Higher U.S. Yields Are Shifting The Risk-Reward in EM: Sassower

percent mark. There were bells ringing across Wall Street, and then it dipped right back down. Joining us now for some of the implications on a broad level of what higher treasury yields UH could mean. As Damien Sassaur, fixed income strategist at Bloomberg Intelligence, he joins us here in our eleven three oh studios. Damon, I want to look at this from the emerging markets point of view, because there has been so much money that has flow flooded

into developing nations. So now that we're seeing higher yields in the US, what's the implication. Well, I'll tell you what's gone on here. We've seen emerging market US dollar debt come off returns of decline quite considerably year today. I think they're off of you know, two point or something, but yields have risen sharply, um. And so what that's

done is it's created a bit of an anomaly. So you have em dollar debt issued by you know, all these you know, emerging market nations like Turkey, Argenta and Brazili you name it, looking rather attractive relative to their local government debt, which is denominated in local currency. I mean, basically, back up, this is important, Okay. So basically people went into emerging markets debt in local currencies betting that the

dollar would continue to weaken. As US yields continue to rise, you are starting to get a bid on the dollar. And this leads to your issue, right, I mean, I mean we We've long been an advocate that investors are um perhaps you know, getting ahead of themselves in sacrificing spread risk for foreign exchange risk. And when they do that, they probably don't realize that that's inherently more risky. Is local currencies have historically exhibited much greater volatility than spreads. Right,

So what you're seeing is a lot of anomalies. You're basically seeing e M dollar debt now the yields looking relatively attractive to EM locally yields probably at the you know, the gap between the two is at the tightest level since March of two thousand nine, right after the global Finalial,

right at the height of the global financial crisis. And then if you look at EM dollar debt relative to US high yield, which is actually up on the year, And if you recall, you know, we have talked about this previously, the yields are now at the widest levels I've seen since TwixT so on a relative basis to US credit, it's actually looking rather attractive as well, Damien, How big is this market so EM dollar debt, sovereign quasi in corporate, I mean three to four trillion today?

A lot of investments are done through exchange traded funds, or they've done to actually buying the debt. A lot is done through a TS that's exactly right, alright. So if you're buying it through an e t F or an exchange traded note or some other kind of derivative product, are you the insurance company, the pension fund, or you the trader? So if I mean if you're a e t F investor. Historically, we've been led to believe that

there's a retail investors mom and pops. But increasingly, what we're realizing that a lot of institutions, a lot of fund managers use those instruments as a way of off setting risk in other areas, or perhaps you know, quickly adding to risk in certain areas and dialing it in. Okay. And they're doing this because what they want to hold the debt long term, They want to take the coupon

and take the principal payment. Absolutely not, absolutely not. They're trying to get exposure to an asset class that may have a higher yield or a higher beta than another one. Okay, Just last point. The amount of money that is going into exchange traded funds that are backed by emerging market debt far out ways the actual amount of emerging market

debt that's being issued. That's not true. Now Here. Now here's the interesting thing, because I see where you're headed there, and and it's something we've also talked about before, which is the liability mismatch between the underlying bonds and these et f s, which may not be as liquid as the daily liquidity you're being provided by the e t s themselves, right, especially PIM in local currency debt. Right, So you know the real risk here is that you know,

you've got local government debt. That is, you know, investors can go move in and out of intro day, yet the underlying bonds don't trade that liquid and so you know, yes, if yields continue to go up in the US leads to your point, you know, we may see, uh, we may see a little pushing pull there, and we may see us reach a point where, um, you know, investors, I don't want to say they can't get their money back from an e t F. Far be from me to even you know, conceive of that. But yeah, those

are those are stress signals. Those are blacks want events that we look for and that we're looking at. Yeah, I want to build on what PIM was talking about e t f s being used for quick bets on emerging markets. Is there a threshold at which, you know, US yields cross a certain point and people just yank their money out of developing markets and go back to the US. You know, to make a call on a particularly yield threshold that's going to drive investors away from.

