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Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney alongside my co host Matt Miller.
Every business day we bring you interviews from CEOs, market pros, and Bloomberg experts, along with essential market Moven News.
I'm the Bloomberg Markets podcast called Apple Podcasts or wherever you listen to podcasts, and at Bloomberg dot Com Slash podcast. Here's a deal. Emily and my Wheelhouse both potentially you know. Look at Paramount Global that's the old Viacom, CBS and Warner Brothers Discovery again the old time Warner stuff plus the Discovery that merger David zaslov as the CEO. Maybe those two companies getting together, which would be really interesting.
Robert Fishman, he's a senior equity analyst at Moffatt Nathanson and Robert's longtime street analyst. Maffatt Nathanson pound for pound the best TMT research on the street in my opinion, that's why we like to talk to those guys when we can. Robert, thanks so much for taking the time to chat with us here. Give us the rational for a potential hookup between Discovery, Warner Brothers, Discovery and Paramount.
Sure, thanks for having me. Well again, this is all speculation at this point. I mean that the reports suggest that they clearly met this week. In terms of the logic behind it, I think it really just comes back to the fact that traditional media is really starting to
get more desperate. And why I say that is that the realities of the fundamental business at hand, with linear advertising falling off a cliff and cord cutting continuing to accelerate, and the costs of switching and pivoting over to streaming,
has really challenged a lot of these companies. So now they're all looking to figure out how can we try to get stronger And the way that it seems most of these companies are trying to do that right now, at the very least, is trying to have conversations to figure out who they can combine with.
Robert, how do you see this deal going down, this potential deal in Washington, It doesn't seem like the antrust regulation would be very welcome to a potential deal this large.
Yeah, we were surprised by the timing of these conversations, and really comes back to two key points. Number one, there's a two year lock up right now for Warner Brothers Discovery as part of its last deal with WarnerMedia and AT and T to come through on the other side of the reverse Morris Trust. So that leads you
to April twenty four. But then coming back to your question, given the regulatory landscape right now, it's hard for us to see how any deal would be approved in the current administration, or at the very least what would have
significant review. And we pointed out in our report this morning the overlap between the linear cable networks and broadcasts, just from a viewership standpoint, would be something that clearly would be looked at a little bit more closely, I think given the potential combination.
Hey, Robert, you know, nothing gets done here unless Sherry Redstone gives the green light. Sherry Redstone the chairperson of National Amusements, which is the control shareholder of Paramount. Do we have any reason to believe I mean, she could have sold these assets at any time over the last six, seven, eight years at a drop of a hat. Why now do you think she might be open to a transaction.
It's a really great question.
What we think is leading to all of this now is again like the realization as far as what the trajectory of the business is going forward. And I alluded to it to a couple of the headwinds facing the traditional business already in terms of advertising and cord cutting.
But another big piece coming up is the renegotiations with a few of their affiliate distribution partners, and namely Charter, and if we all remember what happened with Disney just only a couple months ago, we do think that this is going to be the template that at the very least Charter and more likely other distributors are going to
look to take going forward in future negotiations. So that will put an additional pressure on companies like Paramount, which we've essentially labeled them as one of these cheaters of the ecosystem because they're double dipping in terms of putting their premium content, namely NFL and other sports rights over the top on Paramount Plus. So we think Charter and others are going to look to right size that type of economics.
He you know, Robert, you and your partners over there, Moufett the agency and again the top of the top of the top of TMT research. But quite frankly, I'm not picking up the phone call when you guys call. I mean, I just don't have any reason to believe, Like, I can't figure out how any of those any of you guys make money at Paramount or Warner Brothers, Discovery or maybe even Disney for that matter. This whole pivot to streaming. Do you guys have a view as to
whether anybody can do this? I mean, Netflix has done it successfully, but that's a different model and different legacy. Can any of these traditional media companies make that pivot from you know, the you know, the cable model to the streaming model.
Yeah, I mean we as you probably know what we've long had our doubts in terms of whether streaming is actually a good business. And it's clear that streaming is not as good of a business as the old traditional
PATV business for these companies. And so as these companies are working through this pivot and now that they don't have the full leeway that Wall Street has initially gave them, you know, coming out of COVID, we're at the point now where they have to focus on cash flow and figure out how quickly these streaming services can really be profitable. And we do agree that that Netflix has clearly won
that fight in terms of the streaming wars. We still do expect Disney to be a strong number two player essentially given the assets that they have, but we think it's going to be more challenging for a lot of these other traditional media companies to figure that out.
