Latest / Merryn Talks Money / Is Asia's AI Boom Creating the Next Investment Bubble?

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Is Asia's AI Boom Creating the Next Investment Bubble? · Merryn Talks Money

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  Speaker 1: Bloomberg Audio Studios, podcasts, radio news. Hello Marin Talks Money Listeners,
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  Speaker 1: it is that time of year. The Edinburgh Festival Fringe
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  Speaker 1: The link is in the show notes. Welcome to Marin
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  Speaker 1: Talks Money, the podcast in which people who know the
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  Speaker 1: markets explain the markets. I am Maren Semsep Web and
• 0:46
  Speaker 1: this week I'm speaking with Fioni Yang, a fund manager
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  Speaker 1: at Invesco. She is the manager of the Invesco Asia
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  Speaker 1: Dragon Investment Trust. On today's show, we talk about AI.
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  Speaker 1: We talked about career volatile market, very AI exposed. We
• 0:59
  Speaker 1: talk about India Cheap or not Cheap and why has
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  Speaker 1: it lost so much popularity? And we talked for probably
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  Speaker 1: the first time on the show about the Australian stock market. Fiona,
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  Speaker 1: Welcome to Merin Talks Money. Thank you for having me
• 1:11
  Speaker 1: here again. You were in earlier this year and my goodness,
• 1:15
  Speaker 1: a lot has happened since and at the time we
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  Speaker 1: talked about all sorts of things, about one of the
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  Speaker 1: big topics that we discussed last time. And by the way, listeners,
• 1:21
  Speaker 1: if you haven't listened to the last one, maybe go
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  Speaker 1: listen to that one, either before or after. This one
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  Speaker 1: has had lots of interesting stuff in it. I wanted
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  Speaker 1: to start by talking about what's happened in Korea because
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  Speaker 1: it was already growing great guns the last time we
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  Speaker 1: talked to continue to saw and saw and saw based
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  Speaker 1: on a couple of major AI related stocks, and then
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  Speaker 1: we had a little bit of a stumble, and now
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  Speaker 1: career is I was going to say twenty five percent
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  Speaker 1: of off its peak in June, but on the day
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  Speaker 1: that we're talking, I think that Cosby went up seventy
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  Speaker 1: percent even yesterday. So this is very volatile stuff. And
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  Speaker 1: we're also hearing about a lot of very highly leveraged
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  Speaker 1: ordinary career investors or amblers, I guess we should say,
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  Speaker 1: who've lost an awful lot of money by having very
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  Speaker 1: high margin debt and then being hit by falling share prices.
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  Speaker 1: So career is fascinating because it's exactly as you said
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  Speaker 1: that front row seat to AI, but it's also turned
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  Speaker 1: out to be very volatile.
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  Speaker 2: Yeah, exactly. That's a fantastic observation that you have there.
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  Speaker 2: On the career market, I think they take a step
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  Speaker 2: back quite a few things has worked out very favorably
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  Speaker 2: for career over the past twelve eighteen months. The memory
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  Speaker 2: cycle boosted by AI demand is just phenomenal. This is
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  Speaker 2: one of the biggest supercycle that we have seen for
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  Speaker 2: stocks like some se Electronics and Eessacheinis.
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  Speaker 3: And on top of that, I think we had to
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  Speaker 3: say the.
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  Speaker 2: Korean government has done a fantastic job in boosting shareholder
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  Speaker 2: return doing the value up initiative in Korea. It's a
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  Speaker 2: textbook sort of example that all the other countries should
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  Speaker 2: really look up to for some of the holdings that
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  Speaker 2: we have in the portfolio, so especially the financials. They
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  Speaker 2: are boosting shareholder return massively over the past few years,
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  Speaker 2: and they start to really focus on shareholder interests, protecting
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  Speaker 2: minority shareholders interests, and giving us more voices in the boardroom.
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  Speaker 2: That's something that I think in all this data center
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  Speaker 2: or AI narrative that investors have forgotten. But I do
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  Speaker 2: see risks. There are two risks I see in the
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  Speaker 2: career market. The first one is the concentration risk, as
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  Speaker 2: you correctly pointed out, with the participation of leveraged ETF
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  Speaker 2: I do think some of the retail investors might sort
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  Speaker 2: they just bought into a product that give them a
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  Speaker 2: bit more return into this investing into a great company.
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  Speaker 2: But reality is it's a much more complex financial product
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  Speaker 2: they got themselves into and that led to the capital losses.
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  Speaker 2: And then the other risk is really earnings risk. Now
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  Speaker 2: the market is having super high expectations bought the memory pride,
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  Speaker 2: it's going to be if you look at some Sound
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  Speaker 2: Electronics two q preliminary result that delivered nineteen percent nineteen
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  Speaker 2: times increase versus two q last year for share price
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  Speaker 2: is actually done post that result exactly because of this
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  Speaker 2: expectation versus reality. Expectation of earning scrolls is super high
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  Speaker 2: to the degree that even fantastic earning cycle cannot that
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  Speaker 2: meet that expectation. That also result in share price volatility
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  Speaker 2: that we have seen from the peak.
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  Speaker 3: Interesting.
