Next Wave of Tech Will Shift From FAANG to Payments, Autos

And right now we want to turn our focus to technology and the ways that it's disrupting a whole host of different industries, as well as how people can invest in it. And we're joined, I'm happy to say, with time or Hyatt, he has chief strategy officer for p jim Um. I came in and I saw this beautiful glossy magazine, The Technology Frontier. What is the point of what it it? Sort of do you want to convey to people by giving a sense that we are on

the cusp of a technology frontier? You know, I think at least at the moment, technology is sort of at peak hype, but it's really around a narrow set of stocks.

You know, we've talked a lot about them over the last two weeks with the volatility, but what we wanted to convey was that for long term investors, the technology opportunity has actually moved beyond just the fangs and silicon value venture capital opportunities, and it's really about the technology uses now where the next wave of investment opportunities will

be created. How will companies and everything from the media sector to payments to transportation, how will they use technology and how will they embed technology in their in their processes, And that's where the next wave of winners and losers will be created. Now. This Technology Frontier white paper is part of a series of white papers talking about megatrends and they're going to be winners and they're going to

be losers. And you outline some of those and I'm wondering if you could just go through them, particularly when it comes to the losers, because it gets pretty specific. I was surprised that, for example, transit hubs are perhaps

going to be losers in the technology revolution. Well, then one of the key things we point out is don't just go after the winners, and we should talk a little bit about how you sort of see who the technology winners are, but there's also real obsolescence risk in portfolios. And the pace at which technology is changing is unprecedented,

which means that those risks are happening really quickly. So one good example is in New York, where the price of a taxi medallion has gone down from what one point two million at the peak to kind of thousand now, really rapid disruption. And one example we have that's coming

around the corner is in the automobile industry. So you have electrification at the one hand, and on the second, you have automation kind of vehicles that will kind of be autonomous, and we think that will be pretty disruptive. I mean, one example, in addition to the one you mentioned was parking spaces. We have hundreds of thousands of prime real estate that is devoted to parking spaces and garages.

And in a world where you will have autonomous vehicles and you'll have people sharing rides much more, there's just a massive opportunity for how that will be repurposed and how flexible our garages to be repurposed for new realistic users. So how does one invest in that? Uh, you work with your real estate asset managers and really understand that technology again is not just about equities. It's not just about Silicon Valley venture capitalists. But you can access technology

through real estate, through infrastructure, through fixed income. It really is pervasive. So it's really working with the entire team of asset managers, your in house experts, and making investment decisions that straddled the entire portfolio. I just limited to this tiny niche of just the formal technology sector. You also make a point of contrasting the digital adoption rate of various countries and say that it is not necessarily geared towards g d P per capita. Explain that a

little bit. So one of the things we see is in the productivity data. You don't see rapid increases in productivity, even the many of our personal lives are improved by all the apps we now have. And we think the real secret to that mystery is a lag technology in the ninety nineties when you have the PC revolution and now again will lack the obvious near term gains that we see in our daily lives by ten years in terms of when it's reflected in the GDP and productivity data.

So you add a point, which is what we try to show with the Digital Adoption Index, where six of the world is still offline. When the rest of the world, when the broadest set of emerging markets also adopts kind of wireless and internet technologies, you'll see another rise in

productivity that still hasn't been captured. And we talk a lot in the report about that wave of opportunities that's yet to come, and it goes way beyond China into many other emerging markets that are less well traversed by investors.

I have to wonder where the developed world versus the developing world will stack up with the sort of race to technological improvement, because there's sort of a belief that when they're already is infrastructure in place, it's harder to refurbish it and bring it up to the modern standard. So in some less developed areas, you're seeing the increase in technology come up much faster, and they're actually much more capable of adopting to some of the newer concepts

and technologies out there. Do you think that the developed world will lag behind in a way that perhaps people are not expecting. It's a great question. I think one of the features of this current wave of technological changes has really gone global, so you've had already because of global supply chains, this reverse innovation where ideas are coming

from India. Okay, and yeah, back to the US and Europe where you have China, for example, now being a leader in certain parts of AI and facial technology, and the speed at which code travels, the speed in which you can innovate in another country is very different from old fashioned foreign direct investment where you had to move a bunch of people to an emerging market. So we absolutely see techno oology innovations coming from more places, more