What would be some of the implications for the viewers if this deal we're actually going to go through on content and viewership.
Well, what we're going through now, just back to the last point, is essentially like this content rationalization period where I think we've been all living in this world that we've enjoyed endless content essentially, and there's almost too much out there that you can't even watch everything, and I'm sure everyone has their own playlists that that they haven't
been able to get through. But I think to your question, going forward, we're going to see a pullback in the amount of content that's being spent at these companies again because they need to focus on their cash flows and generating real profits and that's a more challenging environment. Given that that backdrop that I keep talking about, and how they figure that out and how they pivot clearly content spending, what will be a central piece to that, to that.
Puzzle, Robert, what's your top pick for twenty four?
We actually cover sports betting too, so we're in favor of DraftKings and clearly that they've had a tremendous year that this past year, but we think the momentum for DraftKings and sports betting overall is going to continue into twenty four.
I mean, what's the is or what's the bear case for sports betting? Because I can't really think of one. I mean, this is just ridiculous, the appetite for this stuff.
Yeah. Again, DraftKings has taken a tremendous amount of share over twenty three and they're set up nicely into twenty four and what we really saw and was probably the most surprised about this past year was just how quickly and how efficiently expenses have been rained in, but not to any detriment to that top line to your point, because the market just keeps growing really quickly.
All right, Robert, thanks so much for joining us. Really appreciate it. Robert Fishman, he's a senior equity analyst that Maffatt Nathanson talking about the potential tie up between Paramount Global that's the old ViacomCBS, big big media company, and Warner Brothers Discovery another big media company.
EI.
They're both big, a lot bigger than they were five years ago, but guess what, in this new world order, they're not big enough. And so it's that whole argument we've seen in many other industries scale and that's kind of that's certainly the play in the media space as well. So we'll stay on top of that, and the folks at Moffat Nathanson are some of the absolute best research voices on the street.
You're listening to the team. Ken's are Live program Bloomberg Markets weekdays at ten am Eastern on Bloomberg dot Com, the iHeartRadio app, and the Bloomberg Business app, or listen on demand wherever you get your podcasts.
One of my all time favorites is here, Emily. You don't know this, but a Maletti, a head of active equity at Allspring Global Investments. It joins us here for get this liken how money falls Wisconsin or something. I don't know, but I went out there one time about twenty five years ago. When I keep going back, so and thanks so much for joining us here. Boy, this last I don't know, six seven eight weeks, it's been such a move in the equity markets, in the treasury market.
You know you've seen this come and go a million times. What do you make of the last six seven eight weeks?
It's been a wild ride, Paul, And thanks for having me on. It was really nice to be on this week. And wish you all a merry Christmas and happy holidays. So thanks for having me back. Look, it's been a really wild ride. And you know we are getting that Santa Claus rally, certainly a little bit even early, but there's a lot now with the rally that we have that maybe took a little bit away from what we thought might happen in twenty twenty four. So I think now is the time.
To be a little bit more disciplined about the way we enter the year.
And I had the wonderful opportunity to actually meet you at your outlook event a few weeks ago, and I'm wondering if after that fed Duvish pivot you had to change anything from your twenty twenty four outlook.
Well, Emily, you know, as we talk then it was interesting because a lot of the things that we were pointing out is where fundamentals were pointing us for twenty twenty four. And as soon as Powell kind of said the FED put is back on, those things really started to ramp up. Areas like small cap, right. You know, it's an area that we've been looking at really closely for the last couple of quarters. At least the market really hasn't been paying that much attention, but that's where
our investment teams saw a lot of value. And as soon as it became clear from Powell that you know, look, rates are going lower, those that area of the market really really lit up. What I would say, though, Emily, is where we probably want to be a little bit more cautious is the type of small cap stocks that you know, investors enter into. There still are a lot of small cap names that don't have the best balance sheets.