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  Speaker 1: I mean everything you say about the changes in the
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  Speaker 1: Korean market and the changes to shareholder democracy and the
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  Speaker 1: changes to regulation driven corporate governance, that's what we saw
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  Speaker 1: in Japan in a previous cycle, right, and I still
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  Speaker 1: think ongoing in Japan, which is interesting. So Korean regulator
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  Speaker 1: picked up all sorts of hints from Japan and that
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  Speaker 1: makes a great long term story for shareholders in the
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  Speaker 1: Korean market, but nonetheless in the short term, as you say,
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  Speaker 1: it is all about concentration. Let's get high next and
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  Speaker 1: Sam saying are a huge part of the market, and
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  Speaker 1: it's the same across the Asian market. Actually, if you
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  Speaker 1: think to yourself, I'm buying emerging Asia or I'm buying Asia,
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  Speaker 1: and you buy any kind of index or ETF product,
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  Speaker 1: you're actually just buying huge exposure to a couple of
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  Speaker 1: AI stocks. So that concentration is the thing that really
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  Speaker 1: matters if you're buying into any kind of index product,
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  Speaker 1: which means that you really have to look in detail
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  Speaker 1: at the second risk would you bring up there, which
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  Speaker 1: is the supercycle and memory? And when you refer to
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  Speaker 1: it as a supercycle, I wonder what you mean by
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  Speaker 1: that and how long you think that cycle will last,
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  Speaker 1: because I think for old people, old investors, people who've
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  Speaker 1: seen these cycles go on forever and ever. One of
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  Speaker 1: the first things I ever learned when I became a
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  Speaker 1: stockbroker in Asia, was that these cycles tend to be
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  Speaker 1: shorter than you think.
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  Speaker 2: Maybe it's best just to take a step back to
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  Speaker 2: look at how we ended up here, rewind the tape, like.
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  Speaker 3: Two three years ago.
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  Speaker 2: What happened to the memory industry was actually we were
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  Speaker 2: in a dumb cycle. If you look at NONE, which
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  Speaker 2: is sort of non flash, that is in deep loss making.
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  Speaker 2: As a result, even though the industry only have a
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  Speaker 2: few producers of non none of them was really expanding
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  Speaker 2: the capacity aggressively. Similar for d RAM, which is the
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  Speaker 2: other type of memory that goes into all these AI
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  Speaker 2: products these days, same they have gone through this commodity
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  Speaker 2: super up and down cycle in the priials, the data center,
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  Speaker 2: cloud built out era, and the profitability has deteriorated very quickly.
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  Speaker 2: For a company like eskaheanis they have to really go
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  Speaker 2: to the market to raise comfortable bonds because the balance
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  Speaker 2: sheet was in deep trouble. They were super leveraged, so
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  Speaker 2: they were not in a position to expand capex. All
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  Speaker 2: of this moving to where we are today is we
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  Speaker 2: had this period of under investment by the major players
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  Speaker 2: in the memory markets, and on the other side of
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  Speaker 2: demand we suddenly have AI agentic AI that just need
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  Speaker 2: a lot of memory to really record the conversation that
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  Speaker 2: you had with CHGBT, with Anthropic, with Claude, so they
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  Speaker 2: can help you to do the dust better from this
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  Speaker 2: point on. So that demand search is unexpected from what
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  Speaker 2: all these investors as well as memory producers perspective, even.
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  Speaker 3: Twel months back.
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  Speaker 2: That's why we ended up with this shortaging supply because
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  Speaker 2: under investment over the past couple of years as well
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  Speaker 2: as this sudden search in demand.
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  Speaker 3: So what has happened.
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  Speaker 2: Is really this shortage has just driven the prices of
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  Speaker 2: the exactly the same products up phenomenally over the past
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  Speaker 2: few years.
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  Speaker 3: Then the question is about when how long this cycle
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  Speaker 3: could last.
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  Speaker 2: I think it could last for a couple of years
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  Speaker 2: because of this supply to come up will take time.
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  Speaker 2: You need to build the clean room, you need to
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  Speaker 2: order the equipment and put the equipment in there. But
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  Speaker 2: then does that being the share price could last for
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  Speaker 2: two three years at the very high level, that might
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  Speaker 2: not lessarily be true because the expectation is already up there.
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  Speaker 2: Stock market is about expectation versus reality. The expectation is
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  Speaker 2: already there's a sort of an Ai demand that cannot
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  Speaker 2: be mad and the supply will not come up in
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  Speaker 2: the next two to three years. If we do see
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  Speaker 2: any sort of vacuum in the demand side of things,
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  Speaker 2: or supply could come up just faster than expected because
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  Speaker 2: suddenly all these companies have raised huge amount of money,
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  Speaker 2: not just for the Korean ones, but also the Chinese
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  Speaker 2: competitor is doing an IPO in the coming days. All
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  Speaker 2: of that could change the supply dynamics quite a bit.
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  Speaker 3: Then it's about when does that price or the customers.
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  Speaker 2: By the other day, you have a handful of hyperscalers
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  Speaker 2: paying for all these products. If they do see demand
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  Speaker 2: weakening slightly and the supply going to come up quite massively,
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  Speaker 2: the bargaining tip going to go back from the memory
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  Speaker 2: producers to the payers, and we could see prices start
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  Speaker 2: to fall from this point on.
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  Speaker 1: Yeah, let's talk about demand. Then the supply conversation is
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  Speaker 1: slightly easier in a way, isn't it, because you can
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  Speaker 1: see the timeline that's required, as you say, to build
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  Speaker 1: the clean rooms, et cetera. But when you look at demand,
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  Speaker 1: the assumptions for rising demand are pretty pretty enormous, pretty enormous.
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  Speaker 1: There are all sorts of things that could affect that,
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  Speaker 1: one of those being people changing the way that they
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  Speaker 1: use llms at the moment, people changing from using the
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  Speaker 1: services provided by the big American hyperscalis to using Chinese products,
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  Speaker 1: et cetera. So there's lots of things that could shift
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  Speaker 1: inside the demand equation.
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  Speaker 2: There are quite a few moving parts in that demand equation.
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  Speaker 2: How I see. I think demand is here to stay
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  Speaker 2: is just a question of how fast it's going to grow.