quickly than in any previous wave of technological change. Absolutely. Do you see that the way companies are organized financially is old fashioned? And the reason I asked it is because you say in the report that companies that invest in research and development, those are the wants to pay attention to. But research and development is not considered an asset on the balance sheet, it's a cost. Is there going to be some way to change that? I think

it will be quite critical for winning companies. So we talked about obsolescen stress. But the other side of this way investors is what are the alpha seeking opportunities by gliding to the winners. The winner takes all companies that already achieve scale. And I think having a chief financial officer who sees how the investments in technology R and D and development rather than just sort of maintaining what's

there is key. Having a senior chief technology officer who's part of the senior leadership team investing in technology R and D, doing technology driven M and A. That'll what will drive future winners in this sector. Are there specific companies that you think are going to be winners that are not recognized widely as the future winners? I think beyond the big obvious names, it will really be about looking at the next sectors. And I think the sectors that we focused on as the next wave is the

payment sector, uh, and then definitely the automobile sector. I think much further down the path would be sectors at construction and healthcare where there's a huge room for technology improvement, but it's still ways off. And when you mentioned technology and that healthcare sector, do you think that the government is going to spur that or is it currently making it more difficult give you that thirty seconds. I think

it's both the public and private sector. We've all gone to a doctor and seeing that they don't have their records from our last visit to another doctor. There's just huge opportunities for technology across both the public and private sectors. Time are higher. Thank you very much for being with us. The chief Strategy officer for JIM. We are broadcasting live

from the PJYM headquarters in Newark and New Jersey. PIJIM is the global investment management business of Prudential Financial and Lisa, I know one topic that's always exciting to talk about real estate, real estate, and Kathy Marcus joins us now. Kathy Marcus is the global chief operating Officer and the head of US business for PJYM. Real Estate nearly seventy billion dollars in assets under management. Thank you very much for being with us, and thank you for having us here.

Thank you and thank you for saying that real estate is exciting. It is it is. Everybody wants to talk about real estate, especially well, that's why we have you here. Um. I know that you know p JIM has a global outlook. You have properties all over the world, but let's start in the United States and maybe just to find pie Jim's strategy because you offer finance, you do financing for real estate, and you also own properties out it just give us a little hint of what your remit is.

Sure UM well within PEDUM real estate UM specifically, as you mentioned, we have seventy billion dollars of assets under management, and that is primarily in the equity space, and it's all around the globe. We operate in US and Latin America, in Europe and an Asia. We invest in all the major property types office, apartment, retail, industrial, and then in others that might be considered a bit more niche, including

senior housing, hotel, and self storage. So I want to talk about one of the biggest issues of this year, which is the concern that all of the money coming into the US and into the real estate market from China is slowing down because of the trade tensions, and that basically there's going to be a sort of deflation

and valuations because of this exodus of foreign money. What have you seen on that front, So that is very true that about UM, the amount of Chinese investment in US real estate markets is down by about other investors, non US investors have UM come in to sort of fill that gap. And among those investors are investors from Singapore, Australia, UM, and Canada in particular. And in terms of you know, sort of the overall picture of investment in US real

estate UM on behalf of non US investors UM. You know, there's a long term average that about nine percent investment in US real estate markets. It's coming from non US investors UM. And we're twelve so we're still you know, above the long term average. But UM. You know, investors from one particular country of China, clearly that has gone down. I think that that has UM that has manifest itself

more in some markets than others. The Chinese favored certain markets New York, San Francisco, those types of what we would call a gateway market. UM. But there's still lots of other non US interest in in US real estate. One head win that some non US investors have been facing in US real estate is that the cost of hedging the US dollar has gone up, and that you

have seen some evidence of UM. You know, certain investors who are more likely to hedge, German investors in particular, sometimes you've seen a little bit less activity from them. I wonder if you could speak to the issue of the value of real estate located near, expansion of infrastructure projects, expansion of public parks, public venues such as the high Line in New York, and redevelopment areas. Because PJAM has been very active in almost twinning its investment thesis with

