The AI Chip Bubble: Why South Korea & Taiwan Are In the Danger Zone | Michael Fritzell | Asian Century Stocks

South Korea, I do think it is available because the estimates for Ford profits, for SK high nix and some sort of electronics, we're now talking 200 billion US dollars in that profit estimates for 2028. That will make them the most profitable companies in the world. These are companies that produce commodities. I wouldn't say that the memory chip cycle is over. In fact, I'm not able to confidently predict how the cycle is going to move, but I'm also very, very confident that these Chinese competitors that have been trying to improve their yields, they are now very profitable and they will come with new supply in 2027 onwards. Welcome to other people's money. My name is Max Weathy. I am joined today by Michael Fritzell, the author of Asian Century stocks that as its name suggests, focuses on equity research in Asian companies. Michael, thank you for coming. It's an absolutely fascinating time to be looking at Asian stocks with indexes representing countries like South Korea and Taiwan soaring. While the countries like China and India that have long been cited as the de facto leaders in Asia are some of the worst performing markets in the world. Just incredible dispersion in outcomes, at least at the index level in the continent or in the region of Asia. I want to start there. Why are we seeing such great dispersion in Asian stock returns right now? I have invested in investing in Asia now for almost 20 years and through that process, I've seen cycles come ago and what's so good about the geography is that it's a huge breath of companies and regions is huge in terms of what you can invest in. Asia Pacific is four billion people if you include the Middle East and includes countries like India and China. Each of them have something like 5,000 stocks and I'm based in Southeast Asia and another 500 million people and what's good about the opportunity set as an investor is I can choose which country I invest in and they're not always synchronized. So I can tell you like you know from a top-down point of view we have gone through different cycles in China seems to have a bull market every three or four years and right now in the past one year, one half years, the AI theme has really just taken over everything and the focus of attention and speculation everything is on AI stocks. Both the next stocks in Japan or the memory chip stocks in South Korea, even the Intel supply chain in Malaysia and Singapore, that's what everyone is focusing on right now. So it's almost unbelievable. The speed at which the indices in Korea have gone up, I don't know how much is up you know year and year but it's got to have tripled at least the cost-be. So that's happening and cost-be is now 50, 60% two memory chip stocks and I'm noticing also people in Korea are incredibly enthusiastic about these stocks. It almost reminds me a little bit of the 1999 bubble in the US where you had a very few number of popular growth companies and people are selling value stocks in Korea and doubling up on these memory chip stocks. So I feel like we're now, I wouldn't say Asia Pacific is particularly speculative as a whole. There are plenty of cheap companies but these parts of the market, I have not seen such pickulations since 2021, the COVID boom. That was also a period of extreme speculation in South Korea. Well I know you have opinions about the index construction in Asia but it's really the best thing we have as a measurement for these markets and you are correct the EWY which I like because you can do total return and it's in dollars. The EWY I shares MSCI Korea ETF is up 255% over one year and Taiwan is up a measly 112% over that same period of time. So you know naturally you're comparing to 2021, you're comparing to 99 2000 would you call that a bubble? I think it is because specifically South Korea I do think it is a bubble because the estimates for Ford profits for SK high nix and Samsung electronics, we're now talking 200 billion US dollars in net profit estimates for 2028, 200 billion and 250 billion that will make them the most profitable companies in the world and these are companies that produce commodities. So I wouldn't say that the memory chip cycle is over. In fact I'm not able to confidently predict how the cycle is going to move but I'm also very very confident that these Chinese competitors that have been trying to improve their yields, they are now very profitable and they will come with new supply in 2027 onwards. So it does not seem like there's any real like longer term constraints. It's just a question of how long is the lead time until we get a supply response. So for me this will be extremely speculative to enter you know chip company, commodity companies that's 10 times book or whatever they are right now. It does not seem prudent at all especially there are so many opportunities when it comes to small caps in South Korea it's an amazing market for small caps. That's why I feel like it's like the United States. You had a value to growth like divergence 99 and then eventually that you know there was a the came back again in 2020 as a year 2000 onwards growth came down and value outperform from the next five seven years and I think that's the same thing is going to happen eventually maybe from you know end of this year or early 2027 value stocks are going to perform again. So China declaring that a particular industry needs to ramp its output for national security, national economic reasons is a cycle that has played out many many times. It's not surprising that they would look at the memory bottleneck and say this needs to be solved and it needs to be solved by Chinese companies. So my big question would be who are these Chinese competitors and have they participated in the same way in some of this run up or the are the also brands in the memory space that are going to be ramping production starting to see a move in price to front run that production that is going to come online hopefully in 2027. Well according to what's been disclosed publicly they are expanding capacity rapidly, young to remember memory, Changsin and in Shanghai and elsewhere. So that supply is coming and exactly what the lead times are whether there's one and a half years or two years is a different question but I've met some of these companies many times and in my experience when you meet them they always very conservative about their future supply estimates. They don't want to any kind of worry among investors but if this one thing we can trust the Chinese companies to be good at it's to scale up production. So I can't see why memory chip would necessarily be all that different than solo panels or electric vehicles or batteries. They are pretty damn good at hardware and