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  Speaker 2: The market expectation is no one really has a crystal
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  Speaker 2: ball of what's going to happen in the future, but
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  Speaker 2: the narrative in the market is that demand are going
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  Speaker 2: to grow at an exceptional pace. I do see a
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  Speaker 2: couple of risks in there. The first one is really
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  Speaker 2: the return on those Hyperscaler's investment. It is really, given
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  Speaker 2: the current sort of annual round rate of the revenue
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  Speaker 2: produced by open AI and Tropic and not to mention
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  Speaker 2: on certain paths towards profitability, the ROI of this Hyperscalar
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  Speaker 2: investment is still questionable. On this huge amount of capex,
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  Speaker 2: we're going to see all we expect to see, So
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  Speaker 2: that's one risk. The other risk is competition. As you
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  Speaker 2: pointed out, the Chinese large language model viewed up on
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  Speaker 2: cheap power, cheap electricity, cheap land, and cheap hardware producers
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  Speaker 2: because China is yeah, the technology could be generators behind,
• 10:51
  Speaker 2: but once they get to a certain technology level, the
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  Speaker 2: cost of producing those products is just significantly cheaper as
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  Speaker 2: compared to the developed market. So as the result, their
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  Speaker 2: large language model is actually prized at a fraction of
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  Speaker 2: the cost of the leading edge model that we have
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  Speaker 2: seen in the Western world. I was just having lunch
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  Speaker 2: with one of my friend who operates one of his
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  Speaker 2: own software company in the Asia region. He talks about, yes,
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  Speaker 2: we just switched between the models. Certain tasks, we can
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  Speaker 2: just use the ninety percent cheaper Chinese model, and certain
• 11:23
  Speaker 2: tasks the most advanced masks, maybe we use the Western model,
• 11:27
  Speaker 2: and that's a perfect way out for us to both
• 11:30
  Speaker 2: save one cost and really get to the desired outcome
• 11:33
  Speaker 2: for coding and etc. So that just there's two risks
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  Speaker 2: that I have taken to consideration thinking about the demand
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  Speaker 2: and how quickly that demand going to grow from this
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  Speaker 2: point on.
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  Speaker 1: Yeah, see, that's interesting. So a lot of the demand
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  Speaker 1: assumption to assume that everyone will always want to use
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  Speaker 1: the best model, but that's not really the case. Is
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  Speaker 1: that people will use the good enough model depending on press,
• 11:54
  Speaker 1: depending on task. Yeah. Okay, So if you are now
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  Speaker 1: investing in this region and you're looking at this concentration,
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  Speaker 1: and you're looking at these risks that we've just talked about,
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  Speaker 1: and I know that a lot of people will say
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  Speaker 1: to you that the big companies, the Samsung's and the
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  Speaker 1: high Next, etcetera, that they still look reasonably cheap. But
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  Speaker 1: of course that's the way cycles always work. That you're
• 12:17
  Speaker 1: supposed to sell these companies when they look cheap and
• 12:20
  Speaker 1: buy them when they look expensive, because that's how the
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  Speaker 1: cycle works. So if you're an active investor, now is
• 12:25
  Speaker 1: the time to diversify away from those peer plays, is
• 12:29
  Speaker 1: my guess, and start looking at companies that are not
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  Speaker 1: so much the picks and shovels, but the companies that
• 12:35
  Speaker 1: will benefit in other ways from using AI. If you're
• 12:38
  Speaker 1: still going to talk about this as an AI trade,
• 12:40
  Speaker 1: start looking at the companies that will be able to
• 12:42
  Speaker 1: use AI to improve their productivity, their customer service, etc.
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  Speaker 1: So you're moving out from those peer plays.
• 12:49
  Speaker 2: It is exactly you know for active bottom up farm manager.
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  Speaker 3: That's my job day to day. So two angles. I
• 12:55
  Speaker 3: look at this.
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  Speaker 2: One is really outside of the AI stuff in Korea.
• 13:01
  Speaker 2: If you are SMSUM employee, you get this huge bonus
• 13:04
  Speaker 2: because you just negotiated to get ten percent of the
• 13:06
  Speaker 2: company's op to operating profit to be paid in bonus.
• 13:10
  Speaker 3: What are you going to do with it? You're going
• 13:11
  Speaker 3: to buy a house?
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  Speaker 1: Can we just stop on that? What do we get
• 13:13
  Speaker 1: people getting in the way of bonuses? And I've read
• 13:15
  Speaker 1: about this one hundreds and hundreds of thousands of dollars
• 13:17
  Speaker 1: being paid out and bonuses to ordinary employees. What's the
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  Speaker 1: scale here?
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  Speaker 2: This is going to be massive people the sale side.
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  Speaker 2: The most foolish expectation is next year, as Kahnis could pay,
• 13:28
  Speaker 2: could get to about four hundred, four hundred and fifty
• 13:32
  Speaker 2: trillion Korean one. If you have ten percent of that
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  Speaker 2: paid to the employees, it is going to be huge
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  Speaker 2: as a percentage of the country's GDP.
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  Speaker 3: Of course that's expectation. I'm not saying we will get there.
• 13:44
  Speaker 2: But with that huge amount of money, then people will
• 13:48
  Speaker 2: want to spend it. They want to buy house, they
• 13:51
  Speaker 2: want to buy handbags. Actually, it's already happening. People talking
• 13:54
  Speaker 2: about the incestuable demand for luxury handbags as well as jewelry.
• 14:00
  Speaker 2: In Korea, the department store is just packed. If you
• 14:03
  Speaker 2: go to the VCA in the morning, you have to
• 14:05
  Speaker 2: get a queue ticket the first moment it opens, otherwise
• 14:09
  Speaker 2: you will not be able to visit it for the
• 14:10
  Speaker 2: whole day.