It is kind of difficult to say, you know, I don't think we've we have seen you know, fits of it for sure, and in certain environments absolutely. I think the one area right now and that's the one, you know, the one thing that you know a lot of people have kind of it's killed people in the M as the US dollar, right, the US dollar has come off you know, quite considerably in the last year, mostly because of the wand right the China remnimbi has just been

on a straight shot higher. And if you saw overnight there's been talk that they may start easing rates in China, which you know is kind of taking people by surprise here today in the market because what would that mean. That might mean that growth is slowing in China, and what would that mean for all of the largest constituents

et s in these industries. If if growth starts to slow in Southeast Asia and it filters into Latin America and in the Emia region because of China being the largest trading partner of emerging market, that could be a real risk and that can drive investors into the dollar, into the And when the dollar starts to rise, i M currency's tend to fall and local debt tends to get hit pretty hard, and we've seen that happen quite often in UH in recent memories. So yeah, thanks for

being with us. Always a pleasure, always learned something. Damien Sassaur is fixed income strategist for Bloomberg Intelligence. Giving us the wherewithal when it comes to emerging market that always always a pleasure. A lot of people are going to dissect the key moment when you as ten year treasury yields hit that three percent mark, only to come back down here to talk about how much he cares about

this sort of thresholds, this magical numbers. Ason trent Ert, Managing partner, chairman and chief executive officer of Strategious Research Partners in New York. Chason, thank you so much for being with us. How much do you care that tenure treasury yield hit three I, frankly, I only care to the extent to which I think it's a sign of a strengthening economy. I don't do you think it's that?

I do? I do? I think that Listen, nominal GDP growth this year should be somewhere, in our opinion, between five and six percent, and um generally speaking, in the past tenor treasury yields are roughly a word UH nominal GDP growth is so in my opinion, we've been much lower than that for variety of reasons. A lot of it has to do with financial oppression in the propensity and the other times of banks propensity to buy treasuries.

But I think to the extent to which we're normalizing interest rates, it would be natural for interest rates to move higher. Jason, I want to push back a little bit. Some people are arguing that the reason why US treasure yields are rising so rapidly on the longer end right now has to do with oil oil prices at their highest since two thousand four, and arguably that could crimp

growth in the US. No, it could, um, it could, But you also I think, UM, there's also the physical stimulus, which, in my opinion, for whatever reason, I'm not quite sure why people have UM stop talking about it but or

um or have written it off. But in my opinion, the fiscal stimulus that's likely to hit the economy this year UH is very large and should increase real GDP growth by fifty to seventy five basis points, so you'd have something well over well over three reel this year, plus you have somewhat stronger wages um because there was someone stronger wage growth as well, So energy would be an offset. That's shoot, your trade might be a little

bit of an offset. But I think if you a counterbalance of that would be the enormous fiscal stimulus that's that's coming down the pike. So good for stock prices, Jason, I think so, I know. I certainly don't think it's inconsistent with with with stronger stock prices and maybe someone inconsistent with an expansion of earnings multiples. I think that

you know that is a distinction, in my opinion. Over since the financial crisis, you've had a situation where financial assets greatly outperformed the real economy, and in my opinion, we're going back to a period now where the real economy is likely to outperform the financial assets of financial markets. There's another way of saying, you're not gonna get big multiple expansion. Earnings will grow but um, but the market will probably grow more in line with what earnings grows.

Is as opposed to two thousand, fourteen, fifteen and sixteen earnings were flat on a nominal basis at around a hundred and eighteen dollars and um, and yet the market continue need to rise. And I think here you're going to different, You're going to a little bit of a different paradigm. So don't be don't be surprised if you see a flat stock market but good economic reports from

the United States. Yeah, I mean, I think my own opinion is that the market will probably be up somewhere in the order of seven to eight percent this year in terms of price return, maybe another two percent for for dividends, so you might get something close to double digits, but earnings will be up much more meaningfully than that. Earnings could be up. Earnings the first quarter will be

up probably somewhere around and so UM. So the idea is that earnings growth the market will be up probably around in line, if not a little bit less than what earnings growth is probably for the foreseeable future, as long as interest rates are rising. What metric are you looking at to uh to see if you're right with this thesis, Well, I think earnings are one of the earnings are probably one of the better better things to looked at, and just the performance um of the market.

