摩根士丹利宏观 Asia Defense Spending India Equity Strateg

00:00:00 Good morning and good afternoon everyone. It is July nine Thursday. Welcome to MorganStanley Asian medicalcro webcast. My name is frizo ji Asian em ACU strategist. Before westart to late today, please note that this event is from Morgan Stanley institutional clientsand financial advisors only it is now for memberm press. 00:00:18 If you are in the press, please log up and reach out separately. Please also note that thissessions and your questions may be recorded. Today we have kaitan Aya, chief Asiaeconomist, written Desai, head Of India equity strategy and director Of India equityresearch gettin coolo, Asia macro strategist during this session. You can send the questionsat anytime from the ask a question text box. First up we have Jayden with us today, um totalk about the Asia defense spending, um outlook and also the fiscal space for the funding.Um, without further ado let me hand it over to you Jayden. 00:00:51 Yeah, thanks crystal. So, you know, we've been writing about our capex super cycle thesisfor some time and today I wanted to zoom in into one of the components, which is defensespending. So just to recap, uh, we've been highlighting that there are four key drivers to this, um, Asiacapex, uh, super cycle number one is AI and AI related. 00:01:16 Digital infrastructure number two is energy.Number three is defense.And number four isthe broader industrial capex, which is related to on shoring of. 00:01:28 Industrial supply chains as well as the spillover effect of capex in the other areas.Andconnected to that, I mean, before we get into defense spending, one of the things whichwe've been getting in terms of questions from clients is that isn't this capex cycle largely justAI? Um, to to that, I usually respond with the clarification on the size of The AI and AIrelated digital infrastructure spending versus. 00:01:57 Another big item, which is energy, so AI capex plus the semiconductor company's capex in Asia is about 380 dollars, billion dollars this year. Whereas energy capex is going to be 900 billion dollars this year, so it's going to be two anda half times, um, The AI capex and a semiconductor companies's capex taken together. 00:02:22 M and then moving on to defense spending, which is also another big area.Uhm, so on that,uh, let me just see if I can move this slide to the next page. 00:02:37 You know, our expectation is that defense spending is already has already inflected oneround in 2022 because of Russia's invasion into Ukraine. 00:02:50 And then now we are saying that it's going to take another leg higher up because of theconflict that we have seen in the Middle East. 00:03:00 And then the numbers are as follows, so totally we are, we are, we are having currently 700dollars, billion dollars of defense spending and this is a pace, this has been growing at a paceof six and a half percent in the last four years and going forward we expect that this pacewill accelerate to 10, % odd. 00:03:27 From 2026 to 2030 and within that um, capex items will grow at the rate of 15% for ah, theregion. 00:03:43 Before I get to the further details on this,if you can see this slide,what we are doing in termsof the assumption is for China,we are assuming that its defense spending rises to2%or it's currently1.8,%，um,but for India and ah,us s allies in the region.We'll see a rise in defensespending to to. 00:04:10 2.5% coincidentally China is at 1.8% of GDP and region X China aggregate defense spendingis also at 1.8% of GDP. So for for region X China effectively we are ah ah changing theassumption ah to lift it up to 2.5% of GDP. And then the second scenario that we areoperating with is uh assuming that China still remains at two but the uh and India remainsat two and a half, but the us allies will lift their cap spending to overall defense spending tothree and a half percent of GDP. Now this because there has been an explicit request. 00:04:53 From the us to its allies in the region that they should lift their defense spending to ah 3.5.%。 00:05:01 We have less conviction on that outcome, particularly for the largest ally in the region,which is Japan. We don't think that it' will be easy for Japan to lift its spending to three and ahalf percent of GDP considering the ah, challenges on demographics and attended rise insocial welfare costs for. 00:05:21 Japan so then just to recall, the defense capex numbers, which I mentioned in scenario one is going to be 15, %，that would probably go to 21% if you go through that scenario too. 00:05:35 For defense spending, um, and then in terms of the reasons why defense spending is goingUPI mentioned one in terms of the geopolitical risks, events like Russia's invasion intoUkraine, and the second one was ah, is the Iran conflict that happened this earlier this year. 00:05:53 And it's still ongoing. Uh, the, the second reason is apart from the geopolitical risk events, isthe situation in us, uh, interest spending as a percent of G