even if there are a few years behind I know past memory chip cycles that people have been worried about Chinese supply coming it never really came to as much as people believed but if they're making 80% gross margins or whatever they are right now of course of course the cycle is going to turn. So I'm talking right now as a journalist but this is just common sense. So if you want to play that game I would look at the enterprise DROM spot prices on a day-to-day basis. You can find the data from trend force in Taiwan it's disclosed and when the cycle turns you just get out of those stocks. Not investment advice by the way you know do your own research but yes yes we'll add that to disclaimer none of this is investment advice this is all the opinions of one author and one podcast host. But I guess look not all hardware is the same people have talked about how hard it is to make some of these advanced chips it's part of the reason that chips are being smuggled into China these Nvidia GPUs. So when you look at memory is it the same level of complexity in the manufacturing process or is it just a matter of building the factories building the lines filling them with the right people robots whatever it might be to to get this out or is there IP in terms of the construction process that is not available to the Chinese. The fact that there are a I'm talking about the commodity D-Round. HBM might be different, but at least for commodity D-Round, there is a daily price. That to me is a commodity. If you can track inventories and track prices daily, that means they're standardized enough. We also have three or five companies competing. Will they want to take market share to avoid that kind of to maintain pricing discipline in this environment? I think it would be very difficult. So we're talking logic chips, TSMC. That's a completely different calculus because they haven't raised prices that much. They're still a huge bottleneck. That is to say, TSMC is that bottleneck because they haven't increased their production that much. So that's, to me, is a lot more sustainable, the bull market. But even in Taiwan, the amount of speculation on the ground is astounding. I'm talking about retail speculation. And it probably goes beyond what we saw in 2020. Perhaps not as extreme as 1989, 1990, but it feels like we're in some stage of a bull market. Maybe it will continue for another few years. But it's pretty clear to me that we're some way through this AI boom, for sure. What are some of the examples when you say you would not believe the speculation that I'm seeing on the ground? Are people taking out second mortgages on their homes, caching in retirement accounts to go all in on single stocks? What is the type of behavior when you're saying the speculative fervor is reaching a level? Is it just the only conversation if you walk into a market? People are not talking about the products and goods being sold. They're talking about the stocks they're trading. What are the hallmarks of the speculation that you're seeing on the ground? Well, I haven't been to Taiwan since last year. So I had secondhand information, but in terms of how prices move, typically, when there is a particular theme, like Optics stocks, and just by being mentioned as a potential beneficiary of data collection construction, for example, I previously only share a call, a call, Lorgan, that they produce these optical optics for smartphones, and they're now starting to produce similar types of optics, but for data centers. And that would be a very small business for them, but the stock price reacting in a just violent way, that to me is a sign that something is, there's a lot of speculation in the market. And I also see suddenly on Twitter, I spent too much time on Twitter, you see all the accounts which never existed before, and they're all talking about K-Lines, and that kind of technical analysis. And just look at the overall index, it's been astounding the performance it's had. Of course, TSMC is almost half of the index, but prices are very high in Taiwan. Like average P ratios, closer to 30, something like that. I mean, it's a very different story than small cap Asia. For sure. Now, what about Western participation in this? We were talking somewhat about the local participation in these markets. We just got access through interactive brokers to South Korean stocks for the first time. You could have bought Taiwan before. Obviously, TSMC is in many ways the most popular stock, SK Heinix Samsung on the Korean side. And so I'm wondering, are you seeing increased interest as well from Western investors in these markets? And is that new compared to these previous bubbles in Asia? Since interactive brokers, they open up access to South Korea, both Cossby and Kostak. There's been a lot of interest among Western investors. I think they can relate to Korea in a way that they perhaps can't with the Philippines or Thailand. And so I've seen a great deal of interest. Almost as much interest as there's been in Japanese stocks over the past few years. Japanese stocks have run quite a bit. They're actually a bit more expensive now. So there is for sure interest. I think retail investors, they typical Western investors in they would invest in US tech stocks like MicroM. And you would have to be more adventurous to getting to SK Heinix or SK Square or any other Korean listed companies. So I wouldn't say I'm seeing a lot of interest. And when it comes to Taiwan, people are only invest in TSMC. And for some reason, they are very concerned about the invasion risk. But when it comes to TSMC, they forget about that. They just kind of close their eyes and invest. But there's nothing else in Taiwan that's really, like when I write deep dive some particular stocks in Taiwan, I see almost no interest. They are, they want to invest in TSMC or nothing else. That's vice versa. Interesting. Well, before this huge run in Taiwan and Korea, Japan was actually leading a lot of the Asian markets because of reforms to capital markets. I know Korea is actually starting to institute some reforms. It seems like China's maybe going backwards. So we're seeing a lot of regulatory changes happening in the region, talk to me about how capital markets are evolving in those three markets. - Yeah, so we've had a proper bull market in Japan. I think the Nikkei is back to 1989 levels, which took them a long time, but it's back there. And this bull market has really been driven by the week Yen. And that itself is due to the interest rate to the differential with the United States, I think. Like US rates came up 2022. Like Asia never had much of a stimulus. They didn't have many COVID-19 stimulus packages. But for some reason, rates have gone up a lot more in the US. And Japan, the Japanese yen fell precipitously. Now we want 60 