• 14:11
  Speaker 3: You have to cute. You have too cute store to
• 14:15
  Speaker 3: go to one of the jewelry shops. Yeah right, everyone
• 14:19
  Speaker 3: should come to Edinburgh.
• 14:20
  Speaker 1: There's no queues outside our luxury shops.
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  Speaker 3: I think they're gonna do that absolutely.
• 14:25
  Speaker 1: But your holidays here I needs employees were waiting.
• 14:30
  Speaker 2: So those are the things that we expect to see.
• 14:32
  Speaker 2: We already started to see signs of that. But once
• 14:35
  Speaker 2: that money get into the pocket of the employees, that's
• 14:37
  Speaker 2: exactly what they're gonna do. They're gonna go overseas to
• 14:40
  Speaker 2: travel as well, so we want to benefit from that.
• 14:42
  Speaker 2: I think the banks it's going to see acceleration in
• 14:46
  Speaker 2: long world the welsh mana in product demand for introduced
• 14:49
  Speaker 2: by the banks. And then also on the other side
• 14:52
  Speaker 2: is Peppex gonna benefit a lot of the construction company
• 14:56
  Speaker 2: in the country. So that's around within the career, the
• 15:00
  Speaker 2: secondary and tertiary beneficiary from the AI trend, and then
• 15:05
  Speaker 2: outside of that is the point of RAI is about
• 15:07
  Speaker 2: who're going to use this AI technology to really benefit
• 15:11
  Speaker 2: structurally for the future. So some of the winners that
• 15:15
  Speaker 2: we identify actually the Internet space. We like some of
• 15:19
  Speaker 2: the game developers in China or in the region. If
• 15:23
  Speaker 2: you think about online games, how you develop in the past,
• 15:25
  Speaker 2: you spend millions of dollars trying to produce the content
• 15:28
  Speaker 2: to make the AGI looks absolutely amazing. That comes at
• 15:32
  Speaker 2: the expense of hiring thousands of programmers graphic designers. But
• 15:37
  Speaker 2: now using AI, you can just make it so much simpler.
• 15:40
  Speaker 2: It saves the costs and really enhance the gameplay and
• 15:43
  Speaker 2: you can even tailor made the products to every individual
• 15:47
  Speaker 2: user have a completely different gameplay versus a guy sitting
• 15:50
  Speaker 2: next to me because we just like different things. We
• 15:52
  Speaker 2: want different experience in the virtual world. That just increased
• 15:56
  Speaker 2: time span on the platform and lower the cost some
• 16:00
  Speaker 2: of the stocks that we have held in the portfolio
• 16:02
  Speaker 2: for the longest time. It's just underappreciated by this AI beneficiary.
• 16:08
  Speaker 1: Thematic Can you give us the names and tell us
• 16:11
  Speaker 1: some of the details of some of the other stocks
• 16:12
  Speaker 1: you're holding in Korea that have exposure to these themes.
• 16:16
  Speaker 2: Right, So in Korea we own some of the banks
• 16:19
  Speaker 2: like k BE Financial is one of the biggest bank
• 16:21
  Speaker 2: in the region. We also own some Sound Farmering. It's
• 16:25
  Speaker 2: one of the insurance company that has just seen shareholder
• 16:29
  Speaker 2: return being boosted and into the capexpanding cycle of the
• 16:33
  Speaker 2: Samsung Group. We do own some sound na It is
• 16:36
  Speaker 2: one of the captives sort of construction company for the
• 16:39
  Speaker 2: Samsung Group that could continue to cater to the company's
• 16:43
  Speaker 2: future buildout of their clingroom in the country. And then
• 16:47
  Speaker 2: for the other theme about the beneficiary of AI using
• 16:51
  Speaker 2: AI technology, we do net Eas and Tencent in China.
• 16:54
  Speaker 2: They are the game producers in China, and because of
• 16:57
  Speaker 2: the regulation that you need to really pup games in China,
• 17:01
  Speaker 2: it's not something that AI can't actually do for you
• 17:04
  Speaker 2: to really negotiate with the regulator, what sort of games
• 17:08
  Speaker 2: can be brought to the market that still needs the
• 17:11
  Speaker 2: humans and humans, yes exactly.
• 17:35
  Speaker 1: That much of Asia is now beginning to look relatively expensive.
• 17:39
  Speaker 1: So we've talked about career and I know Japan is
• 17:42
  Speaker 1: a new area, but that's not the pure value play.
• 17:44
  Speaker 1: It used to be India, welcome onto India in a
• 17:47
  Speaker 1: little bit, but expensive and some Vietnam, for example, used
• 17:51
  Speaker 1: to be so cheap, isn't it anymore? But China remains
• 17:54
  Speaker 1: pretty inexpensive, still a very unpopular market. Tell me about
• 17:58
  Speaker 1: that from point of view.
• 18:00
  Speaker 2: Yeah, I think unfortunately, China has just been used as
• 18:04
  Speaker 2: a funding source to buying into the AI hardware space.
• 18:09
  Speaker 2: So the Chineses have many of the popular holdings among
• 18:13
  Speaker 2: Asia and emergeny market investors. When you think about investing
• 18:17
  Speaker 2: the region, you usually own stocks in China because they
• 18:21
  Speaker 2: are perceived as the best. And now with the funding
• 18:24
  Speaker 2: flow coming out of these popular holdings and going into
• 18:28
  Speaker 2: Korea and Taiwan, is just have depressed that market valuation.
• 18:33
  Speaker 1: So people have just been selling their holdings in Chinese
• 18:36
  Speaker 1: markets to buy into the exciting stuff and career in
• 18:39
  Speaker 1: Taiwan exactly.
