Penn Mutual Is Selling HY Bonds, Opting for IG: CIO

at Bloomberg dot com. Well, the everything rally that investors enjoyed in nineteen appears to be continuing here in the early parts of To get a sense of what the risk rewards scenario is for investors right now, we welcome Mark hepp Install, chief investment officer of pen Mutual Asset Management. They have about twenty eight and a half billion dollars under management based in Philadelphia, but Mark joins us here

on our Bloomberg Interactive Broker studio. So Mark, again, a fantastic performance in financial markets last year, A good start to the year. What are the risk to the market from your perspective? Well, you know, I do think that, um, the geopolitical risks um, certainly with what's going on with the RAND attentions there. Um, Clearly the coronavirus is front and center, and it seems as though the second case arriving here in the United States is enough to pressure

equity markets some today and lower interest rates. So um, but you know, generally our outlook is for a more stable market both equities and interest rates this year, and I think that's really resulting from the veed honestly wanting to get out of the spotlight, move to the side, keep interest rates where they are, and we think that's going to be uh, really an outcome where both equities and interest rates are more range bound this year as

opposed to dramatic moves like we've seen the previous two years. There's been a common theme where people say that bonds and stocks are sending different messages, with bonds rallying typically indicating some negativity, pessimism about global growth, stocks rallying indicating optimism. You said you disagree, You don't think that these narratives

are inconsistent. Why well, I would say, on the short term, like you get a day like the day where fear enders and market you can you're gonna see a situation where bonds and stocks act differently. However, over the long term, I do think that the fact interest rates are so low, they are so on a tractive versus other alternatives. UM inequities I think are a big part of that equation. UM it really forces investors to take more risk when interest rates really sit where they do today. So I

think over the long term that's supportive evaluations. And I do think that you know and clearly that you know that the mantra don't fight. The Fed worked um in late two thousand and eighteen and then worked in two thousand nineteen, So I think that's also part of the equation. And last year, you know, the FED at the beginning of the year was expected to really move interest rates higher.

So the fact that everything rallied last year in response to lower FED interest rates, you know, I think makes sense markets an election year this year, how do you typically think about your portfolio and positioning in in a presidential election year? Well, I will say the pull from the middle, um from I would say both parties, really, I think means the outcome for the election is going

to have significance for markets. And it doesn't necessarily mean that stocks are gonna scream higher scream lower depending on which party wins. But I do think in terms of winners and losers will be quite different, um depending on the outcome of this year's presidential elections. So and we've been involved heavily in the fixed income markets. That's where

we tend to focus our investment activity. And so you know, certainly healthcare is an area that has been under some pressure there for fear that you know, there could be dramatic changes for the health insurance in the United States, so that you know, is against something that the outcome I think will deliver different winners and losers next year. HILED bonds, they've been on a tear at least through the last couple of days when we saw the price

of oil really tank. Wow. Crew trading on the imax now fifty four dollars and forty eight cents on a barrel. That's down from the end of the year when it was sixty three. It's almost now ten dollars since the end of last year. Amazing. Uh. And you are seeing HIL debt underperform other types of credit as a result of this due to their energy component. What's your view on this space, Well, I do think when the double B universe is trading sub for scent where it sits

or close to it today. You know, it's hard to make a case that UM, I would say, high quality, high yield makes a lot of sense. So you know, I do think there are better opportunities for total return within uh the investment grade corporate bomb market and also within certain parts of the securities securities markets. So you know, I will say I think generally consumer balance sheets are

in better condition than corporate balance sheets. So I think if you're gonna take credit risk, you much more UM paid well to do it and rewarded in consumer credit as opposed to corporate credits. So are you underweaiting how yield right now? We are, Yeah, We're looking for opportunities to lighten UM our high you would exposure and upgrade to UM investment grade into securitized, in particular for our Strategic Income Fund, which is really a go anywhere fixed

income strategy. When did you start doing that, Well, probably towards the second half of last year. UM. You know when we generally, you know, at the high end, we may have ten to fifteen percent of how you would exposure within our Strategic Income fund, but we've been gradually reducing that. And again, you know, we we're finding similar

types of spreads for highly rated securitized products. The residential mortgage backed securities market in particular, last year they underperformed partly as a result of higher prepayment field as h fears as mortgage rates declined. So that's an opportunity where if our outlook is for more stable rates this year, that should outperform corporate credit for example, how about credit quality in your portfolio. We're ten eleven years into this

economic cycle. People are concerned perhaps about credit quality. What do you see in your portfolio? Well, we you know, we do think that UM. You know, good solid credit research, especially UM on the corporate credit side is critical today given where UM valuations sits. So you know, our corporate credit team, you know, they really focus across the credit spectrum, both investment grade and high yield, and they've done a