almost to the USD. And that's been a boom. Like that's been a very positive thing for most of the companies in Nikkei. And to a less extent topics, which is more of a small cap index or a mid cap index. So that's part of the reason why we had this kind of sustained bull market in Japan. And I think Japanese fund managers they've been chasing export companies because that's where you've seen growth. And people haven't wanted to have too much yen exposure. So Nikkei has really been where they've hid. And at this point, we've also had of course, corporate governance reforms since 2023, I just suppose the token stock exchange have almost shamed companies into improving the return of equity. And I think shaming in Japan works due to their cultural, for cultural reasons. So companies have issued these plans on how they will improve their capital allocation. We've seen a lot more buybacks. We've seen cross-share holdings being reduced, which is fundamentally, of course, friendly to minority shareholders. We've seen markets for corporate control being formed in Japan, which didn't exist before. So finally, there's like a value anchor in these companies. And for good reason, they've been traded up. But that bull market, it feels like it's almost run its course at this point. And a lot of activists, such as, for example, asset value investors in the UK, Oasis, Dalton, they're all hiring people in Korea now because Korean exchange, they're doing the same thing almost as Japan is doing in terms of trying to shame their listed companies to improve their capital allocation. And there's been a few issues in Korea, like there's always been a discount of Korean equities to Japan. But I think the government now under, you know, the current Prime Minister, they are do, they understand the issue behind this persistent discounts. And I feel like now the smart money is really moving to Korean small caps. And people, whatever I mentioned, that people say, you know, why were you in Western Korea? The market is up, you know, 800%. But they don't realize that actually small caps have been selling off in the last few weeks, like the last two months. They're really sold off. And you can find single-digit P stocks, like solid quality companies, growing companies, at single-digit P ratios. It's a stunning. So just quickly, I mean, what would the issue with Korea has been threefold? One is the inheritance tax, 50%. When the only person passes away, you use the market value of the shares at the time of passing. So a lot of families, they've kind of minimized the share price, so they don't get hit, you know, with a huge tax bill. And the-- Just talk about potentially reform that a little bit. You would need to reform it completely, but on the margin, it looks like some companies will actually use book value instead of market value. That would help with the disincentive somewhat. Different taxes is another issue. Now they reduce the different tax for high dividend payers. That's reducing that issue. And the third issue that they fixed in 2025 is that in the past, they didn't have a liability towards all shareholders. They weren't liable to act in the best interests of all minorities. Where today they are. So if there is a related party transaction in a career listed company, you can sue directors. Like they are a personal liable. So since 2025, I think the number of related party transactions and have gone down. So it's super exciting. I think we're going to see a wave of activism in Korea. And who knows what happened with this memory chip, bull market, but fundamentally, if you're a stock picker, I feel like it's time to move on from Japan and look forward to our career. This is where you get the juiciest stories with the most upside. If and when you get to activism in these stocks. - Yeah, it was surprising to me. Obviously there was a big talk here in the US when Trump implemented his tariffs last year. And foreign markets started to outperform. The narrative was, oh my gosh, people are getting rid of the dollar. They're repatriating capital and coming home and people were pointing to the performance of the all-country world index, the emerging market indexes and saying, look, this is happening, this is showing up in the price. And if you dig deep down Taiwan and South Korea are huge contributors to that outperformance. And it's really the same AI trade that's happening here in the US. And so people would say, South Korea is supposed to this very advanced society. These are high tech companies. It's hardware, mostly not software or these big tech, the hyperscalers that we have, the Fang companies here in the US. But at the same time, it is still considered an emerging market. And it's largely because of those governance issues. And they're called what, kibles, right? The-- - In Korea, yeah. - Yeah, they all are. - Family conglomerates, they control everything, they own everything. And so you're saying that they've actually had their power reduced slightly. They had had their power reduced. And this goes for all family companies. So in the US, you have a very well-functioning market for corporate control. Like private equity companies will bid. You can sell your company to a professional management team and manage buyouts and so on. That doesn't quite exist in East Asia. A lot of the companies are family owned and they typically leave the company to the next generation. And that has all sorts of issues. Some sort of electronics, for example, it's now in the third generation. As he is talented as generation number two, that's a big question, maybe not. And if you look at the-- I mean, some sort of it's a very successful company. But if you look at the cross-cycle return equity, it's not more than 10%, maybe like 9%, which is the standardly low. So capital education has been lacking. It's not just some sort of almost-- most of these family owned companies have arguably they've optimized for tax minimization. And it just happens to be the case that it's been negative for minorities. So I think that's going to improve. And yeah, like to your point, now emerging markets is like 50% Korea Taiwan, or almost, which is just bizarre. I mean, these countries are fairly rich, actually. OK. And so you said there's opportunity within Korea, within the small caps. What are the sectors that you think are interesting and trading at attractive valuations in Korea right now? It's really across the board. It's anything that's non-tech related. That's the entire focus is on tech. There is no speculative for anything else. So consumer companies, industrial companies, frankly, like software as well. Like it's a fairly small sector, but there are some software companies. That's been sold off. I just wrote about this, the Korean version of FICO, called Nice. Very cheap, I mean, trades at 10 