• 18:40
  Speaker 2: I think that's definitely play an important role in that.
• 18:43
  Speaker 2: And if we look at the index composition of MSCI China,
• 18:48
  Speaker 2: there are a lot of Internet names in there, and
• 18:51
  Speaker 2: many would argue for internet companies, maybe you need to
• 18:55
  Speaker 2: reinvest yourself, reinvent yourself to have a new business model
• 19:00
  Speaker 2: to really survive in the new ai era. Maybe you
• 19:04
  Speaker 2: want to increase your capech spending, you need to have
• 19:07
  Speaker 2: the most competitive large language model so as to wing. Really,
• 19:12
  Speaker 2: as a result, it's not sociue whether those companies are
• 19:16
  Speaker 2: still the leaders in the region, so they get sold
• 19:21
  Speaker 2: off because the FUM flow and the question mark of
• 19:24
  Speaker 2: how they're going to evolve themselves in this new technology world.
• 19:28
  Speaker 1: Yeah, but evaluations reflect that this is one of the
• 19:30
  Speaker 1: few places in the region where you can still say
• 19:34
  Speaker 1: definitely not paying.
• 19:36
  Speaker 2: As the contrary, investors, when other people look away, we
• 19:39
  Speaker 2: always want to look more into it because there are
• 19:41
  Speaker 2: a lot of gems in that market, and investors are
• 19:44
  Speaker 2: fixated on a lot of the macro issues about weak
• 19:47
  Speaker 2: economic growth or still underwhelming consumption data. But you know what,
• 19:54
  Speaker 2: there are companies that can actually thrive in this macro environment.
• 20:00
  Speaker 1: Extraordinary, isn't it What a small part of the indices
• 20:03
  Speaker 1: the Chinese market takes up.
• 20:05
  Speaker 3: Definitely, Definitely.
• 20:06
  Speaker 2: I think it's more of the case of how quickly
• 20:09
  Speaker 2: Taiwan and the Korea have gone up, and then the
• 20:12
  Speaker 2: market cap of this mega company, the concentration that they
• 20:16
  Speaker 2: have in the Asia in decks is mind blowing.
• 20:20
  Speaker 1: Yeah, I'm back to concentration and be careful what you buy, right,
• 20:23
  Speaker 1: all right, let's look at India, which was incredibly popular
• 20:26
  Speaker 1: level age as everyone loved India and we were constantly
• 20:29
  Speaker 1: being told you didn't need to worry about price, just
• 20:32
  Speaker 1: by India because of the growth and the exciting companies,
• 20:34
  Speaker 1: et cetera. And that's over. No one's died in India anymore,
• 20:38
  Speaker 1: fallen out of favor. But you've recently taken a trip
• 20:41
  Speaker 1: to India.
• 20:42
  Speaker 3: Yes, so India is a very interesting one.
• 20:45
  Speaker 2: Two years ago, it was one of the most popular
• 20:48
  Speaker 2: country to investing for the whole region, and here we
• 20:52
  Speaker 2: are it is completely being put into the bottom of
• 20:55
  Speaker 2: the jaw because it doesn't.
• 20:56
  Speaker 3: Really AI stocks in there all.
• 20:59
  Speaker 2: The Internet company again similar like the Chinese ones, being
• 21:03
  Speaker 2: questioned about their survivability for the long term and the
• 21:06
  Speaker 2: growth in the long term. So I just thought it's
• 21:09
  Speaker 2: an interesting time to definitely take a trip and visit
• 21:11
  Speaker 2: our portfolio companies and identify whether they are more interesting ideas.
• 21:16
  Speaker 2: I think the conclusion is still the market, despite on
• 21:19
  Speaker 2: the performance versus everywhere else, is still expensive.
• 21:24
  Speaker 3: Unfortunately, is.
• 21:27
  Speaker 2: Valuation is something that we can't get the hurd or over,
• 21:30
  Speaker 2: but doesn't mean we can't own stocks in the market
• 21:33
  Speaker 2: because they're still selected parts of the market looks extremely
• 21:37
  Speaker 2: valuable for us and if you look at the growth
• 21:40
  Speaker 2: compounding power of some of the portfolio company is definitely impressive.
• 21:45
  Speaker 2: So one of my favorite in India and during the
• 21:48
  Speaker 2: trip is Truan. This is a non bank financial company
• 21:52
  Speaker 2: operating India for extended period of time. They basically serve
• 21:56
  Speaker 2: to say, the truck drivers helping them to get a
• 21:59
  Speaker 2: second give them a loan to get a secondhand truck.
• 22:02
  Speaker 2: They also help the small businesses giving them some working capital,
• 22:05
  Speaker 2: loan and etc. So the business has thrived over the
• 22:08
  Speaker 2: past years because of the underpenetration of the formal banking
• 22:12
  Speaker 2: sector in the rural area of India, they can really
• 22:16
  Speaker 2: serve the underserved and it can grow in the market
• 22:19
  Speaker 2: because of the income of the average people would go up.
• 22:24
  Speaker 2: They want to take up the formal jobs, they want
• 22:27
  Speaker 2: to open their own small businesses and Sreram will be
• 22:30
  Speaker 2: there helping them with their vast network across the country
• 22:35
  Speaker 2: and their personal relationship of their loan officer with the
• 22:39
  Speaker 2: end customer, something the formal banking sector just cannot really address.
• 22:43
  Speaker 2: To and what impressed me this time around where I
• 22:46
  Speaker 2: met them they actually have I meanftually the biggest, one
• 22:48
  Speaker 2: of the biggest Japanese financial company investing a huge chunk
• 22:53
  Speaker 2: into FREERM. That means that the credit rating for sree
• 22:57
  Speaker 2: Ram can really improve on the back of a big
• 23:00
  Speaker 2: parent company.