We're more interested in quality and looking at small cap stocks that have free cash flow, that have better balance sheets, those names and margins obviously to maybe the margins above twenty percent. Those were the names specifically that we were calling out that are durable and can last whatever we do see in twenty twenty four.
Hey, and you know, one of the things that had I think concerned investors certainly for the first maybe nine months of this year was the lack of breath in this market, the Magnificent seven driving most of the performance. But that seems to have improved a little bit. We've had the Russell two thousand really outperforming over the last couple of months. How do you think that's going to play into twenty twenty four? Should you think you'll see
some continued improvement in the bread out there? Or should I just jump on the Magnificent seven for next year?
You know, Paul, it's so interesting because you know, as you and I both have been trained over time, fundamentals really do matter, and you know, it was as we really dug in and I did a lot of work on this. The Meg seven really did generate good returns in twenty twenty three because they had really good earnings
relative to the rest of the market. And so, okay, i'll give them that, But when you look at the thirty percent plus earnings growth that many of the Meg stocks seven, or the many of the Meg seven had at least five names out of Megs seven grew earnings over thirty percent, many over forty percent in the third quarter, it's going to be really hard for them to top those. You know, compares now become very difficult in twenty twenty four.
So I think we were also saying our compares are easier, and again that showed us where the breath of the market could be in twenty twenty four. That pointed to areas like small cap, but also areas like healthcare, where earning's growth appears to be the best almost of any
other sector. As I look to twenty twenty four to twenty percent or more, earning's growth, No, look, it wasn't great in twenty twenty three, but we think the prospects there are pretty good in twenty twenty four, So driven by fundamentals, we think the breath is going to be much broader in twenty twenty four. And you know, not that the Meg seven are bad, it's just that the chances for them to top that growth rate is going to be a little bit more difficult.
So then what does it tell you about the market that we're in that people are still buying the mag seven. You look at ETF flows. We saw a record inflow into spy s and P five hundre ETF last week, twenty billion dollars in. It looks like stocks more broadly, and a lot of this is coming from large cap sixty nine billion dollars into equity ETFs in December, that's the best month since twenty twenty one. What do you
make of that? I guess euphoria just piling into these large cap stocks, or should people be pivoting into other areas?
Then well, we personally think they should, Emily, and I think you know sometimes and look, I think investors generally speaking are very very smart. But one of the things that has gotten disjointed is this heavy overweight in these Meg seven stocks. And so you know, when you're buying an index, when you're buying the Russell three thousand growth when you're buying and all just the Russell three thousand.
When you're buying the S and P, you're buying the most expensive names, and you're buying thirty forty percent of those names and much less of any And so while you might think you're diversified, you're buying, you know, very chunky portions of a few names and very few of the others. And so, you know, we think taking a much more active approach and having fewer names, but owning a broader portfolio makes sense at this point in the market,
and we think returns can be better. Now. It's not surprising to me that those ETF flows are going there just because of the structure of the indexes. But we think it should change, and we think it will change when the performance of the other names starts to show that they can produce the fundamentals that I talked about earlier.
Hey, and how about valuation here in the market. We've had a big, big move higher. I don't I'm not sure we've necessarily had a commensurate increase in earnings here. How do you guys think about evaluation here?
Yeah, that's what makes me a little bit nervous, Paul, You know it. You know, certainly I can point to the four hundred and ninety three names that aren't as highly valued as the overall market. But I do think we do need to see some catchup, and we do need to see the fundamentals play out. And so, you know, I don't love the fact that we've had this really strong rally here, and I do think we're entering twenty
twenty four with a much foggier environment. Yes, inflation has come down, but you know, we have problems with the Red Sea right now. The geopolitical risks as we enter twenty twenty four, you could say, are much higher than when we enter twenty twenty three. It's a political year, an election year. Now, typically those end up being up markets, but typically also pretty about little and so I think, you know, it's going to be much more challenging than
investors believe today. That being said, we think will end up having an up year, but it's not going to be up, you know, double digit. We think it's going to be kind of up single digit, maybe high single digit, but expected to be a rocky one.
What's the biggest macro risk for next year? That you don't think enough people are talking about.