I think those would be the primary primary things to look at. I find there's a lot of skepticism about UM, about the potential for the economy to do better. I'm not quite sure why earnings recessions are twice as likely as as economic recessions. And while there have been earnings recessions that we're not accompanied by an economic recession, you've never had an economic recession that was accompanied by stronger

earnings and so uh. In my opinion, the most meaningful thing to look at with regard to the efficacy of the fiscal stimulus that was passed would really be capital spending. And I think capital spending is just the policy legs are long and variable, and it takes a while, and I think in the immediacy of our environment, we we

tend to expect things to happen all at once. And and again, the tax pack was was only past three and a half months ago, so I think it's gonna take a little time for capital spending to show up UM, and I think now you probably should so arche to see consumer spending pick up as well. Jason, you've written in the past that Donald Trump is under owned. What do you mean by that and does that still true? Well, yeah, we had written, you know, uh back to two thousand.

In two thousand and eleven, we actually wrote a piece about the potential appeal of Donald Trump as a political candidate when he flirted with running, and then in two thousand and fifteen when he announced for president, we we uh suggested that he had a shot of winning, and then after he one, we suggested it would be good for the markets, and so um, you know, became less and less crazy as time went on. It's it's still

you know, it seems kind of crazy. But the idea of Donald Trump being under own really we wrote that last last summer, and it had to do with the

fiscal stimulus. Uh. You know, we had found that certainly the administration had a rough spot at the beginning, or continues to have some rough spots, clearly, but with regard to its legislative agenda and particularly healthcare, and I think as a result, people were quite skeptical that anything could get done as far as tax reform was concerned, and we were we were of the view that that idea was very much under owned, that there there was a

very good chance of tax reform getting getting through and it and it did, and of course you also have regulatory reform, regulatory easing, particularly as it relates to the financial sector, which again in our opinion, is probably being underestimated in terms of its potential impact on the velocity of money. Uh, there's there are a lot of reserves in the system, but the velocity of money has been

weak really since the financial crisis. I gotta leave it there, but thanks very much for being with As Jason Trenter is managing partner, chairman and chief executive of Strategous Research Partners. We have been talking about what a big rash of earnings we are getting this week. The biotechnology as area is similarly seeing some pretty big earnings here with us to walk us through them. As Max Nissan, biotech, pharma and healthcare columnist for Bloomberg gad Fly, So, I want

to start with the earnings. We got results already from Eli, Lily UH, and Biogen so far today they were kind of mixed. Both companies are seeing their shares down. We're expecting Amgen earnings after the bell. What stands out to you so far? Yeah? Absolutely, um So. The thing about Biogen that I think kind of sparked the negative reaction is that sales disappointed for spin Raza, which is a drug it kind of got recently approved for a rare

uh a rare new neurodegenerative condition. It's been launching extraordinarily well, but in this quarter I grew sales by only a million sequentially. It's because of of a strange dynamic with that particular drug where patients start on the drug, they take a lot of it, and they graduate to a

more kind of gradual intermittent dosage. This is something that was known, but to kind of just see it was a bit of a shock and in the broader context of the company where they have a declining older set of multiple scrossest drugs, it's just sort of scary to see and and puts pressure on them to maybe do a deal or find some more in the pipeline. Didn't they have a deal though, I believe with I Honest Pharmaceuticals. Yeah, so that was actually the original developer of spin Raza,

and um, you know, it's a decent sized deal. It it gives them more access to that company's pipeline of medicines. But they're sort of hoping for for lightning to strike twice, you know, before spin Raza, I unders had a pretty long history of drug development failures, and um, you know, they might get another spin Raza, but that's kind of the extreme optimists case there are. The more likely is that that they'll either get nothing or or something of

a little bit less value. You So, I want to talk about Eli Lily as well, because they boosted their full year revenue forecast and it was two above estimates, and yet the shares are down. I don't get it why. Um, you know, I think it might be to some extent because that beat came in large part from the company's diabetes franchise, and that's just sort of a scary thing to rely on given the amount of price pressure and

competitiveness in that particular sector of the market. Also, the companies is pretty heavily our investors, at least are heavily watching an upcoming trial of one of its diabetes medicines, which is going head to head with really good data from the arrival Novo Nordis treatment. If it doesn't measure up, things will go from you know, kind of nerve wracking.

