Patrick 00:00

Welcome to the Barclays Brief podcast. It's Tuesday, 7th of July. So this year, the center of gravity in the AI investment boom has shifted decisively towards Asia, Korea, Japan and China. Each offer a very different way to play the AI theme. So today we're exploring the opportunities here and some of the risks as well across all three markets.

Patrick 00:22

And with me is Kaan Singh from our Equity Tactical Strategies team based in Hong Kong. Kaan delighted you’re on. Thanks for joining us. It's great to be on. Thanks for having me here again. Great. Well, let's start with positioning. If you look at client flows over the past couple of weeks, where have investors been putting money to work. And is there anything that caught your eye?

Kaan 00:44

Yeah, absolutely. Look, one defining theme in the flows and client conversations that we are having on the desk is really this fairly recently, you know, this rotation away from Taiwan and Korea into Japan, upside expressions. And just given the rally in AI stocks in Asia over the past one year, clients are still pretty overexposed to those two markets.

Kaan 01:07

And we are consistently seeing those underweight being taken down. So the foreign selling numbers that we see are really staggering. Over the last three months, we've seen 40 billion USD sold from foreigners in Korean equities. And this is by far the largest selling streak that I've seen in the last ten years over a three month period. So Japan looks pretty interesting.

Kaan 01:29

It offers a pretty deep and wide breadth of themes to invest in, which are just not AI. And in this market where investors are looking for themes orthogonal to AI, that's a very interesting value proposition. And then another theme that I'm kind of picking up on in terms of flows is some early bottom fishing in China. Asia's where both from a market technical perspective and also some upcoming catalysts.

Kaan 01:54

It's an interesting market as well.

Patrick 01:57

Okay. And so before we talk about China and Japan just on Korea, is it basically just seen as a memory trade, whereas Japan is seen as an economy trade with an AI booster?

Kaan 02:00

Yeah, I think that's still pretty accurate. You know, I'd be lying if I said that the market right now looks at Korea in any shape or form other than a high bandwidth memory.

Kaan 02:15

HBM play. And sure, there are other themes in the market. There's shipbuilding, there's defense, which is really more a global theme. But the market looks at this very much as a tech play still. And we are right in the middle of earnings season. So there's interesting developments happening. Fundamentals are still strong but the market is treating it as a sell the news event from very early plays.

Patrick 02:34

Okay. So we should be keeping an eye on that short term in Korea. But let's talk about Japan. It's enjoyed a remarkable run. The narrative has clearly evolved from corporate governance reforms to a broader structural kind of growth story. Where do you think we are on that journey? And you mentioned that investors are shifting away from Korea into Japan.

Patrick 02:54

Broadly, do you think investors are still underweight Japan?

Kaan 03:00

Yeah, I think it's a good question, Patrick. I wouldn't say that the market is underweight Japan right now, but I'll say that the overweight are far smaller than Korea and Taiwan. And you know, you said it. It really is an economy play at this point. But first, why it's pretty interesting is because it just doesn't have the same leverage exposure that Korea has.

Kaan 03:18

And this matters because Japan and Korea both have a pretty high proportion of financial assets and savings. So it's around 50% for each of those markets, which is higher than Taiwan's 30%. But still, Korea sees far more active margin trading from retail investors than Japan does. And at this stage of the equity cycle, I'm more comfortable having upside exposure in a market that doesn't have a lot of retail exposure.

Kaan 03:44

So from that perspective, Japan is interesting. And then second, you know, I touched upon this. It offers more liquidity and breadth. If you look at what's actually outperformed in the market over the last one month and two weeks, it's actually non-AI plays. So as Japan banks that have worked as a normalization trade and Japan autos are actually outperforming the index in the last two weeks.

Kaan 04:05

So it's really more than just a tech play.

Patrick 04:06

Okay. But you know you talked about banks talked about autos. But what percentage of your conversations with clients are about AI themes. And what are about non AI themes?

Kaan 04:10

Yeah, it's really still 70% very much about AI and 30% about Non-AI Japan themes. But I'd say in that 70%, my conversations are increasingly about hedging AI infrastructure stocks as well.