times PE ratio. It's just across the board. And perhaps some of those are partially related to the AI fears, I mean, fears of genitive AI disrupting them. But no, I mean, I like to look at the insider buying. And this plenty of insider buying in Korea, a lot. Like it's one of those countries where you see a lot more buying than selling. And the buying is also broad, across consumer, industrials, and so on. OK. Now, you talked about consumer companies, at least from my perspective here in the US, if we're thinking about exports. Korean beauty seems to be all over. Is that an interesting sector for you? And does it maybe because of its international exposure, trade slightly more expensively than some of these more domestic focused industries? The beauty sector, I guess there are two parts of it. One is the cosmetics industry. You have cosmetics brand, like Amore Pacific, and LG Household and Health, those are two big ones. And then you have these ODMs, which make cosmetics for Chinese brands and other brands. Both, LG, you know, H&H, and also Amore Pacific, they have this boom in China. And eventually, went away. They stopped buying Korean cosmetics. Perhaps on nationalism, perhaps due to something else. In any case, and now both of them are trying to reorient themselves towards Western audiences. And I think it's working, at least for Amore. They own amazing brand names, like Sulba Zool, for example, the Face Shop or Lanesh. So they have amazing brands, I would say, on par with maybe Japan. And they have more of this cultural influence through K-pop and K-drama. So that, to me, is a super interesting theme. I'm sometimes a little bit surprised how unprofitable they are. I feel like if they were around us, US companies, they would have higher margins, higher returns on capital. Cosmetics, though, it's a little bit tricky, because you have cycles. One year, there's a steel cream, it's popular. And then next year, something else is popular. So the industry is a little hard to predict. For the last few years, we've seen one stock that I wrote about, called Samyang Foods. They make spicy ramen. And that really took off. It's unrelated to K-pop. But I think partially because of the influence of K-drama, and so on, I think maybe that helped reach a Western audience. And Samyang Foods, in particular, has done really well in the US. So you can find their noodles in Walmart and Costco, so on. So I think it's always interesting to have that in your back of the mind, if a Korean company were to expand overseas, because of the influence that they have through the-- I mean, I can tell you that I have heard people that I never would have expected saying, seeing somebody walking around with an H-Mart bag, which is the Korean supermarket chain here in the US. And this is not the type of person that you would expect to say, oh, where's the H-Mart? The interest in Korean brands and Korean consumer products is extremely interesting. I went to Halloween, obviously, here in the US, is massive. And I went to a street that serves something like 10,000 trick-or-treaters. It's maybe the most congested street of trick-or-treating in the United States. And I cannot tell you the amount of K-pop demon hunters stuff that I saw. I mean, it's very clear the cultural exports. Japan very much in the business of cultural exports to the West. I'm interested in how those trends, influence consumer exports more broadly. If it's just purely the culture, does it make its way down into goods? Speaking about K-pop demon hunters, which was a massive success in Asia as well, across Asia. So cosmetics, of course, I mentioned that. But K-pop demon hunters, they had a corporation agreement with Nong Sheem, which is another new-reast maker. And they had a special packs with the branding, one for each of the characters from the show. So I think these types of kind of collaboration. probably help popularize them overseas. But it is a little bit hard for me to find us like something investible. The studios themselves, like they're not, they're hit driven. There is a company that makes like these containers for for cosmetics. They're doing really well, companies called PUMTEK. So there are supplies like that. But exactly, you know, what type of products are going to benefit. I wish it was more simple from a, you know, ball map one of you, or just like invest from the top down. But yeah, I'm still looking for something really good. Like some young foods has been one of the, you know, great stories. There's been APR corporations also down the world. But yeah, right now I don't have any such ideas. So what you're saying is for Western investors, we are going to actually have to look beyond what we see in our own backyard to find the truly exciting companies in Asia. I would say the best way to find ideas is to not wait until they reach the US. Because for example, coming back to Southern Foods, they went to the US as the last destination. So it wasn't obvious. If you waited until then, the story had already played out more or less. I would more look at insurban. And now I'm not sure if it's some news for some, for whatever reason. But there's been insurban in Nongshim. And I'm not saying that's a, necessarily a good buy. But that is interesting to me. There's insurban also in the liquor sector. Like they have Soju, which is kind of like a rice wine. I'm not exactly sure why to be honest, but these are trading pretty low, low multiples too. There is one company that has actually been hurt by the AI trend that is in the business of exporting culture all around the world. And that's Nintendo. So Nintendo was doing very well. And as memory prices started to rise, Nintendo stock has, has dropped I think over 50%. At the same time as the Super Mario Galaxy movie has, you know, broke, broke records at the box office. Nintendo Switch 2 has actually performed relatively well in sales. But people seem extremely focused on the memory story. And that seems to be the only factor driving the stock. It's one of the larger stocks in the region. I'm interested in what you think about memories weight on some of these electronics companies, and particularly Nintendo. There is a, you know, a real headwind, I think, because memory prices have gone up a great deal. It certainly affects the profitability of their console business. And they're trying to hedge through a slightly higher prices and bundling and so on. But for sure, it's going to be a tough year for Nintendo. And they had some inventory who's going to go out. It's going to last, perhaps until August. So there is a real issue here. And I can totally understand why short-term you might want to sell. It's not all rated to, to dearly low, they they will spend, they spend this hope that October is going to be the release date for a new 3D Mario game, perhaps