those kinds of general improvements. Yes, that's been a real strategy of ours, and in particular around transit and transit oriented development, particularly in the multi family space in the US, has been something that we've been very focused on. And part of that has to do with who the renters

are for those types of projects. And interestingly, if we had been talking about this ten or fifteen years ago, our prime renter for urban type apartments would have been all young people, and now you're really seeing much more of a barbell. There's lots of empty nesters and baby boomers who are renting in those types of projects too, And both of those populations they like transit. They like to be able to walk to their local coffee shop or walk to a movie, or walk to lots of restaurants,

and they also both like a lot of amenities. They want, um, you know, a golf simulator, they might want a saltwater pool, and so a lot of the development which we've been involved with and others have as well, is really in this class A space and and that's really worked out

quite well because of the demand in that space. But I think we all know that there's really almost a crisis of affordable housing in the US, and so you know, the fact that so much development has been in this class A space really means that there is an entire part of the population that is underserved in terms of apartments, and that's really something that we've been focusing on lately.

That's interesting. Um, I want to I want to go there, actually because I was going to move to senior housing, but I want to hear how you're planning to serve that population given the fact that the actual material costs are increasing and labor costs are increasing, and it's just not that profitable to build housing that you can't sell

for for higher prices. You are correct there, and and um, you know, construction costs have gone up precipitously in the past year in particular, So our strategy has really been um that we've been acquiring existing assets. In the past year, we've acquired about units of what we're calling workforce housing, and the strategy there is to acquire existing assets, but to do a little bit of upgrading and a little

bit of renovating there. But the key to that strategy is to have the discipline not to over improve, because if you go in there and you spend so much money upgrading and you go into the granite countertops and all of the amenities, you've just defeated the whole purpose because now your target renters can no longer afford the project. So it's a fine balance between keeping it competitive within that workforce housing UM space. So what is workforce housing?

We consider that to be essentially Class B type assets. They tend to be UM constructed in a garden style project, and they tend to be located in the southeast and southwest, where you have really sort of um uh, the phenomenon of it being affordable because of where it is and because of its age. The cycle in real estate has it been repealed, and our investors nervous about where they are in the cycle. We're clearly late in the cycle, and that's something that UM everyone is thinking about and

talking about. And therefore some of the strategies that we've been focused on are really tailored to where we think we are in the cycle. And you know, we just talked about Class B apartments workforce housing. Senior housing is another example. And really the themes here are our strategies that are underscored by demographic or societal trends and things that we see coming that are not as um tied

to the economic cycle. Although there's been a lot of investment in senior housing, and there was just a front page article in the Wall Street Journal talking about how, uh, a lot of seniors aren't going to senior housing so quickly because they're actually staying healthier for longer and being independent. How do you address that? It's true in terms of the um what we see in our in our properties is that the average age of the senior housing resident

has gone up tremendously. UM. But there's still a demand and there's you know, what people refer to as a silver tsunami that's coming right and um, you know, the demographics show us that in the coming decade, three times as many people are going to turn seventy five as have in the prior decade. And so, you know, the current stock of senior housing in the US, two thirds of it is over fifteen years old, and so you can see that there is a need for more development there.

I would agree with you. There are some markets that maybe got ahead of that um, you know, supply demand dynamic, but overall a very very compelling thesis. And peach and Real Estate has invested in senior housing for the past twenty years. It's something we've always liked, but the dynamic is more compelling now than ever. Kathy Marcus, thank you so much for being with us and talking about this issue that both PIM and I find fascinating, and that

is real estate. Kathey Marcus, Global chief operating Officer and head of the US business at Peachim Real Estate. And Lisa Bram what's along with PIM Fox and this is Bloomberg Markets, Lisa, after the close of trading today, we will get the results from Apple, and who other than John Butler, our senior Telecom services and Equipment analysts for Bloomberg Intelligence. Who other than John Butler? Would we have to comment on it? Absolutely? Nobody? Exactly, all right, John Butler?

