Featuring:
Annabelle Droulers, Bloomberg Tech Reporter in Hong Kong
David Waddell, CEO and Chief Investment Strategist at Waddell & Associates
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Welcome to the Bloomberg day Break Asia Podcast. I'm Doug Chrisner. Our top story this morning, Bloomberg has learned Chinese officials are evaluating the possible sale of TikTok's US operations to Elon Musk. We are told it's one option being explored if TikTok were to fail to fend off a ban here in the US. Plus a look at broader markets with David Waddell. He is the CEO and chief investment strategist at Waddell and Associates. But we begin in Hong Kong. Joining me now to unpack the latest news on TikTok is Annabel Jewelers, who covers Asia Tech for Bloomberg News. Thank you for making time. I'm sure it's been a busy day for you. This is kind of an interesting story. Just help me understand where we are at the moment.
Well, I think in the bigger picture, I mean, we had the US Supreme Court that had the here last week, and it was really a chance at that point for representatives from both the US government and also from TikTok to present their sides and what we got out of that on Friday was that it does very much seem to be the case that TikTok will be forced to go so called dark in the US after January nineteen. That would have been the deadline that would have needed to have divested its operations.
There, unless it finds a buyer right.
Exactly, And that's the big bloomberg scoop this morning. So what we're hearing is that, you know, this is something that the Chinese government is thinking about as well, and in terms of the possible options, we do need to emphasize their priority is that ByteDance continues to keep its US app and to retain ownership of that. But of the other possibilities, one of those is for Elon Musk to acquire the US app, and that would be through x The two companies could work alongside each other. Of course, for x it could pick up a lot of advertiser revenue from TikTok. It's XAI, that's the AI artificial intelligence company that Musk also started. It could also benefit as well in terms of the amount of content that's been created by TikTok, but a lot is really still not clear how we would finance it. The scope the way it would happen. But yes, as I said, that's one of the possibilities we're hearing about.
Anytime I've had a conversation about TikTok, the thing that comes up is the algorithm. That's really the gold here. Right, Would a sale necessarily force ByteDance to surrender the algorithms?
Well, that's it, and that's really the big talking point. I mean, TikTok's algorithm is sort of the prize, or one of the prizes out of all of this, and in terms of the sale, that's what Beijing also really wants it to be able to retain. You've got to remember, of course, that even if by Dance wants to sell its US app, it still needs to get approval from China, and China's got export rules in place that prevent Chinese companies from selling their software algorithms like the one at TikTok, and so so it does really underscore just how much of a role that the government could end up playing in what happens next.
There's no way that that could change even if Beijing wanted to curry favor with the incoming Trump administration, Right.
I mean, look, I think that part is too hard to tell. I was speaking yesterday with Showminglu from Eurasia Group, and she was saying that, you know, out of all of the issues that are between the US and Chinese governments right now, actually TikTok is sort of maybe one of the priorities that's lower down the list. What has been also interesting I've been discussing with colleagues this morning as well as just this possibility that going forward, if we do see an explosion of apps, because what's interesting actually to note that the users that are leaving TikTok, they're actually going in the US to other Chinese apps like Shaohongshu that's read. Note there's also Lemonde that's owned by ByteDance. If you do see these Chinese social media giants really blow up and become a lot more popular, maybe it becomes a question of well as to how they're splitting their data and do they need to have separate data centers in different regions.
My recollection correct me if I'm wrong here, is that the law in China essentially forces any Chinese based firm to share data with the government. Right, so if it's not TikTok, if it's another Chinese based app the law still applies.
Well, that's it, I mean, and that's something else that we've been discussing as well, and that is sort of the level of clarity that we're sort of not clear on just yet. I mean, yes, Hiaohongshu isn't specifically named in Protecting Americans from Foreign Advisory Controlled Applications Act. That's the actor that the Supreme Court's currently considering, and that's what could result on the ban on TikTok. But there is certainly no guarantee that companies like Hiaohongshu will read node aren't going to sort of follow in TikTok's footsteps either by being blocked by the US government. So if it's not TikTok, I guess, as you can say, what else could also fall into the crosshairs?
So talk to me about price. If a deal gets done that would allow mister Musk to control this and maybe merge it with his platform X. Is there a value that we can assign TikTok.
Yes, there has been one that's been floated. This is coming from Bloomberg Intelligence. It was done last year, but they're saying up to around forty to fifty billion dollars, so it's a substantial amount of money. Of course, you're talking about the richest man in the world, so maybe it's not quite as substantial to him. But it's still very much unclear how Elon Musk would be able to sort of even pull off a transaction of that size. Would it, for instance, mean that he needs to sell or sell other holdings? Is the US government going to be approving it. He paid forty four billion dollars for Twitter a couple of years ago. He's still paying off those loans as well.