Yeah, I still think it's geopolitical, right, We're definitely focused on interest rates right now and whether the FED gets it right or wrong than you know, whether we have a softer hard landing. But it's always, you know, you know, Paul probably would also agree with this. It's never the things we spend the most time worrying about. It's the big surprises that come out of nowhere that really have
the most dramatic impact of the market. And so you know, it seems to be that probably a geopolitical risk, but maybe one that we're not evening considering today.
And as always, thank you so much for joining us. That is the great and malady head of active equities at all Spring Global Advisors. And I've said it before many times and I'll say it again pound for pound, I think some of the best investors I've ever come in contact with over my career. Or in Milwaukee. Why maybe it's the great University of Wisconsin, but boy, there's just so many firms large and small in Milwaukee that have some really smart investors and have really good track
records over a long period of time. So you wouldn't necessarily think it. I'm telling you.
Many maybe I have to take a reporting trip there.
Absolutely, you're listening to the tape.
Cat's are live program Bloomberg Markets weekdays at ten am Eastern on Bloomberg Radio, the tune in app, Bloomberg dot Com, and the Bloomberg Business App. You can also listen live on Amazon Alexa from our flagship New York station. Just say Alexa play Bloomberg eleven thirty.
Let's talk Apple here, I mean here we are the holiday selling season. It's kind of important for people that sell stuff, and Apple is certainly a company that sells stuff. One of the things they sell are those watches. I'm not an Apple watch? Where or either of you an Apple watchwhear? Nope, right now there Nora's got it? Okay, great now, I like I'll watch it tells time. So, but apparently they have a little bit of an issue here. Mark German joins us here, a chief technology correspondent for
Bloomberg News. Mark put into context a tell us what's happening with Apple, and b kind of put it into context like doesn't matter.
Yes, it certainly matters. And to tell you what's happening here, it's an unprecedented situation.
This is the.
First time in the modern era, or probably in the entirety of Apple's forty plus year history, where the company is being forced to stop sales of one of its core products in the United States. That core product being the Apple Watch Series nine and the Apple Watch Ultra two. Those make up probably eighty plus percent of all Apple Watch sales, the two newest models. They only sell three models,
so two of the three models are impacted. Here. There was a patent dispute with the company in southern California called Massimo, and the International Trade Commission of the US ruled that Apple is violating two of Mosamo's patents related to blood oxygen saturation.
Right.
That's the app on the Apple Watch. You click it, it'll tell you your blood oxygen. Most people are looking for a percentage between ninety five percent and one hundred percent. That's in violation. Two things happening a season to sist on Apple being able to sell the watch in the US, as well as an import band and injunction so they can no longer import Apple watches manufactured outside of the US. All Apple watches are built outside of the US. For
those watching at home. So that's the fundamental issue there, right. So starting on Christmas Day, the end of the day, December twenty fifth, the Apple Watch sales in the US are no more when it comes to the Ultra two in the series nine. Now, given that we're talking now and it's Thursday morning, starting at three pm Eastern time, the Apple Watch will no longer be sold on Apple's online store. Apple retail stores in the US they have
about two hundred and seventy of them. They're closed Christmas Day. So December twenty fourth, Christmas Eve is going to be the last day of in store retail sales. Now for those who still want to buy an Apple Watch before the end of the year, maybe for themselves or a gift and what have you. Apple's not allowed to tell you this for legal reasons, but I can tell you can still get one at Best Buy, Target, wherever they're sold other than Apple retail stores.
What's the history between Apple and Massimo. I'm so curious how Apple got involved in a patent dispute. I mean, you think of Apple, one of the largest, most important companies. How could something like this happen to Apple?
Yeah, so Massumo actually sued Apple in twenty twenty. In January twenty twenty related to ten patents on health sensing technology. Right then in September twenty twenty, Apple introduced the Apple Watch Series six. That was the first Apple Watch that includes the blood oxygen feature. Now, Massimo, they're known for their contributions and patents related to blood oxygen, so they preemptively sued Apple in anticipation of this watch coming out.