What should investors look for in the commentary when Apple reports results? The first thing I would look for PIM is any commentary on the latest phones. So to me, this latest jen ration of phones or they're all based on the iPhone ten design. They're a bit of a feature upgrade. There's a lower, lower cost version of the iPhone tent out there, called the iPhone ten R x R as some people call it, and in my view, this sort of sets the stage for iPhone growth over

the coming three to five years. So I want to hear how well those new devices are resonating with consumers. And you know, if you wind the clock back at your Tim Cook gave us some good color on how iPhone ten was doing. He made comments that it was the best selling phone in every week since it had been launched. I'd love to hear similar commentary like that this year. The other thing I'm focused on is services and what the growth outlook looks like for the services business.

That's actually where I wanted to go because once upon a time, a long, long couple of months ago, uh and we were discussed saying how the supercycle in smartphones is definitely plateau ng if not declining. People who have a smartphone who want one, have one. Uh So the saturation point is pretty high. I'm just wondering, I mean, are people not focused on that anymore, or I do think that Apple is going to try to emphasize services and the revenue that they get from that over the

iPhone sales. So Apple is doing two things. Number One, the iPhone has grown to really dominate the sales mix, so in a very good quarter at sixty percent of sales, in sort of the slower quarters, it's a little less than sixty percent, but it's a higher percentage revenue. They've been trying to grow that services business to diversify their overall mix and lessen the reliance on iPhone growth quarter

and in quarter out, and it's been working well. My concern is that services don't continue to grow at thirty percent quarter and in quarter out either, and so I'll be looking very closely to see how services growth is doing, what's new, what might be on the drawing board there. And then on the iPhone side, I like what they're doing, which is they're shifting a reliance on driving high unit

sales of iPhone to driving higher priced iPhone sales. So you know, revenue is a function of units and price. They're now focused on price night units. Two years ago, three years ago, it was all about unit sales and less about price. John Butler, is Apple on track to do a hundred billion and gross profit for the year. I can't comment on the specific numbers. The regulators would hang me for that, but um, they're doing well him

you know him. Well, well, you can't tell me that that Apple revenue on an annual basis is over two hundred and fifty billion. Yes, they are, is a staggering number. It's incredible. This really is a very special company in many ways, and the iPhone really was an iconic device and it continues to sell well for them. Um, And you know the beauty of it is, you now have this huge installed base out there, and that's why they're focused on services. They want to monetize that installed base

now that the overall category really has matured. We just got the latest numbers from I d C on Global on the global uh smartphone market, pardon me. And it really is a low single digit growth market overall, and so that affects Apple and every other vendor in the market. So I also remember once in upon a time we were talking about innovation out of Apple and the fear that Tim Cook couldn't replicate anything in the Steve Jobs era where it was constant innovation and disruption of the

entire industry. If that's really the case, which it seems to be, if the iPhone really is going to be the main product of the company going forward, then is it overpriced given the fact that it might not be the growth story that it has been in the past. Well, again, it's morphing into more of a services and even a subscription story, if you is it valued as one again, Lisa, I hesitate to comment on valuation, um, but I think

it reflects Apples still robust growth outlook. You know, the the iPhone this year, as old as the iPhone is, it's ten years old. iPhone revenue grew double digits last quarter. So you know they're finding you new and unique ways of growing that product line, which is buying them a lot of time to transition into other categories. And you know you alluded to other products, and they really have

not had that. They haven't pulled the rabbit out of a hat again, as as I like to say, they did it with the iPad, they did it with the iPod, and they certainly did it with the iPhone. I'm not sure they have anything left there per se, But again, diversification is their friend there. So the iPods have done well, Uh, the home home pods will maybe do well there. So so we'll have to see what we'll have to say exactly, John Butler, we're gonna have to leave there. Thank you

so much for being with us. John Butler, senior Telecom Services and Equipment analyst at Bloomberg Intelligence telling me and him how much we're gonna have to spend on our family iPhone budget. It is our pleasure to introduce Nathan Sheets, the chief economist for PEACH and Fixed Income. But he's so much more. Previously, he had a storied career at the U. S. Treasury and also for eighteen years served

in a variety of positions with the Federal Reserve Board. Sir, thank you very much for being here, and thank you for having us. It's a pleasure to be here and welcome to PEACH. Well, we appreciate it. And know, just to put a little bit into context, I understand that the your dissertation, your doctoral dissertation, uh supervisor, one of them was one Stanley Fisher, and I'm wondering if you could comment first of all on the Federal reserves current policy.