terrific job in terms of of navigating these markets. And I will say last year, even though generally it wasn't everything rally, there were pockets of weakened weakness, especially among lower rated high yield credit so energy, some certain triple C rated securities last year really underperformed. So that's been an area where we have been underweight. What kind of returns can people expect from a credit portfolio right now

that takes a bit of risk. Uh, it doesn't go crazy, but is trying to operate and getting a little carry in this environment. Well, you know, the starting point really for all financial asset pricing is the resk free rate. So when you have the ten year yield trading now below one point seven percent, you know, to me, it's it's hard to make a case that you're going to get much more than you know, mid twos to three percent for a reasonably high quality investment grade corporate bond

portfolio today. So you know, again we think it's time to be cautious, and we do want to make sure that you know, if do if we do get in a circumstance similar to the December of two thousand eighteen, when really the credit markets were on sale, equities were under pressure, you know, we want to have dry powder to take advantage of those opportunities. How about new issues at least? And I we keep saying Bloomberg News stories about all the new issues coming into estment grade market,

Well there has been, Yeah, there's been incredible demand. And I will say there are certain um securities, especially within the banking space. Some perpetual preferred securities are getting done in that low four percent zip code. So you know that was levels of issuance that were unthinkable twelve months ago. But you know, again, I do think the negative interest rates abroad um really are steering foreign investors to US financial assets. Low treasury yield, steering investors to to yield

where they can get it anywhere. So even though we generally think bank credit quality is good, you know some of some of the opportunities, they are definitely uh less attractive today. That's actually what's distracting me right now is the gap between two year bonds in the US and Germany. It's just absolutely blown my mind. It's the lowest since

September seventeen. I'm actually completely serious. But it's exactly your point, Mark, which is that basically, uh, this is confirmation in my view, I mean take it as you well to me, this means that investors are coming over from Europe and coming into the US and trying to take advantage of that gap. I could be wrong by email address if you want to right to me to tell me I'm wrong, Lebrono. It's at Bloomberg dot Net. Mark Happens Style, chief investment

officer of Pen Mutual Asset Management. Well, much of the focus on international trade has between between the U S and China, but there's also been rising rhetoric between the US and France on a whole host of items, including wine. We have to figure out what's going on there. Nobody better to do that than with Tom Gearing. He's a chief executive officer and co founder of Cult Wines Asset Management based in London. Tom, thanks so much for joining us.

Tell us what's going on potentially with the French wine market and tariffs? Yeah, good morning, Thanks so much for having me. Well, I mean, obviously the current sort of impass between the France and US over the digital service attacks was in one way you had going to have a huge implication potentially on the French wine industry, and one particular region that I think would have suffered significantly

would have been a Champagne region. The Champagne, for example, US represents the biggest export market for at four five million euros, and the potential ents tariffs that they were looking to impose on French goods would have included Champagne could have been quite a catastrophic really for the for the for the Champagne region, and would have been I mean, I don't think you can underestimate the seismic impact that would have had on the global wine marketing, in particular um,

you know, the French wine market. But now that that sort of ceasefire has um has been established seen the two sides, I think what people have sort of forgotten about is that there already are tariffs imposed on e wines, in particular French wines, and these were imposed back in October as a result of the dispute over airbus. So if you actually look at the European wines in take a French wines, you know that they've been under fire

considerably over the last few months. And we've already started to see the impact um those tariffs have had on French wines in the in the global marketplace, and and in particular the impact it's had with US importers canceling orders UM that they had placed canceling on from a futures contracts they had in place UM. And you know a lot of the wine owners, wineries, distributors you know

in Europe understandably worried and Similarly in the US. You know, a lot of the importers, merchants, distributors again are very concerned about what's going to happen over over the next few months. So I think even though this is a this is a good sign for the market, you know that they've decided to hold fire. Um, you know, we're not out of the woods yet, and it's it's very finely poised. I have to ask the burning question in the room, Tom Gearing, how does one get into wine

asset management? So, I mean, my my my background, my family we were were passionate wine collectors. It's something that I've known about for a long time. But I really believe in in the financial viability of wine as a as a diversification for an investment portfolio. You know, wine is it as an asset. Classes is a tangible product. It's something that is um fundamentally based on unique characteristics in that the greatest wines in the world are produced

in very small quantities and they're consumed. So wine has a perfectly inverse affly curve. So there's you know, there's there's a lot of history and romance around the product. But if you take some of that romanticism away and treat it as a financial asset. You know, it has a lot of potential benefits to anyone investing it. So fine wine as an as as as an asset management concept. I think it's something that's going to become more and

