Markets Expect Mid-Year Snapback From Coronavirus

whether the coronavirus is contained or can be contained. There's still are questions being raised about the numbers coming out of China, Apple saying that they will not meet their revenue forecasts for the first quarter in light of some of the sales disruptions in China, and yet markets incredibly resilient in the United States. Joining us down to find out exactly how much longer markets can remain this resilient. Fill Orlando, chief equity market strategist and head of client

portfolio Management at Federated her Mays joining us by phone. Phil, You've been a bowl, You've gotten it right for a long time. You've been heavy into the big tech giants. I'm wondering from your perspective, at what point do you throw in your cards and say, you know what, this is going to be a longer term issue for the tech giants what's going on in China. So thank you again for having me on UM. I'm not sure that

we're going to throw the towel in. UM. I will absolutely concede that the market, except for you know, a three percent correction over about six trading days at the end of January, has largely ignored the coronavirus and and UH. In my humble opinion, I think this situation is going

to be potentially bigger than than people think. And we're just today getting the first snippets of economically related news investment related news on coronavirus witness UH, you know, Apple talking about having some supply issues and and Walmart talking about, you know, having missed on on Christmas, particularly January, maybe some in December. I'm not sure exactly where the details are in part based upon UH coronavirus and and we also know that a couple of the other retailers, Calls

and Target had disappointing numbers. So I think there's gonna be more of this going forward. UM. As we looked at the retail sales numbers that were related to the street for the Commerce department on Friday, UM, Christmas was

pretty good. And and as we define Christmas, because of the the the extraordinarily early Thanksgiving and the way the Black Friday weekend was sort of split up half in November half in December, companies were making a concerted effort to start to advertise and move Christmas product in the month of October. So our view was, Okay, let's just define Christmas as October, November, December, and January because you've

got gift card redemptions. So as we looked at the data for those four months on a year of a year basis, retail sales are up four That was a pretty good Christmas. So I'm fine with Christmas having been good. Coronavirus UM really didn't start to become part of our nomenclature here in the States until about the third week in in January, and has now really started to you know, catch some some some traction here looking at coronavirus versus stars.

Back in the two thousand and two thousand and three neighborhood, the total confirmed number of cases for STARS was We're we're already north of seventy three thousand with with the coronavirus with no real end in sight here, and our best guess is that this is going to continue for at least another couple of months. And that's got to take into account um retail sales numbers being sloppy in February.

Maybe that spills into the easter season. And I think we're going to get more guidance down from companies who are going to use coronavirus as a justification for why their numbers are coming in, you know, software than expect it. And I'm not sure that any of that is yet in the market, with the market having done as well as it's been doing. So, Phil, are you in the camp that I think is gating some more members every day?

And that camp is if the coronavirus does have a meaningful economic impact on global economies, the central banks are they're waiting to respond in lower rates and be you know, supportive. We're absolutely there, But I don't think our Federal Reserve is going to cut interest rates because I don't think the coronavirus situation is going to be uh from a

time standpoint. Um, we think it's going to have a significant first quarter impact, and I think as we get into the second quarter, the middle of the year, I think we're gonna have our hand around this. Um. We are doing much better looking at coronavirus compared to Stars. One of the things we're focusing on is what's known as the mortality rate, the percentage of people who died from this with With Stars, that mortality rate was just

under ten percent. With the coronavirus. The mortality rate right now is running about two and a half percent. The Chinese government as as as much as as we think they're being irresponsible here in terms of transparency and letting the world know what's going on, etcetera. When we look at COVID nineteen versus Stars, they have been much more aggressive by you know, a period of about a month of six weeks in terms of letting the world know

what's going on, giving us the sequencing. US global pharmaceutical and biotechnology companies are actively working on some some compounds that that might have some promise in terms of vaccines or you know, medicinal purposes or whatever. So I truly believe in my heart of hearts that that as we get into the second quarter of working towards the middle of the year, we're gonna have our hands around this and we're gonna see these numbers start to receive. So

so it's ugly right now. Um, we're gonna see a hit to GDP growth, We're going to see a hit to corporate earnings. But as as we look at the balance of the year, I think we're we're looking at a snapback as we get into the middle of the year and in a strong second half of the year, and I think that's why we're seeing a limited market response. Now. I think investors some degree you're sharing that view and perhaps looking through the ugliness of what's going on right now.