It's it's truly scary for what's the company's most important franchise, UM does to Kada need the deal we're shifting to Shire and yeah, six right, I mean, why do they need to do this. I think that the CEO, Christopher Webber, is probably feeling some degree of pressure in that shares of the company are kind of flat um during his tenure, and the company lacks really any easily identifiable catalysts or drugs in the pipeline that might give it some upside.

So this is kind of the biggest and boldest of of possible ways that they might go about this. Whether this is the right way to go about it is is another question, um, you know, because they're they're likely going to have to deliver an improved price even on what we've seen so far, which means an incredible amount of debt and a highly dilutive deal for for shareholders.

There's a lot of risk and and it's for Shire, which you know, even though the company is at a discount to what it might have fetched in the past, there are reasons for that. There are risks to as team Ophilia franchise and to its pipeline as well. You know, it would have to really really outperform on the pipeline. I'd uh to justify this price. So so it's big risk, even if it is theoretically at least worth it to

for Takeda to make a spplash. So the latest on this is that Shire is studying a new takeover bid from Takeda that already have been four snubs and another suitor that has come in uh to possibly do something here and then quickly backed up Takeda shares down, Shire shares up. I thought it was interesting Max just quickly that some of the rating agencies are looking at possibly downgrading Takeda if they did go through with this deal. Yeah,

and that's not a surprise. I mean Takeda is about the same size as or a little smaller than Shire. And then in addition to the death that it would be taking on in this transaction, which could be up to even from from levels that we thought previously, if they're raising the the price, they're also taking out a substantial deadload from from Shire, which spent big on back Salta a couple of years back. So, um, it's definitely comes with some financial RISKSK And um, you know, they

they may raise the price. I know, if they'll have to raise it that much to get this deal done. Um, you know at the end of the day. Shire was trading around thirty pounds just a few weeks or months ago,

and this has at a substantial premium to that. So even if it's more of a stock component that they might like and becomes tricky because some people don't want to own Japanese shares, it's still a pretty good option for for Shire at least, and they can still kind of hold out hope that someone will scoop in with a better, more cash ret option and then have this kind of sitting on the back burner, which is not

the worst outcome. Thanks very much. Max Neeson, Bloomberg gad Fly, commist all Things Healthcare much appreciated the shares of Alphabet, the parent company of Google. They are lower by about four and a half percent after the company reports results that exceed need analysts estimates yesterday after the market close. But seven point three billion dollars that may be giving some investors pause. That's how much the company is spending

on a variety of ventures. And here to tell us more about the company is Alex were Bloomberg Gadfly calumnists covering technology. Alex thanks very much for being with us. Give us your reaction and your analysis of the report from Alphabet, it seems to be a sort of task admission that they recognize that there's the potential for headwinds coming up. They clearly see regulatory pressure being exerted on Facebook.

They have a very similar model to Facebook. They can target adds that people based on the data they have on those people and so ensuring that they are owning the interaction with the customer through that their own made, self made mobile phones and some in the form of the pixel is one thing. And investing in the real infrastructure of the web, cloud computing network, cabling those sort of ideas they that helps build a backbone of data which can help support their business. Alex, can you help

me understand something I can do my best? Please do? Alphabet posted the strongest sales growth in almost four years yesterday. The initial response was positive, The initial response in pre trading this morning was positive, and then close to around eight a m. The shares tanked. Why suddenly do the investors start to get nervous about alphabets spending? Because yes, they are going to be spending a substantial amount more and tripled their capital expenditure for the quarter to seven