One of the interesting things you were talking about other Chinese based apps becoming popular in the US. I don't know whether they are as a fisticated as the TikTok algorithm, but imagine a world where the algorithm doesn't transfer with the sale, and the app maybe is not functioning at the same level that it functions now that risk users leaving the platform, does it not?
Yes, definitely. I mean, the algorithm is sort of considered to be sort of the secret source of TikTok, and that is what's so highly prized and probably plays a large part into that valuation. I mean, but it's not just sort of that's not the primary concern either from the US government. Yes, they're concerned about the algorithm. They're also concerned about how much data is being created as well. But I guess underscoring all of that is also the concern about sort of propaganda campaigns and the way that it could be used to have sort of covert or what they would say would be covert manipulation campaigns.
So what are you hearing from the Hong Kong perspective? What are people in the tech world saying about the news story that we're talking about today.
Actually this has been a really big talking point, not so much in Hong Kong, though of course it is. I mean, I think sometimes in Hong Kong people wish that, you know, the tensions would be tamed down. This is supposed to be sort of one of the leading or pre eminent financial hubs in the world, so obviously Hong Kong prefers to not have these sort of tensions between the US and China. But just in you know, weed chat and for people that aren't familiar, weed Chat is the equivalent to WhatsApp that's also used in mainland China. This has been the leading chat this morning for me with people that are working at a lot of different Chinese tech companies and they're all putting up different images in it. I'm just looking through it now, but talking about how they're red hook books or their their jhaohong Sshoo pages are basically going mad, going crazy. A lot of people are getting involved with this, and so called TikTok refugees are starting to flood the platform as well. But just to underscore that, and to note, I was actually looking at the US app Store this morning for Apple on the iPhone downloads and number one right now is Jahangshou and it's followed by Lemonade. So there is a clear trend that we're seeing. Whether that lasts, but certainly people are really exploring the alternatives and for a long time we'll be thinking that it would be you know, Meadow or Facebook and Instagram, you know the meta names. But right now it seems like it's that trend from TikTok, but still keeping it within China.
Yeah, such an interesting story, particularly now that we've got Elon Musk's name involved. Annabel, thank you so much for being with us. Bloomberg's Anabel Drollers covering the tech story for us in Asia from our bureau in Hong Kong. Joining us here on the Daybreak Asia podcast. Welcome back to the Daybreak Asia Podcast. I'm Doug Prisoner. So we want to take a look at the broader market right now, and we'll do that with the help of David Wardell. He is the CEO and chief investment strategist at Wardell and Associate. David, thank you for joining us. Can we begin with your overview of markets for twenty twenty five. I'd like your expectations for the price action?
Well, thanks for having me. You know, it started off with the vis up here around twenty so you know, there's plenty of confusion out there, some of which I share. But I think that the Trump agenda is such a big component of all of this that until we see that reconciliation bill, a lot of it is unknowable. But I can tell you kind of my guests before we see the details on that. First, you know, we ended the year with a whole lot of expectations. We had hindsight bias after two twenty percent plus years in the SMP, and so the market needed to cool off a little bit. There was a major rally in stocks once the betting markets forecasted a Trump victory, and then those started to go sideways and sell off a bit as the rest of the market it's caught up. So there have been major rallies obviously in interest rates, major rallies in oil, major rallies in the US dollar, and I don't know if this is axiomatic, but the SMP doesn't tend to rally when those three do. So I think we've been in a bit of a digestion phase and I'm not really afraid of that, but just to put some numbers around it, and this is kind of where my thinking's going for the year. You know, we had two years where earnings and valuations both expanded. I'm not sure that in twenty twenty five we will see valuations expand. So we ended the end of twenty four at twenty two times earnings, but the yield on the ten year was was, you know, half a percent lower. Now we're at four zero point seventy five, which would support twenty one times pe multiple. And the difference between twenty two and twenty one is about five percent, which is the drawdown that we've had so far on the SMP. So if you think that rates can go to five to five and a quarter because we are in an environment of higher structural nominal GDP and the Trump agenda will pass through the system. Then you also have to forecast pees that are one to two points lower, which means you could lose altitude of ten to fifteen percent just from pe compression. Now that sounds daunting, but if earnings go up fifteen percent, it's a wash, okay, And then you have to look into twenty twenty six. So I think it's tougher sledding this year because there are valuation headwinds which we didn't have up until this point.
So in terms of economic policies from the incoming administration, we know tariffs have really become the centerpiece. And we were talking earlier in the day here in New York about members of the Trump economic team discussing a gradual approach to these tariffs, and one idea that we are told would be to increase them by about two percent to five percent per months. So we are understanding the aim here is to get a little bit of negotiating leverage and at the same time to avoid a spike in inflation. So if you get that as kind of the underpinnings for them push into applying tariffs. Does that give you any comfort at all?