Right well, that's exactly where I was going to go, which is you said that you don't think markets have been pricing in the real potential implications of the coronavirus. It sounds like they're not because they're expecting a V shape recovery and the economy and there therefore there isn't

gonna be a longer lasting effect. Are you in that camp where you're not going to change any of your positioning in response to what we're seeing over in China, just with the expectation of this V shaped recovery, we we have not made any changes in terms of positioning. We made some changes in positioning at the end of last calendar year in terms of taking domestic large cap growth from overweight back to neutral and upgrading domestic large

cap value from neutral to overweight. We've got overweights and domestic small cap um and we also added an overweight to emerging markets, which, in light of what we now know with coronavirus, maybe that was a little premature, but we're gonna stick with it again because we think of the relatively short live nature of what we think we're dealing with right now. Hey, Phil, thanks so much for

joining us to really appreciate your thoughts. As always, Phil Orlando, chief equity market strategists and head of client portfolio Management at Federated our mays joining us on the phone. Uh. Phil has remained, as you noted, at least a consistent lee bullish. He's been consistently right. I think I appreciate his thoughts on the coronavirus how, you know, kind of putting a timeframe on it, kind of bleeding into uh the second quarter, but then becoming less of an issue

in the second half of the year. That's I think how they are discounting the coronavirus there at Federated WELLO. Good friends at Walmart reported earnings this morning kind of mixed bag. The fourth quarter of the all important holiday quarter a little bit uh weaker than expected, but the four year guidance for pretty much in line with what the street was looking for. So the net net on the stock is it's up about eight tenths of one

percent today. For Walmart. To get a sense of what's going on at Walmart and all things retail, we turned to our good friend Bert Flickinger, Managing Director Strategic Resource Group. He joins us here in our Bloomberg Interactor Broker Studio. So Bert, a little bit of a mixed bag out of Walmart. What's your key takeaway going forward with these

folks too? A couple of things, Paul and Lisa. One, Walmart's insulated because they sell more fresh food, refrigerated, frozen and fresh than anyone else, so it's about two thirds of their business. So Walmart, like Costco, which hit a fifty two week high in the Bloomberg terminal today, to uh forward looking, they've both invested tremendously in technology for the last thirty years. So the markets looking at Walmart's capex being a little bit less in technology compared to

competitive peers. And secondly that Walmart and Costco strategically invested in distribution centers and inventory. So despite tariffs, coronavirus, and sourcing more locally within the continental US, Walmart has some longer term advantages for the next couple of quarters that

most of their competitors don't come close on. All. Right, let's put the coronavirus aside, because they basically have not put that into their assumptions in any way, it's unclear how they're going to be dealing with that, and just talk about the fact that they missed expectations when it came to revenues in EPs forecast. This has been completely shrugged off by markets. Yet this comes after Target also disappointed. I'm wondering how much we can read into this as

a trend. Does I say something about the consumer just to say something about Amazon dot Com, you know, rolling up all of the market share away from the Walmarts and the targets of the world. Lisa, It says yes to all of the above. It says the Amazon roll up. Uh. It also also says uh, despite targets miss in our pricing studies. Targets still a little bit premium priced in

our pricing studies with Walmart. For the first time UH in five years, Walmart's line price with the low price leader leaders Windco in the West, UH Costco nationally and internationally. So you and Tom Kane talk about very well frequently is while Walmart's investing more in lower prices, Walmart's units are up. At the same time, as you're presently pointing out, the consumers are facing higher monthly budget expenses in ten out of the top eleven expenditures everything except gasoline, so