point seven billion. Why was this suddenly such a concern? I mean, this sounds like such a cop out as an answer, but I wouldn't put it. I mean, i'd wager that it's just profit taking. You know, you quite often see this with the big text docs when they have a really good quarter. UM people sense that as a good opportunity to get out, particularly they've been on a tear of late, and and you know that there's

a very good chance that's what's happened with Google. I haven't seen the volumes, which probably would be more indicative of that, but I wouldn't be surprised if that is the reason. Equally, as I said, you know, Google is recognizing that down the line they do have challenges coming up, and so if I were to give the non cop out answer, it might be on that basis, but I

think that's less likely. But if that's the case, isn't it a positive that they're actually spending on diversifying their business. Wouldn't that be uh something that shareholders should cheer. Yeah? Absolutely. But there were some some analyst notes this morning saying that UM they expect some volatility in the margins going forward. The margin dropped the operating margin dropped from them, which is,

you know, that's clearly a big drop off. And if they're anticipating that sort of um lack of consistency was going to become a trend, that perhaps means that people expecting you know, stability in the stock um are therefore prime to get out of it. Is it worth noting that a lot of the expense two point four billion of it? I believe it's the purchase the Chelsea Market Building headquarters in New York City for a goop for

it is worth noting that. But equally, even without that, they're spending doubles, you know, so it's still it's still a substantial increase. Uh, I mean, frankly something like that. It seems like a not want to predict the housing market or the property market in New York, but that's always going to be a prime property and seems you know, pretty sound investment, particularly if they intend to keep attracting top talent which likes to live in a big metropolis.

Another area that investors are showing increasing queaziness about is with Apple and increasing predictions that the supercycle of cell phones and smartphones is dead. Why is this now a theme since we've known this for years now. Well, it's more the fact that last year, heading into the iPhone ten cycle, there was some hope, or at least expectation, or at least hope, I should say, that this would

be another supercycle. The iPhone six is with the last supercycle that was a generation of phones which spurred you know, really stratospheric growth numbers and uh and it carried on for two or three years. There was a hope that this would be kicked off again with the iPhone turn.

So far that absolutely has not materialized. And the Christmas numbers, the moments in the Christmas quarter were okay, the sales numbers were The actual unit sales numbers weren't great, but Apple was able to squeeze more dollars out of every phone, and so the the revenue number continued to grow. The big question mark was going to be over this March quarter. To what extent does appetite for the iPhone turn hold up. That clearly hasn't proven to be the case, it seems,

judging by how what the suppliers are saying today. It was a MS, an Austrian company which makes a lot of the components going into the three D censors, and um, they have said that they've got capacity which is being unused in Singapore right now, or an asiable baldy right now. And each chance that the new screen technology is going to revive people's interest in getting a new phone. I mean,

my take is no, the new screen technology. Was Mark German I think, referring to his scoop a few weeks ago, that Apple is developing, Well, you know who is the leader in screen technology right now, it's Samsung. Apple buys most of this stuff from Samsung. So it's the extent to which Apple is able to introduce new stuff. By the time it comes to market, the odds are it is going to be catching up with what Samsung has already,

So they seem to be behind the curve on this front. Um, I don't know if you know anyone who said that they bought the iPhone ten because it had an old screen. You if you, I think if you've got to those people on the street and you asked what a od led screen is, they would have not the foggiest idea. Um, it's something that the fan boys really like, but those guys are going to buy a phone anyway, so it doesn't seem to be a massive differentiated to me. Alex Web,

thank you so much for being with us. Alex Web, European technology columnist for Bloomberg gad Fly. Thanks for listening to the Bloomberg P and L podcast. You can subscribe and listen to interviews at Apple Podcast, SoundCloud, or whatever podcast platform you prefer. I'm pim Fox. I'm on Twitter at pim Fox. I'm on Twitter at Lisa abramoits one before the podcast. You can always catch us worldwide on Bloomberg Radio