if you believe in the re-rating story for some of the regional markets where these semiconductor stories are concentrated. So we wouldn't say we see a lot of excess froth in the segment right now, especially because of the sell-off. But for the North American market, given the mega IPOs that are on the horizon, maybe it's slightly trickier to make a very, very strong valuation bet. But for the tech hardware ecosystem elsewhere, especially in Asia Pacific, we think it's quite compelling. And that's one of the reasons why, especially for the diversified portfolio, it's worth having some of these exposures and trying to look through some of these volatilities that are highly technical in nature and will likely fade in due time. Homin, I guess to your point also, I mean, we've been seeing the chip makers in South Korea in terms of the stock action. They've been pairing some of the early losses. So maybe there's that dip buying that is emerging. You talk about exports. Talk to us about the risk in the back half, because this week as well, in terms of tariffs, we're seeing the 122 expiration. Do you think there is something on there that we need to be paying more attention to? So you're right. Over the course of the week, we could likely get the expiration of the Section 122 tariff, and Trump administration will try to replace that with sector-specific and country-specific tariffs. Now, our assumption is that the overall effective tariff rate will remain close to the pre-Spring Court ruling level, and that's manageable for the market, but simply because the mechanics of replacing the universal tariff with this sector and country tariff is quite complicated and potentially has, you know, some disproportionate negative impact for significant sectors in different countries, we think we definitely have to deal with some volatilities down the road due to this dynamic But it important to understand that you know from our perspective it's not going to be easy for the Trump administration to replace, you know, or actually raise the effective tariff rates significantly from what we had before the Supreme Court ruling. But meanwhile, for the market, you know, this week we could potentially get another positive development in China AI space. and also more pro-growth and constructive signals from the Poliparo meeting in China. So there will also be some positive offsetting events. And ultimately, we simply have to wait for the uncertainties to clear in the Strait of Homo. So that's another factor that we need to keep an eye on. That is Homan Lee, Senior Macro Strategist at Lombard ODA, speaking with Bloomberg TV host Averill Hong, bringing you their conversation here on the Daybreak Asia podcast. Hi, I'm Barry Ritholtz, inviting you to join me for the Masters in Business podcast. Every week, we bring you conversations with the people who shape markets, investing, and business. I speak with CEOs, Nobel laureates, market innovators, and legendary investors. Whether you own stocks, bonds, real estate, commodities, even crypto, these are discussions you absolutely need to hear. Subscribe to the Masters in Business podcast on Apple, Spotify, or anywhere you listen. Welcome back to the Daybreak Asia podcast. I'm Doug Krizner. Crude oil prices are higher in Asian trading after the U.S. and Iran engaged in a series of tit-for-tat attacks. And for the American military, it was the ninth consecutive night of strikes. At the same time, we know that more U.S. warplanes are being sent to the Middle East. Now, Tehran is vowing not to allow oil or gas to pass through the Strait of Hormuz without coordination and permission. So as geopolitics continues to buffet markets, we checked in with Ileana Jain, international economist at Westpac Banking Corporation. Ileana spoke with Bloomberg TV host Paul Allen about how the oil story is impacting the Asia-Pacific. Look, the situation in the Middle East seems to be changing every single weak but one thing we can be certain of is that any sort of geopolitical calmness if you can call it that or it or any sort of indication that oil supply and energy supply will be normalized will be well received by policy makers when it comes to countries like indonesia they are massive energy um that they consume a lot of energy when they're producing a lot of the goods that they're producing and for them energy costs are absolutely central to how the economy is going and so if we start to see a bit more energy stabilisation, it's going to be good news for most of Southeast Asia and South Asia, because we'll see that income squeeze created by those energy costs start to come down. And again, that'll help support domestic demand at a time where industrial policy needs to catch up a little bit. So hard to predict, though, because at the start of this month, the oil was sort of settling around the $70 mark. I think perhaps a sense of complacency had said, and no more, of course. In Japan's case, I mean, we'll get the June CPI numbers, but what are the implications for the Bank of Japan and the yen as well? I mean, have we seen a flaw for the yen yet? Look, when it comes to the Bank of Japan, they're focusing on a broader set of indicators beyond just the CPI. For them, it's about coming to a place where they consider is neutral and normal for the economy that they are inheriting right now. We know the Japanese economy is a vastly different place to where it was prior to the pandemic. And it needs an interest rate that