Super Mario Odyssey 2, or Super Mario Galaxy 3. They used to have, at the Wittner, in the Wii era, they had another two more Super Mario Galaxy games. So there's a hope for Mario game coming out for the Christmas season, 2026. And it doesn't look like that's the case. Instead, they're replacing it with the Ocarina of Time remake, which is a Nintendo 64 game, I think. So it looks like the 2024, 2026, sorry, Christmas season is going to be pretty thin for Nintendo. And I think that's what we've been weighing on the share price. So there's maybe some nervousness about the upcoming investor communication, where they will, you know, perhaps announce and not particularly strong slate for the Christmas season 2026. And this comes also at a time when GTA 6 is going to be released in November, which is going to help their competitor, Sony PlayStation 5. So they're in a bit of a middle year. Like we know that the top franchises, globally, GTA is one of them, Mario's one of them, Zelda is one of them. And it just happens to be that they don't have anything this year. But I think at this point, the stock is down almost 50% and I think you're starting to see the real prices. I wouldn't say that they're the peak to anything, but it feels like we are getting to a point where sentiment cannot get so much worse than this. And it's going to be a very strong 2027 for Nintendo with Zelda movie, potentially a 3D more game coming out. Like the Switch 2 is fantastic. The only issue with the console is the fact that there is no, there hasn't been a blockbuster game yet. Doesn't that speak to execution, right? And so if you have a company that had this huge console launch with much fanfare around it and they didn't think about the titles and specifically the titles that they control. I mean, it's one thing if you're Sony and I don't believe Sony has the same sort of IP and creates their own games. They're relying on these other video game studios to produce them. You're kind of beholden, you work with your partners, but Nintendo is developing these games themselves. And so it to me would say, what is management thinking and is this, are the right people leading the ship? I think they're aging. The company is aging. I mean, there is a deep talent bench, perhaps in the middle level, but the senior management team is perhaps aging. You know, there are some retirements. I think there were hopes that this dokey Kong but as again, the came out last year was going to be a huge success. It does look like Mario in some ways. It just was perhaps a bit peculiar and the IP isn't as strong as Mario and Zelda and these other Pokemon as well. It just isn't as strong. It wasn't as strong. It didn't catch people's attention. Too peculiar over games. So I think they maybe miscalculated there. That said, it doesn't take much. All they need to do is create another Super Mario Odyssey with different levels. Their games are top notch. I mean, have been so good that it's almost been unbelievable. So they don't even have to reach those levels. Just make some new content and reach eight out of ten instead of ten out of ten. So I'm not worried. I think this is the console you buy as a family. So I have a son. I mean, this is to me obvious, the obvious choice. So there isn't. And I'm very pleased with the experience of the console. So I don't think there's too much to be worried about. Perhaps on the margin from console to console, there is this issue of roadblocks, I think, taking market share and young people they prefer to play with their friends, Minecraft and roadblocks in particular. But also also the US people are perhaps a little bit less into such games. And I think Nintendo still rules supreme when it comes to like family consoles. Now, I want to ask about another factor that's weighing on Japan. And that's the war with Iran. Energy prices, spiking have hurt Asia in particular because of the lack of production in the region. It depends on whether you include the Middle East within Asia, but still East Asia, not self-sustaining in its energy production by and large, relying on drawing down these reserves of crude oil as well as refined products. And you can pretty much draw a line on the day that the war started. And that is when Japan stalled out. Up to that point, Japan had been outperforming the US and was one of the, would have been in our list at the beginning with South Korea and Taiwan as examples of a market of Asian markets that were really leading the world. And since then, it hasn't. And so I wonder about the bid in Japan coming back at all if we were to see end to this conflict. And what's your view on the ground of the effect of the conflict, not just in Japan, but across Asia? That's a difficult question. I find it interesting that you say that. I've always felt that the Japanese market is really benefiting from a weak Japanese YAM. And that's really the direct impact, I think. Of course, there's also the practical issue of So, the price is increasing, you know, imported LNG prices and so on. But the markets in Southeast Asia, Philippines, has been huts immensely. I mean, they're shutting down their cities because they don't have enough energy supply. So this is a very serious issue and also for the currency, 'cause it destroys the terms of trade. So to me, this is perhaps a solve-up problem. I do think that they've huts in terms of the performance. Stock prices have declined quite significantly and that's also been in sync with this crisis for me. I'm thinking about in particular, the Philippines and Indonesia, which are more of these frontier or emerging markets type of economies. - So you're saying the true frontier markets in Asia is really where that energy story is happening. And Japan, you could say, has maybe been, if we were expecting rate cuts here in the US and perhaps just basically that the idea that rates are gonna have to continue to rise, right? To fight potential inflation. So you see it more as a rate story than an energy story. It's an inflation story rather than demand destruction or the industrial economy being hurt by higher prices. I mean, I'm a bottom-up stock picker. So this is a little bit beyond my pay grade. But yes, typically that's what moves the currency and that's what the stock market really cares about as well. Rate differentials, the currency, it's not necessarily bad for the market if the currency weakens. Well, of course, higher energy costs will be negative for some companies like utilities. - Let's talk about the lagrids though. I mean, India, China, up until the AI trade took off, seen as the de facto leaders in the region, the two markets that you had to be in. If you were talking about investing in Asia, those were pretty much what people meant, especially with Japan having been in the doldrums for so long, South