Kaan 04:30

So it's not just about how to increase long exposure, but actually how to take down nets in Japan overall.

Patrick 04:31

Okay, so Japan's clearly interesting from that sort of economy trade with the AI kicker. Let's talk about China. It always feels to me like a market that's constantly balancing attractive valuations, on the one hand against lingering concerns around growth and policy.

Patrick 04:53

What's your sense of what it would actually take to bring international investors back in a meaningful way into China equities?

Kaan 05:00

Yeah, totally. And we get asked this question a fair bit actually on China A I think it really comes down to two signals. One on macro policy. And investors have always since I'd say reopening wanted a better view into that.

Kaan 05:15

And the second on capital markets policy. And the reason I say capital markets policy as a thing of its own is really because the market kind of got confused in the first quarter when we saw the national team selling down CSI 300 stocks, and this was pretty large selling, you know, they sold down almost 90 billion USD, which is as much as they accumulated from the start of 2024 to the end of 2025.

Kaan 05:39

So, seeing the national team actually take down their exposure was confusing for markets. And I think clarity around that would be helpful. And on the macro policy side, China's exports have been exceptionally resilient. But on the domestic front, the data is still a bit more uneven. And as always, more clarity on monetary and fiscal policy in China would go a long way in attracting more sticky capital.

Patrick 06:03

Okay, interesting. Which market of those three do you think is the most misunderstood by investors today? And what are the sort of potential catalysts in that market that are coming up in the next 3 to 6 months that our listeners should be aware of?

Kaan 06:25

I think irrespective of when you ask me this question, the answer is always going to be China and specifically on shore China. I think there's a genuine information gap on how the market looks at China, AI integration. I think we're kind of moving away from just this focus on token maxing to really entering bit more of this regime of what margin maxing looks like and what could be a multi-year up cycle for global equipment names.

Kaan 06:50

So, you know, when you think about the transmission, Patrick, it's really maximum demand that filters into memory bottlenecks, which is the part of the trade we've seen play out in KOSPI, which then goes into memory and foundry CapEx ramp up, which is what we are seeing in the recent headlines, which then filters through into equipment name earnings, which I think is the part of the cycle that we are actually getting to.

Kaan 07:12

And in China, this trade is super interesting because to your point on catalyst, there are some important IPOs that are coming up in the second half of this year. And there's market focus right now into this theme on supply chain. And I think it will pick up even more. So I think semiconductor process equipment names are actually very underappreciated in China right now.

Patrick 07:31

Okay. And what I've got you I've got to ask one last thing. You also find charts and data points very exciting. Anyone that's read the Barclays Equity Tactical Strategy team's emails will see a lot of charts and a lot of new charts and new ways of thinking visually about data. If you had to pick just one chart for our listeners to look at, maybe, maybe a market indicator that you're going to be watching over the next quarter, what would it be and why?

Kaan 07:56

Yeah, so we kind of stumbled upon this chart last week on the desk and then got really excited about it. But we looked at publicly available LLM token expenditure and rental price data. And we use the two to make our own simple inference margin proxy. So the idea was how do we really test, you know, quantitatively that the market's narrative on AI might be changing?

Kaan 08:19

And what we found is that the series really tracks Mag Seven price performance quite closely recently, which again tells me that AI unit economics is what the market is focusing on for valuations. So we're watching this space very closely. And for any of our listeners who want to get into the details, please come to our desk.

Patrick 08:37

Right. Okay. Well, thanks so much for joining. We will definitely have you back on at some point later on this year to talk about the equity story in in Asia. Thank you.

Kaan 08:54

Thanks so much, Patrick. It was great chatting with you.

Patrick 08:55

Okay. So I think if I reflect on this conversation, the key takeaway for me is that Asia Equities remains an incredibly dynamic market.

Patrick 08:54

It's clearly not just about Korea and the tech trade. Japan is very interesting as a broader economy trade with an AI tailwind. And as always, China is misunderstood from an international investors perspective. And I thought Kaan explained that one really well, where there's a range of catalysts that could help drive the market in the second half of this year.

Patrick 09:16

Thanks a lot for listening to the Barclays Brief. If you enjoyed today's episode, do hit subscribe and we'll be back at the same time next week.