Then once the watch came out, they filed an injunction claim with the International Trade Commission of the US asking for the watch sales to be banned. Now that was filed in twenty twenty one. That is not actually going into effect until, like I said, the end of the day Christmas Day, so it took two years in change for it actually to go into effect. Masimo says they met with Apple ten years ago, back in twenty thirteen,
before the first Apple Watch was introduced. Apple promised them some sort of partnership or discussed hiring them or licensing from them. In the end, what Apple did as they ended up hiring about twenty to twenty five of their individual engineers and executives, hired them to come work at Apple, offered them more significant salaries and they worked on the Apple Watch without Apple needing to partner with Masimo. So Masimo considered this a trade secret violation, so they sued
Apple over that. In addition to this, these hiring concerns plus the patent concerns that have been ongoing. Now the first lawsuit, like I said in the beginning of twenty twenty, and now this is the ultimate pushback against Apple, this injunction and the season desist. Now, what I will tell you is the lawsuit related to the trade secret situation that actually ended a few months ago and ended in a hung jury. So these two things well related the
same companies. This ITC ruling was able to happen exclusive away from the lawsuit.
Mark. What is Apple saying in response here?
Yeah, Apple is saying that they're going to take every legal method possible to get the Apple Watch background sale. They're complying with the order. They believe it wouldn't be so hot if they didn't comply. What I'm hearing is that Apple's trying to fix this via a software update. So that software update has been in development now for several weeks. What needs to be done is they need
to test it. They need to get some sort of testing done related to regulatory given that the Apple Watch is in some cases used for health purposes, right, so there's an extra layer of testing that needs to be done internally. That blood oxygen feature is not regulated, so they don't have to deal with the healthcare regulators or the FDA, But what they need to do is get approval from the US Customs Agency. Need to submit that
software update to the agency. The agency has to review it, and then they make the final determination if the season desists and the import band should be lifted or not.
When do you expect to see this actually hit Apple's earnings, Apple's stock price? I mean, I'm looking at the HCP function on the Bloomberg terminal right now. I see that this week is looking to be its first down week in over seven weeks seven week win streak. This will be the first down week, down about one point five percent right now. But when do we actually see this come up in the price action?
Yeah, so the sales and the revenue for the first quarter, right that runs through the end of December, so December thirtieth or thirty first, So I don't anticipate an impact on Apple's revenue that they're going to announce for Q one. They'll announce those numbers at the tail end of January
or at the beginning of February. But what I could tell you is that they're going to probably get impacted on their Q two or Q three, depending on how long this roll is for I would anticipate a several hundred million dollars head wind year, which is not extraordinarily material to Apple, but certainly is worth discussing. And it is the difference between a growth quarter and a non growth quarter.
Right.
All you have to do to grow is generate one dollar more than you did in the quarter of the year prior, Right, So if you're down several hundred million or a couple of billion, you're not going to get that flexibility, and you might have a down quarter when you otherwise would have had an up quarter. But the big question is how long this is going to take. My guess is probably around three months, unless we have some surprising stay order from the federal government or some
sort of last minute detO. But I don't really expect either of those.
Mark, what's the for What are you looking for out of Apple in twenty twenty fours? Are there any products that we need to be on the lookout for any new services that you think they might try to pursue, any any anything else that's on your horizon.
Well, the Vision Pro right, that's all anyone in the Apple world is talking about right now. That's the first mixed reality headset. I don't think it's going to be a big revenue driver, but it's certainly going to be awesome. The other big thing is out.
When do we know? And that's going to happen, the Vision.
Pro that's going to come out by February, so probably at the tail end of January or.
Now are you going to be one of those techniques that's going to get one of these?
Yes?
Yes, it will be the whole paycheck on a Vision pro.
Se an expensive who's kidding who? All right, So that's coming up in February. That's interesting. Now, how's a company positioning that thing?
Well, they're not. They haven't talked much about it since the introduction in June. It's pretty nascent. Like you said, it's pretty expensive.
With tax.
It's probably coming up against four thousand dollars throws for most people, and so it is pretty pricey. I think the big marketing. Push is going to start sort of more in the middle of the year, obviously, when they release cheaper models. That's going to be a significant development. You asked about services. I think you're going to see Apple walk into the generative AI space this year. You'll see introductions in June around jen Ai integrating large language
models into the iPhone. So that's going to be a quite significant initiative for the company too, even though they're going to be about a year and a half behind everyone else.
Mark, I don't know if you know it, but Michigan's playing in the Rose Bowl. You're in southern California. Are you going to the game?