more mainstream. Um. You know, over the years, Paul I will say that I treated as a viable asset in the evening. It does work. It does work. So town, what are you buying right now? What are the wines that are promising the value right now? Well, I mean look to keep it in the context of the conversation about the terrorists. Um, you know, it's Italian wines. The best Italian wines that have done extremely well. You know, they were the best performing subregion last year in terms

of price performance. Um. If you look at some of the best wines that are produced in northern Italy in particular and Pierre Mont where the Nebuola grape is uh, you know, the grape that's grown more than most the wines in that region have gone up significantly in value. There's demand that's increasing because if you look at the quality the wines are being produced there. In comparison to

say that the equivalent of Grand Crew Burgundy. There's quite a significant price gap, and there's quite a significant price disparity.

And I think that globally, consumers, especially at the top end of the market, um where prices have increased, in particular for French wines, in particular Burgundy Groan Crew for example, People on our something to look outside that for value, you know where, kind of whe where else in the wh Where else in the world can I buy into really really high quality, um small production wines, but that can still deliver um, you know, outstanding experience. Well, I

guess that there's a question about wine. When you say that it's a financial asset, I mean it is, but you can consume it. And there's a question are people buying these mainly as an investment vehicle? Do they expect them to be drunk at some point? I mean, is there sort of that end goal or is it that

they are being increasingly treated as financial assets. Well, I mean, look, if you look at wine from a very basic expective that you know, the great wines in the world are actually made to be drunk in ten, fifty, twenty years. So they need someone to carry that cost um. They need someone to carry the cost of storage, of insurance of the wines and making sure that they're kept in

the opten conditions. So the fact that wine as an asset, as a as a product sorry, um, you know, increases over time and value in most cases provides the holder, the person who's carrying the costum, a financial incentive to

do so. So regardless of whether your intentions on day one are to buy for purely collection purposes or whether you're buying purely for drinking purposes, the fact that wine increases in value gives you the financial incentive to actually hold and store these wines, which can be quite a costly exercise. Um. So what I think is, you know, as altruistic is you could be as a wine connoisseur. Sometimes you don't know how much your preferences or objectives

in life might change over time. So with wine, it's of course first and foremost product that should be consumed, and a lot of people in the world are consuming these wines. But from a secondary perspective, if you're if you're a collector and you can get a financial benefit from doing so and end up drinking the wines for less in the future, or you can resell them and generate a profit. Or you can come into the markets a pure investor and generate a very low risk adjusted turns.

Then I forget all adds to the overall greatness of the asset. Tom Gearing, thank you so much for being where us. Tom Geary, chief executive Officer of cult Wines Asset Management, joining us by phone. I want to get to a fascinating story here. President Donald Trump is again facing questions about his relationship with Mohammed been Salmon if the Sudi Crown Prince was accused of spying on Amazon dot Com chief Jeff Bezos. To get some more on

this story, we welcome Justin Sinc. Justin covers the White House for Bloomberg News. Justin, thanks so much for joining us. Talk to us about how this story is expanding from what it was originally reported. Jeff Bezos and the Saudi Crown Prince. Yeah, I mean what we're seeing now is I think a lot of pressure on the US government

to respond. Obviously, President Trump is still sort of facing the fallout from the killing of Jamalika Shogi, who was the Washington Post columnist who was murdered in inside a diplomatic facility. Uh, and this again has gone back in some ways. This uh latest controversy is like an amalgamation of all the sort of controversies of President Trump's tenure. So you've got, uh, these concerns over you know, closeness

with Saudi Arabia despite UM human rights violations. He've got his back and forth with Jeff Bezos and Amazon, who President Trump himself has been frustrated with because of the owner ship of the Washington Post. You've got this ongoing court case over whether you know, the Pentagon violated UM kind of a fair competition by giving Microsoft rather than

Amazon this huge ten billion dollar contract. And so I think a lot of attention is now turning into how President Trump is going to handle this, because you would think under normal circumstances of foreign government hacking the richest man in the United States the head of a prominent American company would be something that the US government would

respond to. Justin there's also a question of cybersecurity. So, putting aside the politics of whether President Trump responds to this, UH, there is a question of Saudi Arabia's capabilities in any potential friendship or contact from people close to the administration. We know that, for example, President Trump's son in law

had some direct contact with Mohammed bin Salmon. Uh. So, I'm wondering do we have any sense or better surveillance into knowing that other members apps of the government were not hacked by the Saudi Arabians in the same kind of way that they are suspected of doing so with the richest man in America. Yeah, I mean, this is a real question here on the White House, is you know they're they're Is all that's reporting about Jared Kushner

and an MBS speaking with each other over WhatsApp? Obviously the Saudius have been sort of brazen, at least allegedly. But the one kind of point of caution that that some people have said during this is that the investigation into Jeff bezos phone was done by an independent firm.