No, because that story changes daily. So the purpose of the tariffs, the reason, and I am a little nervous about this, but the purpose of the tariffs is that Trump wants to ship away at the budget deficit, which is six point six percent of GDP. Right last time he came in pre COVID, he expanded the budget deficit about one point five percent of GDP. So he's a stimulative kind of guy obviously, So how are you going to cut the budget deficit while you know, trying to stimulate the economy the same way. Well, the only way to do that is to have the foreigners finance the spending, and not just through the treasury market, but also through tax receipts. So I know that in the modeling they've done, what they've forecast out is that they can come up with, you know, a good deal more called two hundred and fifty three hundred, four hundred billion dollars worth of subsidy for the deficit from foreign entities. Is that possible?
Yes?
How disruptive will it be? Unknown? I don't think we're in a smooth, holly kind of moment. But you know today there was conversation with Canada about maybe they just won't ship us the four million barrels of oil or whatever they send us every day to retaliate against the tariffs. That would be bad. You know, that probably has something to do with white oils floating around eighty bucks again. So I don't know where those policies end up. And you know, you can sterilize that with some currency appreciation. We've seen that as well, but I just don't think it's going to be easy. And Trump also advocates for a lower dollar, tear US argue against that. If you want to lower dollar, you tax foreigners on interest income that they receive, and you disincentivize investing in the US. So it's really complicated to figure out how to subsidize your government with foreign taxes.
You were talking a moment ago about that twenty percent plus gain for the S and P in twenty twenty four. A large portion of that was built on the back of artificial intelligence in the rally and those names like in Nvidia. It was interesting today to see the weakness in the stock in Nvidia, shares down about two percent. We had a report in the publication The Information suggesting that some of Nvidia's biggest customers are now dialing back on orders for the latest black quilled chips. How are you feeling about the AI trade in twenty twenty five.
I think it's broader, you know. I think that Trump agenda really should benefit the laggards more than the previous leaders. So I think it's time for the to broaden out. You know, earnings this year for the SMP could be fourteen percent something like that. Earnings for the MAG seven are projected to be something like nineteen. The MAG seven trades at thirty times, you know, the S and P trades x MAG seven around twenty. So it seems to me like the premium that they've received in the past likely isn't the premium they'll receive in the future. And also, if you look at the earnings expectations across sectors for this year, each sector is supposed to be higher in terms of earnings by the end of the year. We did not see that last year. It's also supposed to be the case next year. So you know, to me, I'd rather own say the MDY, the S and P MidCap than the large cap or the mag seven because I can get almost as much earnings growth at a fraction of the valuation. And I just think people are going to be more fundamentally focused this year in the in the contest between earnings and valuations.
You were talking a moment ago about your expectations on the FED maybe moving at a slower rate. I think the market welcomes that, given the stubborn signs on inflation. Does that necessarily mean there are opportunities that we should talk about in the bond market?
You know, people who play the price action is not really our core client base. The question is what can you get out of fixed income? And if you look at I guess the AG year to date, it's down a percent or so. But if you're picking up a five and a half percent yield a six percent on high grade corporates, then that becomes a structural component of the portfolio. So I know a lot of people say the acid allocation trades are dead and sixty forties dead, et cetera. But if forty percent of your portfolio can generate a yield of six percent, that ain't too bad. So I think there's benefit to investors for these yields. It's headwind to stocks to a certain extent. But let's not forget the average yield going back, you know, fifty years or so is five percent, not two and a half percent. So to me, if we can be an environment of true structural growth reel of three percent penomenal of five percent, then the bond yields make sense and you can still grow earnings, especially with the utilization of technologies, less regulation, maybe some tax cuts. So I still think we're in a pretty good environment both for stock and bond investors. But I would encourage bond investors to think about coupons and not play price.
So if yields do remain somewhat elevated, I'm wondering whether or not it's time to look at the financials a little bit more closely.
Well, I mean, good thing you brought that up, because we're going to learn a whole lot about them. On Wednesday is earning season shows up, and they obviously had great price action today, and so I thought, what was interesting about today is we got to see what people are going to buy. They've done some tax laws selling, and obviously the financials had a really good day, you know, seventy to basis points or so, while the sp is a fraction of that. So I think people are buying the financials and I think we'll learn more about it. But the highest Ernie's growth expectation for this year's is the financials more so than tech.
David, thank you so much. Some great insights there from David Waddell, CEO and chief investment strategist at Waddell and Associates. 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 Austrilall you, I'm Doug Prisoner and this is Bloomberg
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