• 23:01
  Speaker 3: And at the same.
• 23:02
  Speaker 2: Time, with the cheap capital support from the MUFG, they
• 23:06
  Speaker 2: can really see their funding costs to go down substantially
• 23:09
  Speaker 2: in the years to come. So we're talking about a
• 23:12
  Speaker 2: business can be supercharged for growth, leveraging to the growth
• 23:15
  Speaker 2: of the Indian economy, at the same time enjoying this
• 23:19
  Speaker 2: expanding margin because of the lower funding costs, and it's
• 23:22
  Speaker 2: still trading at a reasonable valuation as compared to the index,
• 23:25
  Speaker 2: as compared to the peer group. So this is exactly
• 23:29
  Speaker 2: the kind of thing active farm manager like myself try
• 23:31
  Speaker 2: to do.
• 23:32
  Speaker 3: Going to market.
• 23:33
  Speaker 2: Okay, it's expensive, but I mean there are no good
• 23:35
  Speaker 2: company to invest in.
• 23:37
  Speaker 1: Yeah, what about Indian consumer stocks? And one of the
• 23:39
  Speaker 1: conversations having on this podcast a lot is about population
• 23:42
  Speaker 1: and demographics, and of course, whenever you look at China
• 23:45
  Speaker 1: and you look at consumption, you look at construction, et cetera.
• 23:48
  Speaker 1: You have to worry that with a falling population, there's
• 23:50
  Speaker 1: all sorts of things to take into account that you
• 23:52
  Speaker 1: would never have thought of even a decade ago. But
• 23:54
  Speaker 1: while India's fertility rates fallen and actually now but below
• 23:58
  Speaker 1: replacement rate, isn't it, but only it's still the population
• 24:01
  Speaker 1: is still growing reasonably fast. And so you would have
• 24:04
  Speaker 1: thought that in with a fast, dish growing population and
• 24:09
  Speaker 1: whether as you were just talking about high levels of
• 24:11
  Speaker 1: entrepreneurial and income entrepreneurialism and income growth, the consumer stocks
• 24:16
  Speaker 1: would do very well.
• 24:17
  Speaker 3: Yeah, exactly.
• 24:18
  Speaker 2: So the angle that I go in with the consumer
• 24:21
  Speaker 2: stock also looking at the Chinese consumption trend over the
• 24:24
  Speaker 2: past decades, is really which other digital.
• 24:28
  Speaker 3: Companies can cater to that?
• 24:30
  Speaker 2: So I visited a lot of the e commerce as
• 24:33
  Speaker 2: well as digital internet companies in India trying catering to
• 24:37
  Speaker 2: this rising middle income class. So one of the company
• 24:41
  Speaker 2: I visited is Michel, being one of the leading e
• 24:45
  Speaker 2: commerce company in India. But again it's a valuation. I
• 24:49
  Speaker 2: understand the growth, I can appreciate the growth that they have,
• 24:52
  Speaker 2: the vast amount of opportunities that they can cater into,
• 24:56
  Speaker 2: but the valuation is still quite demanding. Then the next
• 25:00
  Speaker 2: layer that I look at, who are the supply chain
• 25:02
  Speaker 2: company or related company catering to that growth. This is
• 25:06
  Speaker 2: a portfolio company that we own for a while as well.
• 25:08
  Speaker 2: It's called Delivery. It's one of the logistics company that
• 25:12
  Speaker 2: deliver the parcels for me Show. They have about fifty
• 25:15
  Speaker 2: percent of the market share into MI Show's parcels and
• 25:19
  Speaker 2: they also cater to the other digital e commerce company
• 25:23
  Speaker 2: across India. On top of that, they also do food
• 25:26
  Speaker 2: truck low services catering to the small as well media
• 25:29
  Speaker 2: enterprises to help them moving from their products from one
• 25:32
  Speaker 2: place to the other place.
• 25:34
  Speaker 3: And they are one of.
• 25:35
  Speaker 2: The biggest logistic operators in the country. If you think
• 25:38
  Speaker 2: about India logistics there are It's really amazing the pace
• 25:43
  Speaker 2: of improvement that we have seen over the past year
• 25:46
  Speaker 2: thanks to Molting. His investment in the logistics space in
• 25:49
  Speaker 2: the countries. Infrastructure really helps companies that delivery to grow,
• 25:55
  Speaker 2: to improve their services at lower costs at higher efficiency
• 25:58
  Speaker 2: so they can take over more our share of some
• 26:00
  Speaker 2: of their competitors, as well as really enjoying this growth
• 26:04
  Speaker 2: of consumers wanting more products, they want cheaper products, they
• 26:07
  Speaker 2: want products that are does step. So this is something
• 26:11
  Speaker 2: that we have investing for quite a while and we
• 26:13
  Speaker 2: are really glad to see them seeing acceleration and growth
• 26:16
  Speaker 2: for exactly these topics that we talked about, and at
• 26:20
  Speaker 2: the same time, with that growth, compounding the valuation, the leverage,
• 26:24
  Speaker 2: the operational leverage that they are seeing in the business
• 26:27
  Speaker 2: is a beautiful small business that we're holding India.
• 26:31
  Speaker 1: I suppose the thing that will always come up in
• 26:33
  Speaker 1: conversation when you talk about logistics and infrastructure in India
• 26:38
  Speaker 1: is the energy problem, because they are a net importure
• 26:41
  Speaker 1: of fossil fuels and that does make for quite a
• 26:43
  Speaker 1: difficult environment at the moment.