Korea, basically in the same boat at an even bigger discount. And then the other markets, while there are pockets of excitement are just so small in comparison and for Western money to put anything to work, it was China, it was India. I ran the numbers last night. They're the two worst performing major indexes in the world. And certainly there's idiosyncrasies with China's setbacks. India seems much more related to trade tensions with the US, tariffs and the war. I'm interested in what you think of the situation in those markets that have really turned down in the past year, China obviously has turned down for a longer period of time. - Yeah, so let's talk about insider buying because I think that sets the scene very well. And insider buying is very strong still in Southeast Asia, like the Philippines, Thailand, Indonesia, very strong. Now we started to see a little bit more buying in India, still expensive markets, but a little bit more than before. And China over the past two years, there's been significant selling in the Asia markets, like insider selling on mass. I think China has been seriously hurt by these US tariffs. And also we've had this massive, massive bust in the property markets. Residation and U-starch are down 70% plus since 2021. Of course, that's been, government has been doing this on purpose. They've strangled the supply of credit to private property developers. They've also curtailed the supply of mortgages to individuals causing property prices to decline a little bit. And but most importantly, new construction has just come down. And I think you used to have millions of construction workers. I think they've probably moved on to something else. Like China was driven by property. And I think that going away on top of the US tariffs, it's got a heart. I mean, I know that volumes are still going up in terms of export growth, but it just has to hurt. So that's how I explained the selling that we've seen in the Asia markets. And then in Hong Kong stocks, they've, it's a little bit singing to a different tune because it's driven by foreign money. And back in 2023, people spoke about China being uninvestable. Shipping Morgan wrote this famous report saying that it was completely dead market for foreign investors. There was a rebound in Hong Kong equities, especially the large caps up until maybe a year ago. And since then, for some reason, I'm not sure why. But people have been selling foreign, has been selling Chinese stocks. It could be due to the US tariffs, April last year. I'm not completely sure. I also think that the government is shooting themselves in the foot through this story about these online brokers, for example, perhaps that was well justified. But they also talk about taxes, gaming taxes. We've seen crackdowns in the tuition sector, in a property sector, a whole bunch of tech platforms have seen the CEOs just kind of fired or just resigned. So I see people around me being disillusioned with Chinese equities. And I'm also personally a little bit disillusioned because these anti-trust actions against Trip.com or whatever, they come out of nowhere. And you can't really predict them. So with China shooting itself in the foot, I think people are pretty well aware of what's happening in the property sector. There were a lot of stocks in the private education sector that were doing well. And they crack down on that sector. The brokerage story is a newer one. And correct me if my understanding is wrong, but it sounds like mainland Chinese investors were perhaps investing in the offshore Chinese stocks, investing in Hong Kong listings, and some of the offshore listings of Chinese companies. And that is what the crackdown was on. And so you saw the shares of the offshore China-related equities fall. And obviously that affected the onshore equities as well. These companies have been operating in a gray zone for years. And I think Jim Chainer was on CMBC back in 2021, 2022, pointing this out that they were operating-- they had Chinese customers. They were not responsible for the capital flights. But the fact that they were soliciting customers on the mainland through local influencers and local marketing teams, also even being based there. Of course, have foreign licenses. I think Momo is based in Singapore. Maybe Tigers is based in Hong Kong. But still, they were really active on the mainland. So I can see why the crackdown occurred in that case. Comparatively, the tuition sector crackdown came out of nowhere as far as I'm concerned. And this whole tech crackdown-- I mean, Jack Ma being targeted for having some kind of speech. That's just nonsense. Like in 2020, they introduced new laws that pretty much said that if you were a private company, you need to have a Communist Party Committee that works as a shadow board. And has the authority-- should have the authority to fire and hire the CEO of a company. And they've had these Communist Party Committee in these larger tech companies for quite a long time. But I think in theory, any larger Chinese company should have these Communist Party Committee. So it just makes a question, how independent are they? And if a genius like Jack Ma can be fired, then who is off limits? And that to me is really problematic. And nothing that is seen over the past five years has really made me change my mind on that. Definitely a reminder that we're dealing with a communist country at its core, the tech sector started to get a lot of power. I mean, education seems like something that if you were in a state controlled system, the idea that education would be controlled by the state seems like something that might be cracked down upon. I was an investor in some of the Chinese consumer lending companies. They recently had a crackdown on the rates, despite the fact that consumers in China were paying back their loans at rates that would make US consumers look like deadbeats. But still, they said the rates were too high, and we're exploitative. And perhaps there was an idea that if anybody's going to be controlling credit to consumers, it's going to be the government and not these companies. We want to rein in this credit. And so it does seem just like a solidification of power at the party level and a reminder to investors in the country and abroad that you're dealing with the communist country. For sure. I mean, this has been a gradual-- shift with the party kind of reasserted control. And it's hard to say whether it was stopped. But if you read history, there's been similar instances in the past when the Soviet Union opened up for a number of years and then closed down again. The only thing that we know for sure is the party was to maintain absolute control. So that's problematic for private sector companies that have too much control, every ground, Alibaba and so on. So as an investor, for