UH rent, tuition, UH insurance, it's taxes, etcetera, etcetera. So the consumers more cash constrained. And as people look at where the consumers going Ross stores on the Bloomberg terminal fifty two week high today, Bloomberg Burlington on the Bloomberg had a fifty two week high today, UH lows and home Depot in terms of category dominant earlier today UH

fifty two week high. So the consumers are going where the best prices are, and the best prices are with the big retailers that are off price price impact or destination that have procurement power. But also I want to make sure to catch key point you referenced, is is this sustainable? It might be sustainable for a quarter or two of the fifty two week highs within retail. Fresh Pet hit of fifty two week high today, that's sustainable.

Not sure chain retail is sustainable. Not sure Amazon sustainable. So let's talk. I know Walmart's having an investor day UH today, so we'll get some more news out of that throughout the day. But one of the places I always look for Amazon and Target and Target and Walmart to see how the compete against Amazon is their digital sales. So another thirty growth in the digital sales for Walmart. That's good, but it's slowing a little bit, but still

pretty solid digital sales. And can consumers who historically might have only been able to to get to a Walmart once or twice a month. Mark Lori x X of Amazon and acquisition by Walmart of Jet will be able to deliver from Walmart supercenters to of US homes within the Continental U lass and Walmart's brilliantly put FedEx UH depots within its store so people can buy at Walmart and ship either within the US or outside the US.

At what point do we have to start worrying about the consumer and how much momentum there is if where they're going is ross stores as the discounters we have, Lisa,

we have to start worrying about the consumer. Now. The telling period is going to be Memorial Data Labor Day where the consumer uh, it's Bloomberg reports has We've been traveling in record numbers, spending in record numbers, but looking on the Bloomberg even before Ryan Newman's tragic death and NASCAR yesterday, NASCAR attendance is way down and that's he's still he's alive. He's in serious condition. Thank you serious

parts and prayers and appreciate the uh timely correction. Yeah, and it's actually as injuries are not life threatening after that horrible crash. Um but he it seems like is going to emerge. But really interesting and thank you so much for being with us, Bird, because this is I think one of the big questions when I came in Walmart disappointing after target disappointing. You know, a knee jerk

response might be to say, is this concerning you? Look under the hood, A lot of factors at play, but certainly heading into this period of the year, important to watch to see if it makes a trend. Uh, and we will have you back to discuss that. Bird Flickinger, Managing director at Strategic Resource Group, joining us here in our interactive broker studios. And interesting to see how Walmart shairs really resilient after missing estimates on a whole variety,

actually gaining today. Uh, They're up eight tenths of a percent. Not a massive gain, but given the fact that the broader market move is lower and that they missed expectations and that they still are gaining, it's somewhat notable. The big news one of the many big news items of the day. There actually are a lot that are sort of done the corporate front. On the corporate front is the tie up of Franklin Resources agreeing to buy leg Mason to create a one and a half trillion dollar giant.

This comes amid a slew of consolidation among asset managers. Any massa covering it all, investing reporter for Bloomberg News, joining us here in our interactive broker studios. Can you just take a step back and look at how significant the wave of consolidation has been in the past, say, five to ten years within the asset management space. Sure, as you mentioned, I mean you can really just rattle off these big UM episodes of mergers and acquisitions in

the asset management industry. You saw Investco by Oppenheimer Funds, you saw Janice Henderson, Standard Life Aberdeen, and this is just the latest in that wave of consolidation that we're seeing. As active managers are trying to, you know, figure out how to navigate um and increasingly passive investing world. You just kind of need scale to be able to compete. So give us the Again, the rationale is scale. So are we simply are these companies simply saying I can

see the pressure on my revenue line. I don't think that's going away anytime soon, So I just got to get scale and try to rationalize my costs. Is that kind of the play here. Yeah. If you look back over the past ten or fifteen years, both leg Mason and Franklin Templeton have seen their assets under management UM kind of come down from their highs. So now, as you mentioned, you have UM a one point five trillion

dollars in assets in these combined firms. It also fills in some gaps for Franklin UM, particularly on the fixed income and alternatives side. What's the price tag being viewed as in the market UM the deal is valued at about four point five billion dollars, and is that viewed is too much too little? UM? I think it's valued about as about in line. So how about when I think of big neutro funds, obviously I start with Fidelity. Do we see Fidelity on the M and a trail? Often?