• 26:46
  Speaker 2: Absolutely, this is a topic in every single meeting when
• 26:50
  Speaker 2: I was India, people talk about but I think the
• 26:53
  Speaker 2: government has done a fantastic job. They have shielded a
• 26:56
  Speaker 2: lot of that energy price volatility away from the customers
• 27:00
  Speaker 2: and consumers. Of course, it's questionable how long they can
• 27:04
  Speaker 2: do that, but how they've managed it, how they manage
• 27:07
  Speaker 2: the inflation, and how they do coordinated the monetary policies
• 27:12
  Speaker 2: and communication with the market definitely brought a lot of
• 27:15
  Speaker 2: reassurance to invest in the market. And I think the
• 27:19
  Speaker 2: other angle to look at it. It's not just about
• 27:21
  Speaker 2: the price of oil for any of this country in Asia,
• 27:25
  Speaker 2: oil India in particular. It's also about trying to build
• 27:28
  Speaker 2: this energy independence. So that's another topic that you know,
• 27:32
  Speaker 2: as a team, we just really like to delve into
• 27:36
  Speaker 2: how Asia can be more independent from global job politics
• 27:41
  Speaker 2: or energy crisis for the next decade.
• 27:44
  Speaker 3: What's the answer to that.
• 27:45
  Speaker 2: I think a lot of things had happened, not just
• 27:48
  Speaker 2: about the Iran crisis, but what has happened in Russia,
• 27:52
  Speaker 2: what has happened.
• 27:53
  Speaker 3: During COVID time.
• 27:54
  Speaker 2: It is a five years, A lot of things had happened,
• 27:56
  Speaker 2: and all that taught all the nations around the world
• 27:59
  Speaker 2: is maybe over the past years, all we care about
• 28:02
  Speaker 2: is operational efficiency or getting the cheapest fuel. From this
• 28:06
  Speaker 2: point on, we should look at independence. We should look
• 28:09
  Speaker 2: at having more of this stuff onshore. So we want
• 28:12
  Speaker 2: to invest in companies that really cater to that theme,
• 28:15
  Speaker 2: the services company, the infrastructure construction company, design companies that
• 28:19
  Speaker 2: help resources infrastructure build out across the region.
• 28:24
  Speaker 3: So some of the stocks that we look.
• 28:25
  Speaker 2: At and we talk about that's one of the they
• 28:29
  Speaker 2: don't just cater to the somesoung Captive, Capex but they
• 28:34
  Speaker 2: also involve a lot of energy resources build out construction
• 28:38
  Speaker 2: type of work, so that could definitely benefit. Another one
• 28:41
  Speaker 2: we look at is in Australia. It's called Wally. This
• 28:45
  Speaker 2: is a design company EPC company to really help the
• 28:50
  Speaker 2: global oil and the resources majors to build out new projects.
• 28:55
  Speaker 2: So we do see that in the future there will
• 28:58
  Speaker 2: be an acceleration in the capital spending cycle in energy
• 29:02
  Speaker 2: as well as resources space across the region.
• 29:05
  Speaker 1: I suppose when we look at Asia, we always think
• 29:07
  Speaker 1: of it as being entirely an energy importing region, but
• 29:10
  Speaker 1: it isn't. There are quite a few net exporters in Asia,
• 29:13
  Speaker 1: aren't there. Indonesia for example.
• 29:16
  Speaker 2: Yeah, absolutely so Indonesia, Malaysia as well as Australia. They
• 29:22
  Speaker 2: are really not so dependent on energy importing the net exporterers.
• 29:28
  Speaker 2: But then again, when you have the resources doesn't necessarily
• 29:31
  Speaker 2: mean you can have a great hand out cards, but
• 29:33
  Speaker 2: you might not play that way real well. So the
• 29:36
  Speaker 2: stock market performance of all the three countries still varies
• 29:39
  Speaker 2: quite a bit.
• 29:40
  Speaker 1: I didn't know that you invested in Australia actually, yeah.
• 29:44
  Speaker 2: So for my team, we do have Asia Pacific products
• 29:48
  Speaker 2: as well, Extra Pan products as well, so Australia. Being
• 29:51
  Speaker 2: sitting in Singapore, it is a place that I love
• 29:53
  Speaker 2: to travel to and see companies as well.
• 29:57
  Speaker 3: Okay, but you put the love to travel to a
• 29:58
  Speaker 3: bit first.
• 30:00
  Speaker 1: All the same companies Australia.
• 30:02
  Speaker 2: Right, Just think last Sydney, Melbourne and a Hying Perth.
• 30:07
  Speaker 3: Yeah, definitely ask for when I.
• 30:09
  Speaker 1: Worked in Asia, I used to do Sydney Melbourne quite
• 30:11
  Speaker 1: a lot as well. Yeah, technically work, but nice to
• 30:14
  Speaker 1: travel too. So what does the Australian market look like
• 30:17
  Speaker 1: to you? And I don't think that we have ever
• 30:19
  Speaker 1: discussed the Australian stop marketing on this podcast before, so
• 30:21
  Speaker 1: this is a first.