you to align yourself with them might not be a good idea. - I wanna talk about other companies operating in gray areas. I know where you are located is one of the places that people cite as where chips muggling might be taking place. So I'm interested. I know that this might not affect your investment thesis, but I have somebody who's on the ground in Singapore. So I have to ask what is happening in the region in terms of companies that are potentially proxies for Chinese interests and the chips being sold into Malaysia, Singapore, other countries in Southeast Asia. And is there any concern that some of the companies in the region are participating in this and might get caught up in crackdowns as we're starting to see these crackdowns occur here in the West? - In city like Singapore and also Hong Kong in the past, there's always been like a middle man, a communist China, they traded through Hong Kong for all sorts of, you know, imports, smuggling of vehicles, that was a big part of Hong Kong. I must say that happens in Singapore, but it is a path for Chinese companies to reach overseas customers. Singapore has a free internet, it's an open economy and it's a rule of law country. So it's attractive for that reason and there are plenty of Chinese companies that have come here to access the Western consumer. TikTok, I mean, by dance as a huge office here and there's hundreds, maybe thousands of Chinese companies that have set up shop here, you can certainly feel that there are a lot more Chinese since 20.2. And that could be, you know, due to an attempt to wanting to access foreign, you know, foreign customers, foreign users in the tech sector in particular. Now, that the Chinese companies have also set up data centers in Thailand, in Malaysia in particular. And I think they're using them to train their models. They have access to the Western internet. So that's probably why it's a taking place. But beyond tech, I think Chinese companies are moving into Southeast Asia to get access to the Western consumer. Some of these countries have lower terraf rates than China does. And so they're very nimble and they're trying to minimize their terrace, the best they can. And to some extent also change their reputation as, you know, not being a Chinese company more, you become Lenovo, you know, people are buying Lenovo. They're not concerned about it being Chinese company, even though it, of course, it is. - Yeah, and Lenovo has been one of the stocks that has been benefiting from these AI tailwinds. But even before the AI trade really took center stage, there was a lot of talk about friend shoring, right? And the moving of business to countries like Vietnam, Thailand, Malaysia, et cetera. And interestingly, it seems like it's going both ways. With Chinese companies moving, some of their business there and US interests moving there, too. Do you see Southeast Asia as a beneficiary from a two-way street perspective of rising tensions between the US and China? - It's a really good question. And I don't have a clear answer to how the region is going to look like, you know, 20 years from now. But we're in this in between period where a new Cold War is forming clearly. And the lines, the new Iron Curtain, the new Bamboo Curtain, those lines haven't been drawn yet. Like during the last Cold War, India, for example, was kind of cut off from the rest of the world, trading only with the Soviet Union more or less. And then after the Soviet Union fell in 1991, India opened up and became more prosperous than it was back in 1991. So that is a, I think a risk. I'm not saying that China is Soviet Union, but there is a risk that if you end up on the wrong side of a new Iron Curtain, that could have an impact on your economic prospects. I think a lot of countries in Asia, they got wealthy, like East Asia got wealthy through trade with the US. Let's be honest. I mean, that's what happened with Japan, South Korea, Taiwan, China as well. So if the country loses access to the US for whatever reason, like Vietnam is friendly to us with the US. But if you cut off from trade, like Myanmar is right now, this is civil war in Myanmar still Pakistan is also nearing, like they're kind of in a partnership with Russia around China, that will have an impact on trade and growth. So right now, where I think with this in-between period, countries like Indonesia, they're trying to play both sides, Vietnam as well, trying to play both sides. And I can't tell you what's going to happen longer term. All I know is that right now Singapore is quite pro-US. Philippines is also quite pro-US, whereas Malaysia, Indonesia, Thailand, I feel like they're closer to China in terms of trade, politics, infrastructure, buildouts, and long term payment infrastructure. I think this is going to have pretty broad ramifications, just like in the last Cold War. But to really understand what's going to happen, I think maybe you need a political analyst. Okay, all right, well, let's focus on what is your true expertise, and that is bottom up stockpicking in the region. You said Korea is the place to be. What are some of the most exciting opportunities that you see in Korea right now? Yeah, so Korea is the one market that is cheap, and it's also having all these tailwinds that are recent. I talk about the lower inheritance tax or other different changes to the inheritance tax, lower dividend tax. Also, the English Disclosure, you can trade the stocks through more and more through interactive brokers. So that's the one market, but I feel like it has momentum. There's interest there. Southeast Asia is also super interesting. We can talk about that later, but there's no momentum there, no interest and no catalyst. But right now in Korea, I'm like, I mentioned one of the stocks. I only own one stock right now in Korea, to be perfectly honest. It's called Nice Information Service. It's the dominant credit score provider. They own something called a nice score. Every time a bank extends a loan to a consumer, they will ping in them and pay for the score. Cost them something like a dollar or a bit less than a dollar. This is like a tall bridge. They're getting cash for every query. And they don't have to do anything with it. This database and this information has already been built. And growth is highly margin-equative. So the margin is going up every year. The P-Ratio is 9.10. I think the dividend yield, maybe I forget what it is, maybe 5-6%. But you have this combination of very stable growing earnings. Maybe double digits, low double digits earnings growth, and a single digits multiple. I do think that the calculation is just fine. There is some of the complex corporate structure. But yeah, this is the story. I think if you compare this with FICO, which has raised prices a lot, this to me, I don't quite understand