I will not, but I'll do well.
Aren't you a good Michigan man, A.
Good Michigan man. But I'm pretty focused on the Lakers these days.
I see the jersey Kobe in the background, So good for you.
You're listening to the tape. Can's are live program Bloomberg Markets weekdays at ten am Eastern on Bloomberg Radio, the tune in app, Bloomberg dot Com, and the Bloomberg Business app. You can also listen live on Amazon Alexa from our flagship New York station Just Say Alexa playing Bloomberg eleven thirty.
A lot of folks as you think about twenty twenty four, as MS was just mentioning the sentiment seems so changed to really leaning towards that soft landing, but there's still some concern out there. Semashad joins us. She's a senior global investment strategist Principal Global Investors, joining us via zoom. Sima, thanks so much for taking the time here. I know you guys have your twenty twenty four outlook aut and I'm just seeing kind of the focus here on pivot, pivot, pivot.
What do you mean by that in twenty four.
Yeah, it's a play on that friend's line. Well, look, I think you know we published that a few weeks
before the FED spoke. I don't think any of us anticipated that the FED would shift in such a manner and so quickly, but clearly, I think the inflation data is certainly backing up that idea that twenty twenty four is no longer just the year of the pause, but it's actually mainly going to be about the pivot, and for a risk acid it's almost whichever way you look at it, there's going to be nuances, But overall, this should be a fairly good year for risk acids simply
because those central banks are going to be are going to be pivoting, and importantly, it's not going to be you know, it's going to be supported by a not too unhealthy backdrop as well.
You've you've seen a lot of year end markets. How crazy has the buying frenzy inequities been for this year and just compared to the rest of your.
Career, it's certainly very aggressive, you know, I think that it's aggressive, but it's also not entirely unexpected, because as we've been going through this year, every time we've been talking to investors, declines and this is anywhere around the world, in Asia, Europe, the US, it's pretty much the same thing. The questions that we've been getting are generally along the lines of, you know, when are we going to know
what the Fed is doing? When will they peak? They're kind of just waiting to put their money to work, So the uncertainty has been clouding a lot of investors' minds, but they haven't had any concerns that this is going to be a downturn or there would be a downturn that would be very destructive that would see any kind
of permanent disruption to the underlying economy. And if you don't think there's going to be permanent underlying damage, then essentially what you're doing is you're just trying to time the market so when you know things are clearly going to be an upward move. So as soon as we saw any indication actually at the Bank at the end of October that Chair Powell was having a slight shifting stance. That was, you know, opening the airwaves, opening the doors
to a huge flood into that equity space. Now, I do actually think that Q one is going to be a little bit more volatile, and you're going to have to see investors be strong in the face of that volatility. But overall, as I look out over twenty twenty four, I think investors are right to be taking on this lightly more optimistic perspective semas.
So the FED, I guess, was clear, maybe clearer than they wanted to be about their you know, being open to being a little bit more dubbish here. How about the the Bank of England, the European Central Bank? What are we hearing out of those institutions.
So again it's a very very similar sentiment and again backed up similar to the US, by a clear decline in inflation. Actually in Europe and your area, it's been extra interesting because the inflation has been inflation has actually come down faster than it went which is unusual. You know, you kind of hear the analogies of inflation takes the escalator up and stares down. It's the opposite way for Europe.
So inevitably the ECB has had to acknowledge that, and they have also taken on dubbish stance, same thing with the Bank of England. But I think the key difference that you're seeing is that they are retaining an element of caution. They are still worried that if they were to cut rates too early, you would see that renewed
drive up in inflation. So whereas they're acknowledging that there's likely to be a pivot in twenty twenty four, they have pushed back a lot harder at the idea that you could see rate cuts as soon as March.
If you were working at the FED, what would stop you from declaring victory right now? Is it the labor market.
So it's a couple of things. I you know, I, like everyone else, has probably poured over wall of speech, the two different speeches that he gave a couple of weeks apart, and he had said at that point that he needed to see a couple of months of clear inflation evidence, and it was disinflation to that three month from three month rate was moving down sufficiently, and in the end he only saw one month of that, and he had enough evidence to me I would be a
little bit more cautious. I'd say, well, look, let's get a series of those numbers to know for sure, because if you look back to the seventies eighties period when you did have very high inflation, the FED made the mistake of cutting rates too early and then that drove inflation to a new high. So I would certainly be a little bit more concerned, especially knowing that, as you know, an unemployment rate of three point seven percent is extraordinarily low.