• 30:23
  Speaker 2: I think Australia is an amazing market. If you rank
• 30:28
  Speaker 2: the kind of capital return, showholder return, this kind of stuff,
• 30:32
  Speaker 2: corporate governance, Australia definitely ranked the number one of the
• 30:36
  Speaker 2: countries that I cover. So structurally it's just a very
• 30:40
  Speaker 2: favorable environment for active stock pickers to work with the
• 30:44
  Speaker 2: company and really enjoining the shareholder return. And then if
• 30:49
  Speaker 2: we look at the resources which we talked about earlier,
• 30:52
  Speaker 2: Australia being the energy as well as the resources net
• 30:57
  Speaker 2: exporter in the region, it definitely have a critical role
• 31:01
  Speaker 2: to play in the Asia space, So that's definitely the
• 31:05
  Speaker 2: go to place for us. If we do want to
• 31:07
  Speaker 2: own some iron oil producers or if we do want
• 31:10
  Speaker 2: to have more or guests in the portfolio, that's a
• 31:13
  Speaker 2: go to place we would invest. And then if we
• 31:15
  Speaker 2: look at a short term there are a couple uncertainty
• 31:19
  Speaker 2: in the market, especially what the government is trying to
• 31:22
  Speaker 2: address the housing market issue over there. That brought some
• 31:26
  Speaker 2: uncertainty because household worlds is quite concentrated in housing, but
• 31:31
  Speaker 2: the government has introduced a few sort of anti negative
• 31:35
  Speaker 2: gearing policies to address what they perceived as our affordability
• 31:41
  Speaker 2: for the younger generation. That's a housing problem that they
• 31:44
  Speaker 2: do want to address. That brought some market uncertainty because
• 31:47
  Speaker 2: banks is banks in Australia are hugely leveraged into the
• 31:53
  Speaker 2: housing market in the country. And then as a result
• 31:58
  Speaker 2: of that, the other issue is the consumer confidence. As
• 32:02
  Speaker 2: I mentioned, wealth is linked to property price in Australia
• 32:08
  Speaker 2: because of the expectation that housing price is going to
• 32:11
  Speaker 2: be soft so the consumer segment is not doing very well.
• 32:16
  Speaker 2: The spanning continues, but the expectation is that it's set
• 32:20
  Speaker 2: to soften from this point on, so we can see
• 32:23
  Speaker 2: structurally they're definitely merit of investing in Australia, but it's
• 32:28
  Speaker 2: just temporarily because of the housing crisis the country seats.
• 32:32
  Speaker 3: They want to address it.
• 32:33
  Speaker 2: For the longer term benefits of the country's healthy growth.
• 32:37
  Speaker 2: That might have set back some of the new term
• 32:40
  Speaker 2: growth potential for Australia.
• 32:43
  Speaker 1: So for the moment, the most interesting stocks there are
• 32:46
  Speaker 1: probably commodity related.
• 32:48
  Speaker 3: Yeah, definitely.
• 32:49
  Speaker 2: We think if the data center going to be built
• 32:52
  Speaker 2: out as planned, they need a lot of copper, where
• 32:56
  Speaker 2: Australia do have quite a couple of names that have
• 32:59
  Speaker 2: exposure in that space. And then the energy security we
• 33:02
  Speaker 2: invested in Wally that's in Australia. They don't just cater
• 33:06
  Speaker 2: to Asia to do the resources and energy build out.
• 33:10
  Speaker 2: They do have fifty percent of the revenue coming from
• 33:13
  Speaker 2: the US. That's a market that just have a huge
• 33:16
  Speaker 2: plan to expand the guests producing capability. So a lot
• 33:22
  Speaker 2: of that is just give us a lot of options
• 33:24
  Speaker 2: to invest in Australia.
• 33:27
  Speaker 1: Oh and thank you. That's so interesting And as I say,
• 33:29
  Speaker 1: at first, we're going to do more Australia thanks to you,
• 33:32
  Speaker 1: because there's clearly a lot going on listen.
• 33:34
  Speaker 3: Ploy let me let you go.
• 33:35
  Speaker 1: Let me just ask you one question. It's holiday time, right,
• 33:38
  Speaker 1: and all of our guests and our listeners headed to
• 33:40
  Speaker 1: the beach and we are wondering when you head to
• 33:43
  Speaker 1: the beach or wherever you're going.
• 33:45
  Speaker 2: Well, I am already on holiday, but because so I
• 33:48
  Speaker 2: fly fly to here to London to be on the podcast.
• 33:54
  Speaker 1: Sorry, thank you so much for doing that.
• 33:56
  Speaker 3: It's great too.
• 33:57
  Speaker 2: So I was in Sweden with my family. I brought
• 33:59
  Speaker 2: my two kids and then together with a bigger family,
• 34:02
  Speaker 2: so we have we rented out a beautiful house by
• 34:05
  Speaker 2: Swedish lake. It's just a tradition that people goes to
• 34:09
  Speaker 2: the lakes and enjoy the summer and the kids can
• 34:11
  Speaker 2: swim in. The lake comes absolutely beautiful, not as hot
• 34:14
  Speaker 2: as here, which is great.
• 34:17
  Speaker 1: Now you have kids, so you probably don't have much
• 34:19
  Speaker 1: time for this. But what are you reading when you're
• 34:21
  Speaker 1: sitting by the lake.
• 34:22
  Speaker 2: So one of the books that I'm reading now is
• 34:24
  Speaker 2: The Coming Ways. That's really good talking about AI and
• 34:27
  Speaker 2: then not just about AI, how it's going to change
• 34:30
  Speaker 2: the world, but some of the consequences that you have
• 34:32
  Speaker 2: to think about, like essex, what it means for job market, etc.
• 34:38
  Speaker 2: I know I should shouldn't care, shouldn't be too occupied
• 34:41
  Speaker 2: with work while I'm away on holiday, but it's really
• 34:44
  Speaker 2: the only time where's two young kids, the only time
• 34:46
  Speaker 2: I can really spend to do some reading. So that's
• 34:51
  Speaker 2: something that I highly recommend for this AI era.
• 34:55
  Speaker 1: Yeah, no, thank you so much for joining us.
• 34:57
  Speaker 3: I really enjoyed talking to you as usual. Thank you,
• 35:00
  Speaker 3: Thank you very much for having me again.
• 35:09
  Speaker 1: Thanks for listening this week's Marion Talks Money. If you
• 35:10
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• 35:13
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• 35:16
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• 35:19
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• 35:21
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• 35:24
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• 35:30
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