is higher than where it was prior to the pandemic. And the Bank of Japan is coming to that end point, that terminal rate. And so while inflation is important, it's about other things like how much domestic demand is going to lift and how much of these inflationary pressures are domestically driven. When it comes to that CPI, the one thing I'll be paying very close attention to is that services component. Is it staying around that 1% mark that it has been over the last couple years? That tells us that there's a lot of domestic pressures within Japan as well. Aside from that, they'll also be watching closely to see how wages are responding to the changes in the economy thus far. And if we see that continued pressure on wages, if we see that structural tightening in the labour market continuing to feed through to wages, we're likely to see the Bank of Japan hike twice more, coming to a terminal rate of 1.5% by the end of next year. In terms of the energy side of things are you willing to predict and it is so hard to predict where we might be with this conflict later on this year Because certainly there be a political case for Iran to push this through to the US midterms Can you see this uncertainty lasting until then? Look, it's hard to say, you know, I'm not a geopolitical analyst, but for the economy, I think the sooner this resolution comes into place, the sooner we start seeing more stabilisation in oil prices, the sooner we start seeing that closing of the gap between North East Asia, which has benefited from the tech sector and has been able to buffer against those energy implications for the economy, and South and South East Asia, that's been more exposed because of their higher share of the economy attributing to agriculture as well as a greater reliance on imported energy. And just to underscore what we're talking about, we're just getting news from CENTCOM. It's begun conducting a new wave of strikes against Iran as of 7 o'clock Eastern time today. This is the ninth consecutive day that we've seen attacks. Now, look, another country in the region that's obviously very dependent on energy, South Korea. And we're going to get those second quarter GDP numbers later on this week as well, in anticipation that we might see some slowing growth here. But is it a more nuanced and difficult case for South Korea? Not only is it energy dependent, but we have this AI story, the enormous volatility we've seen around that ecosystem. What risks do you see ahead for South Korea? Look, I just talked about how the region's really bifurcated between that northeast tech very heavy sector versus the south and southeast. Within Korea, it's the same sort of trend that's playing out. So the Korean economy has been powered by this tech sector, powered by this strength in tech exports, and that's really lifted predominantly the tech industry. But if you look outside of the tech sector, Korea's economy is starting to show signs of weakness. Domestic demand is pretty weak if you compare it to pre-COVID. The labour market outside of the tech sector has been quite weak as well. And so right now we've seen that policymakers, particularly the Bank of Korea, are willing to lean on that strength in that Korean tech sector to hike rates and help ward off some of those inflationary risks. But they're also very cognizant about the rest of the economy that's not functioning as well. So that risk is definitely there. And if we start to see the tech brooms start to slow down both within Korea and outside of Korea, those weaknesses are going to start to show up even more. Can we throw another wild card in there too? Over the last three days, we've seen new models from China, the Moonshot, Kimi 3, QN from Alibaba as well. What are the broader implications for that big ecosystem that's growing up around the AI story? Yeah, certainly. And look, there are many players and China's one of them. And we've seen that when China decides to do something, it does a lot of it. We've seen that excess capacity play out in China. We've seen that overproduction occur in China. And I don't think that tech side will be any different. But the one thing to note here is that the advantage of buying Korean technology is that for a lot of countries, particularly in the West, it comes with a geopolitical security lens. So that's one place where Korea can benefit immensely. They are a more secure partner to deal with than China, particularly when it comes to technology. And so when we're thinking about those risks for Korea, at least in the near term, they have that playing for them. Over the medium term, as China builds its confidence with the West, this might deteriorate a little bit. That is Ileana Jain, international economist at Westpac Banking Corporation, speaking with Bloomberg TV host Paul Allen, bringing you their conversation 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 Krizner, and this is Bloomberg. Gain insight on the innovators, disruptors, and tech-driven trends shaping today's complex economy. I'm Carol Masser. And I'm Tim Stenevec. Wrap up your workday with the Bloomberg Businessweek Daily Podcast. We bring you deeper dives into the story shaping your world from the evolution of AI to the shifting priorities of global business. Plus Silicon Valley power players and the latest tech trends. Catch up on the conversations you miss during the day. Subscribe to the Bloomberg Business Week Daily Podcast on Apple, Spotify or anywhere you listen.