It's a very very tight labor market, and so I would need to see some more evidence of a slight economic slow down. Obviously I need a recession, but sending it more evidence of slowing economic activity and unwinding labor market before I felt sufficiently confident to start cutting interest rates.
So similar where the good folks are principal global investors, Where do you guys see the opportunity in twenty twenty four. We've had such a move here in as last six, seven, eight weeks. I think people are very happy with the performance, but they're saying, oh boy, now what do I do in twenty twenty four?
Right?
And this is a time where you know, we have to start thinking about valuations. What are the valuations, what are the signals coming to us? So from the equity space, you know, we know that the Magnificent seven have driven you know, most of the games this year, but their valuations are very, very expensive. And although we are long term holders of some of those really big tech stocks, there is something to be said for some of that
small cap universe. There's valuations attractive. If you believe that there's going to be a cyclical recovery around the second half of the year, then to me, this is a good time to be ready to write some of the volatility down in the first quart or so, but knowing that you will be well positioned for the upside. So I think that that valuation set level is important. From a credit perspective, credit spreads are extremely tight historic tights.
Knowing that there's going to be a little bit of a slowdown in around Q two Q three, I worry a little bit about, certainly the lower quality aspects of the credit spectrum. So I'd be entirely focused on that core fixed income space. And the other part of this is is as much as we know or feel that there is going to be a central bank pivot, there
is still a lingering inflation risk. You know, economic theory tells you as long as growth there's above target, there's always going to be the risk that inflation researches, and we know that bonds have not done very well in protecting when inflation is moving up. So I still think that there means you need to have some kind of
exposure to relasi it's in your portfolio. It doesn't need to be too much, but at least that broad diversification, so you'll protect against a couple of scenarios, which to our minds they're not entirely throwaway. You still have to consider them.
What about outside the US is that an area to invest in for twenty twenty four?
I think there are certain opportunities. The main area that we're looking at the moment is it's still in emerging markets, but at ex China. The beauty at the moment is that you can actually think about emerging markets without having to consider some of the downturn that's going well in China. So the areas that we're looking at are Latin America primarily.
Again we're looking at very very cheap valuations. You've got central banks which are already cutting interest rates, and also you have the ability to ride onto a secular theme of deglobalizations, so kind of the regionalization of supply chains, as well as the fact that some of the natural resources that would be coming into play as you think about the energy transition, are actually coming from Latin America.
So you can have a number of cecular plays by positioning in Latin America at a time where valuations are extraordinarily attractive at this point.
So China, it's such a big part of the MSCI. But I guess from your perspective, the risk is not the reward is not worth that risk.
We do have yeah, we do have concerns about China still lingering. You know, we've seen from the recent conference that the policymakers are not planning to move in with big stimulus. They're still thinking about quality growth, which of course from a long term perspective is positive. But as long as you're not seeing the property market respond in a way that would improve confidence, then the Chinese economy
is going to be struggling. And the one thing I come back to is if you do a quick comparison of the US property market and the Chinese property market, just to give you an idea. In the US, the property market accounts for about thirty percent of US household Well, in China that number is sixty percent.
Wow.
So as long as a property market is struggling in China, then it's very difficult to see in meaningful economic recovery. And without that recovery, I think investors stay very, very cautious, and you just don't see those flows back into Chinese equities.
It's great analysis. I's always loved that data point. I'm going to use that. I will credit Seema, but I would definitely use that Simasha, senior global investment strategists over their principal global investments in London. One would street great part of town just outside of the city.
Thanks for listening to the Bloomberg Markets podcast. You can subscribe and listen to interviews at Apple Podcasts or whatever podcast platform you prefer. I'm Matt Miller. I'm on Twitter at Matt Miller nineteen seventy three.
And I'm Paul Sweeney. I'm on Twitter at pt Sweeney. Before the podcast, you can always catch us worldwide at Bloomberg Radio