I can't think of some I can't think of any big deals. That's a good question. Fidelity has often been one to really go it alone. But Fidelity also has the advantage of being just one like a giant already. It's really for the slightly like middle size. Can't really pass a trillion dollars in assets where you're seeing this kind of consolidation. Neither leg Or or Franklin was really able to get there on its own. So now tying them up, they can finally get past that trillion dollars

in assets kind of mark. It helps because UM technology is increasingly costly for these asset managers, and and if you can spread out some of those costs across all these different assets and then also offer different product lines. It really does help to be more of a big supermarket. Do you have a sense when you speak to analysts who've been watching the space for a while of who some of the next potential contenders are for for potential

murder activity. Yeah, that's a good question. Basically, UM, what what we're looking at here is some of these acquisitions that we've really seen in the space have faltered a little bit or not been as successful as they were otherwise thought to be. So I think that that's leading to some questions about whether these deals actually pan out

and work. UM. In some cases, like the Janice merger, you actually saw client outflows in the wake of those um in the wake of those tie ups, so it's not always UM a very beneficial thing in the aftermath.

One thing that they mentioned on the conference call is that like Mason will kind of maintain the independence of all these different affiliate asset managers that it works with, and they're hoping to UM hang onto those client assets and stem some of those client outflow potential client outflows that way. You know, when I think about the pressure on the fees and doing large part to this move from active to passive Is that a global phenomenon or is that more in the the US. It is a

global phenomenon. I think you're really seeing a lot of this happening in the US because that's where the largest asset managers are based, and that's both on the active side and the passive side. What about the alternative side, I mean, how much are that? Is that the area that people are looking to for the fees and just trying to get scope with respect to passive and then go into you know, the more liquid securities type of type of trade. It's a really good question. Alternatives are

becoming so important for pretty much all asset managers. And we saw UM even last week with vanguards foray into private equity, and and Blackrock did didn't made a similar pushtion to alternatives as well. Even the giants of index investing can't ignore alts. So especially on the active side, UM firm like Franklin wants to bulk up in alternatives. Are we the early stages of late stages this consolidation? Do you think? I think that we're still gonna continue

to see consolidation in this industry. There's so much pressure on fees for both active and pressive products. Um and scale has become so important. It's this barbell where you have to either be a behemoth that offers everything or just so niche and in between you're going to struggle. Any Massa, thanks so much for joining us. Annie Massa, investoring investing reporter for Bloomberg News, joining us here in

a Bloomberg Interactor broker studio. Jeff Bezos, who is of course the founder of Amazon, announced that he is committing ten billion dollars of his own wealth to fighting climate change. Who was biggest philanthropic effort so far, and it comes after a substantial pressure from within the company from workers saying that the company is not doing enough to fight climate change. But it really raises a question, what can

the biggest companies do? What kind of meaningful changes could they make to reduce their carbon emissions and fight the rising climate. Jelly Bergstein joins us now the chief executive officer of Seventh Generation, which is based in Burlington, Vermont. It was acquired by Unilever, but it really has been one of the biggest speakers out of terms of corporate responsibility in this area. Joey, I'm really glad you're joining us. Today, I want to get your perspective on this ten billion

dollar commitment that Jeff Bezos made. Where do you see the greatest need for that kind of money to actually combat uh, some of what we're seeing with respect to omissions. Thank you very much for having me on, Lisa. It's it's great to be with you and really applaud the commitment that Bezos is made to addressing what is the