But put it into the context of our political back and forth with President Donald Trump, having said pretty clearly that he doesn't particularly favor the policy of raising interest rates that has been adopted by the Federal Reserve and Jerome Powell. As you said, having been trained by Stan Fisher, one learns quite a bit about the importance of institutions

in thinking about economic policy. And certainly that's true now when we think about where the Federal Reserve is and some of the broader political pressures that the fedist feeling. So on the one hand, I think the Fed is is quite pleased with where the economy is today. The labor market is strong, the inflation rate is roughly at its two percent target. The Fed can say in a very convincing way that the economy is now performing in a way consistent with its dual mandate, and so I

think that's very very encouraging for them going forward. I think they're reasonably optimistic about where we're headed. Uh. They're calling for a couple more rate hikes next year, and ultimately the Fed funds rate landing around three point four percent, a little bit above neutral. Uh. But the back and

forth with President Trump that you mentioned adds a new dimension. Now, I believe fervently that the Federal Reserve is an independent central bank, and the FED is not going to explicitly change its policies, certainly not make them easier in response to political pressure. But by the same token, the FAT has to be aware of and respond to and incorporate

in the broader social and political environment. And I think that means the FAD is going to have to be extra careful and explaining what it's doing and describing its path, and I think being particularly careful to not make it seem like they're responding to that political pressure, and that could cough any interesting dynamic. The other real complication for the FED is the trade war with China. Uh. People

have been concerned, and we talked to people. I frankly, I am not getting a clear sense of how people are even pricing this. In This morning, President Trump tweeted just had along and very good conversation with President Jijan Ping of China. Talked about many subjects, heavy emphasis on trade. Also had to take a discussion with North Korea, basically

indicating things were moving in a positive direction. But Black Black Rocks Larry at a conference this morning said he doesn't think that anything is going to stop a full blown trade war. Markets are up on President Trump's tweet, what do you think is the most likely outcome in and our markets fully pricing in the potential decline. So uh, my feeling is that this trade war is going to

continue for a while. Having been engaged in some of this uh international diplomacy with China, I'm not seeing the markers or the indicators that would lead me to suggest that a agreement of any importance is anywhere in the offing. So my expectation is that on January one, the teariffs on the two hundred billion of Chinese imports are going

to click up from temper cent to UH. Broadly speaking, I think President Trump feels that he's got a winning hand, partially for the reason at least that you indicate is that the signature, the imprint of this on the U. S economy so far has been fairly limited. Now, the latest correction inequity prices reflects a lot of things, and maybe trade war is part of it. But I think President Trump feels politically and economically he's in a good place.

He's going to press this and he's looking for fundamental changes in the way that China does is right? Is he right that the U? S economy can withstand this and not be affected to too negatively? On the one he had, let me say that the economy, growth, investment have absorbed this sentiment, have absorbed this better than I would have expected so far. My second point is that we haven't seen how a trade war UH impacts a

modern twenty first century economy. And there may be through the Internet and and access to information and flexible supply chains, there may be more xilience and flexibility in these supply chains than we thought. Nevertheless, there will be a choke point, and there will be a point where UH it's hitting investment, it's hitting the market's more profoundly, and maybe even starts

moving into his politics. And at that point I think that he'll call and it's just likely to be at some point next year he'll have a summon with President She. He'll take up President She's offering and declared a grand victory for American capitalism ten seconds. Do you think the FED is going to make a pause here? I think the FAT is nicely threading the needle between being too restrictive and being too accommodative. There's always a risk, but I think the pal fat is on a very nice trajectory.

Nathan sheates, Thank you so much for being with us. Truly a pleasure. Nathan. She's is chief economist for PGIM Fixed Income, joining us here at the PGIM headquarters beautiful building glass in downtown at Newark and Lisa bram Ways along with my co host and colleague Pim Fox, and this is Bloomberg Markets. Thanks for listening to the Bloomberg P and L podcast. You can subscribe and listen to interviews at Apple Podcasts, 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