why this should trade at a thought of the price. That goes for a lot of stocks. But in this case, you can go through the numbers as well. I think you will end up with the IRR estimates that are pretty high. At least my IRR estimates are pretty high on that pretty short story. So with you being so bullish on Korea, to only own one stock right now is surprising, that means that either you're still doing your work or there are other opportunities that have you even more excited in other countries. which one is it? - I'm very cautious. I used to own FN Guide, which is an index provider. It's almost like the MSCI of South Korea. And that stock is tripled in just a few months. And I sold it in March prematurely, by the way, but it's just too extended in terms of the multiple. I bought it at maybe 11 times PE. Now it's close to 30 times. High quality business. Also, it kind of really high in a multi company. But to be perfectly honest, it is so easy to find ideas in Asia. Today I wrote about Japanese sauce companies, software companies. They trade at such low levels as well. It's unbelievable. Like two times, even two sales, three times. That's the average. They're all growing 20% plus. Long-term margin guidance of 20, 30%. So that's really exciting to me. I feel like that part of Japan, the domestic yen-earning companies, especially growth companies. Southeast Asia, our own stocks in Thailand. I've been buying stocks in Thailand. Single digital peer ratios. For example, I wrote about a company called Tuapaint, which is a paint company in Thailand. That company trades at I think PE ratio of eight. They're growing. I mean, the market is a bit weak. The housing market right now, but longer term. It's an interesting story. So yeah, I mean, I'm finding ideas that are almost equally attractive in small-club career. I haven't bought too much yet, but this is the place to do research for sure. And then Southeast Asia, infrastructure stocks, I own stocks in Fairfax India, which owns an airport in Bangalore. I own an air traffic controller in Cambodia. Tracer like 11 times PE, 8% yield. So this is pretty much where I see opportunities right now. So Southeast Asia and Korea. So India is interesting because you have again, these conglomerate holding companies where you're getting exposure to a lot of different businesses, oftentimes at a huge discount to the net asset value. And SEBI is undergoing some reforms as well. It seems like the trend of trying to close some of these valuation gaps, get higher returns on equity is not just a Japanese story, not just a Korean story, but it's happening all across the region. Is it happening in Southeast Asia in the same way it is in India as well as these other countries? Singapore has a reform agenda, but so far it's been mostly trying to allocate money to the small cap markets. It's pushed up price a little bit. And they've, I think they're trying to encourage companies to allocate cap, cap better. Whether that's long lasting or not, we'll just have to wait and see. I think Malaysia has its own value up program. Also, it seems to be a little bit thin on details. So I'm not seeing as much. And in fact, Indonesia is gone the other way. Like very anti-market type of policies. So for me, I'm seeing as cheap stocks in Thailand and the Philippines, whereas Indonesia has just become the kind of basket case. And Malaysia is kind of a mid-teens P multiple Singapore as well. So if you care about value as I do, yeah, like I said, Thailand Philippines. - With the caveat that this is not investment advice, what percentage of assets do you think investors should be putting towards opportunities in Asia when you look at the opportunity set in the world? - Well, I'm European and I have the flexibility to invest wherever I want. And I have the vast majority of my wealth in Asia. And the only reason for that is it's a huge in the opportunity set is massive. From a stockpick, it's one of you. If you want to minimize risk, you should probably, if you are long term, you're willing to invest on a 10 year basis, you should own stocks that are cheap. Like that to me makes a long sense. So if I'm forced to choose between Shurven Williams versus Tour Paint in Thailand, one is 28 times PE, one is eight times PE. It seems more prudent to go with the latter, despite the fact that it is an emerging market. Like if there were a similar multiple, you would probably want to go with the country with a better corporate governance because countries like the US, Western Europe, Australia, they tend to do better over the long run. A emerging market do better after crises or when they're really, really cheap, like they all right now. So when you ask about the percentage, and I think if I were not so fully focused on Asian equities, I think I would probably have a small percentage of assets in Europe, certain countries like Denmark maybe, where I find value, some in Latin America, and actually quite a lot in Southeast Asia and Korea, just because caperatials, like they're at a different, different level. I remember, I mean, I came to Asia 2009 and back then, US stocks were really unpopular. This was when Rogue Off and Reinhardt, the issue of the book, they said, you know, over 90% public debt to GDP ratio, it means disaster, they're gonna, you know, lead to a long-term crisis. And people were so afraid of US stocks, and here we are 15 years onwards or 16 years onwards. We've gone like the complete opposite. Now, the brick's, like the brick story is the emerging market stories, they used to trade at like 30, 40 times P for consumer stocks. Now they're below 10, almost across the board. So I don't know when the cycle will turn, but if you're long term, you know, I would definitely look a little bit further and take a significant chunk away from the US. Unless you find like, you know, really good stories, like value stocks, it seems like, you know, you had this amazing, amazing boom, but it's not gonna last forever. And if you wanna be product, start looking at, you know, get an interactive brokerage account, that's what I would do. And start looking at Korean equities, perhaps, or, you know, Southeast Asian equities, you have to get a different brokerage account. But if you're product and long term and care about value, this is the way to do it. - All right, Michael, well, I think that is a great place to leave it. People can find you on X as well as on substack. What are the handles there? - My hand on Twitter is Mike Fritzel, F-R-I-T-Z-E-L, or Z-E-E-L. And I'm actually not writing on substack anymore. My newsletter is actually off substack on a platform called Ghost. But you could find it on asiancentristokes.com. So that's the website, or just find my Twitter, send me a message. - All right, wonderful. Thank you, Michael. - Thank you so much.