biggest crisis of our time. And UM, it's really important from our perspective that companies do take real and meaningful action to address climate As we look at what's going on in the world around us. We're really focused in three different areas. One is the products that we make and ensuring that we're creating products that actually have the

low carbon footprint. Great example of that is an ultra concentrated launcher to Jurgen that we launched over a year ago UM that we sell on Amazon, and UM the shape the support that we get from the Amazon team on on that part of our business. We tax ourselves in internal carbon tax that we can then invest to

address our own carbon footprint. And then I would say the third thing is that we're really looking at how do we clean up the energy grid in this country and would love to see investments being made much more broadly by companies across the US to really clean up

our own energy grid. What we've discovered is that when you look at our full carbon footprint from making this stuff, for growing the ingredients on a farm, through to the production process and getting it into the hands of people to use, actually nine of our carbon footprint comes when you and are Washington drying our clothes at home and

as clean as we can make our own operations. The only way to truly address the impact of business is to clean up the energy energy sorry, energy grid, and that for me is the top priority for us in UH in this kind tree. So, Joey, how do you do that with a company? Just take your company, how do you think about and try to address the energy grid? That just seems like a huge issue that might be

outside of your natural kind of day to day business. Yeah, it's monumental, actually, um, and it is outside of our day to day business. So a lot of the work we're doing in that space has been around advocacy and working with grassroots organizations across the country to try to move cities and states to make commitments to clean energy by we think with those commitments in place, that these cities and states will actually take the action needed to

address the energy grid. In two thousand and eighteen, we set out, working with Serra Club and other grassroots organizations to try to get a hundred cities to make such commitments. By the end of the year, hundred eight cities and made commitments um and I think we're up to over a hundred and fifty cities and over seven states making these kinds of commitments, and so that's really the role of our advocacy work too, to try to address the situation.

It's a big question and a big concern for a lot of investors who are trying to follow E s T requirements, And there's a question that gets raised, especially with this sort of ten million dollar commitment that sort of thrust this whole effort into focus today. How much can we tell whether a company is just paying lip service to the idea versus actually doing something meaningful with

reducing their footprint. That's a great question. I think it really starts with making big, bold commitments, because addressing a crisis of this magnitude doesn't happen just by business as usual kinds of action, so I applaud companies that meant UH. It's also really important to consistently report on what actions companies are taking. So we publish an annual sustainability report. We track ourselves single that we make and how we make progress year after year, and I would expect that

other companies are doing the same things. It's it's really not enough just to make the commitment by to also be very transparent about what actions are are actually being put in place. Hey, Joey, thank you so much for joining us. Really appreciate your thoughts on this important topic and on a topic that's growing in influence. Joey Bergstein, CEO of Seventh Generation based in Burlington, Vermont, joining us on the phone. It's interesting to think about, you know,

environmental social governance. It's becoming a bigger part of UH investors view of companies and industries, and there's a lot of data out there. There's a lot of data on the Bloomberg terminal that tracks UH some of the metrics as it relates to E s G. And we're hearing more and more UH investors, whether it's hedge funds, portfolio UH, you know, mutual funds and institutional investors really focusing on

E s G. Yeah. I mean, I do think though we've moved past the point of just saying, Okay, what have you put out there that you're doing to fight climate change into okay, well, how effective are some of these measures? And I think you know, when you look at Amazon, for example, there's been a lot of pressure internally about changing of the practices of the company, and then there's a question of how Jeff Bezos is even going to deploy ten billion dollars because a lot of

these upstart organizations are small. Yeah, exactly right, but that ten billion dollars is a big number. It gets everyone's attention. Thanks for listening to the Bloomberg P and L podcast. You can subscribe and listen to interviews at Apple Podcasts or whatever podcast platform you prefer. Paul Sweeney, I'm on Twitter at pt Sweeney. I'm Lisa Abram Woyds. I'm on Twitter at Lisa Abram wits one. Before the podcast, you can always catch us worldwide on Bloomberg Radio.