It hasn't yet been reviewed by outside government sources. We're not sure if the U. S. Intelligence community has made the same determination, and that that could explain some of the reticents so far by the White House in the

administration to to publicly say anything about this. But my guess is that they are undertaking a security review, not just what happened in the basis case, but if anything had happened that could potentially compromise the US security here Um the way else it said previously that that Jared's PHONN conversations were all properly documented and security measures were taken. But I'm sure that this this case has sort of

prompted a new look at all. That what's interesting, I think the is there any sense that the US government plans to launch an investigation or are they just going to sit on the sidelines and hope this maybe pu bose over. Yeah, I mean, certainly the public indications is the second. UM. White House spokesman Hogan Ghibley was asked

about this yesterday. Uh, he said, you know, the while the administration takes it seriously that Saudis are an important ally, the President himself said he wasn't really familiar with the case, and Treasury Secretary Ammunition uh said it shouldn't stop American companies from continuing to work with and invest in Saudi Arabia.

So there's not yet kind of an indication that the US is launching kind of a full scale investigation or raising red flags in the way that the Obama administration, for instance, did after the sort of famous ony hack um by North Korea, which ended up, you know, releasing a lot of embarrassing internal documents and emails justin sink of Flaver News. Thank you so much for bringing us that. I do want to just give you an update and

what's going on in markets right now? You're saying oil prices fall, uh, it's actually down now, crede on the imax cents, that's down almost ten dollars from the end of last year. Meanwhile, you're seeing tenure into your treasury. Yields fall to their lowest since October. And there is a question of why you've seen it right, you know,

seen the equities rebound, certainly led by tech. You aren't seeing necessarily a massive bid in gold, and there is a question of why yields are constantly being pressed lower in the US. I do just have to say, I do find this interesting. The foreign bid, how much is that? What's driving it given the fact that the ECB is on hold, possibly looking at more ways to stimulate inflation in the rearview mirror, and what a year it was starting off, and generally similar type of fashion, broad strength

of financial markets across the board. Let's see kind of what the big drivers are for going forward. Welcome Mark Lusheni, Chief investment strategist A Johnny Montgomery Scott Basin, Philadelphia. They have ninety billion dollars under management, so lots of money putting to work there. Mark, thanks so much for joining us on the phone again. We started out the year kind of like we ended in some pretty good strength

across the financial markets. How are you framing outlook? Sure? Well, I don't expect a repeat in what we had in twenty the least by way of order magnitude, but directionally similar. And that is to say, I think that US economy is going to remain on sound footing. There are now, I think increasingly evidence of better economic growth abroad. We a slew of manufacturing numbers that came out from the European area this morning, and they were all indicative of

a month over month sequential improvement. And I think that is going to largely play out in a fashion that allows investors and business leaders alike to see those better conditions, framing an outlook for corporate earnings in twenty to improve, and that should set the setting for risk assets to continue to march higher um. Although recognizing that nine plus of the move last year in the U S stock market was a result of multiple expansion rather than earnings growth.

So it's really going to think be heavily reliant on that earnings picture to improve, because without it, I don't expect we're going to see that kind of multiple expansion repeated this year. I'm old enough to remember when people

said we were late cycle. Are we still late cycle? Well, we're later in the cycle than we were ten years ago, are we Some people are actually saying that we've had other cycles, their micro cycles, that have cycled with cycles, and therefore we're totally fine, and now we're starting a

news cycle. Well, I mean there is actually some oscillation that you can see in, for instance, the manufacturing cycle, where they tend to ebb and flow in three year periods where you have about eighteen months of manufacturing activity advancing and then eighteen months of slowing manufacturing activity. And so actually, what worries think we're seeing right now is that nater being formed in that eighteen months of a slow down in manufacturing that should lead to improving numbers.

And therefore, I think work up towards catching up to the data we've been getting out of the service society of the economy, which is much larger, much less volatile than the manufacturing side. But together that should lead to once again an improved outlook for economic bacteria or the balance of this year. Well, Mark, I'm enough to remember when valuations matter, and I think about the equity performance up nearly thirty percent last year, I don't recall a

lot of earnings growth accompanying that. So how should we be thinking about valuation and the equity markets right now? Well, there's a number of ways. One and look at it if you just simply look at the price to earnings multiple. We started this week with the SMP five hundred trading at a precisely nineteen point zero times forward earnings for facts at s and P five hundred estimates of a little over a hundred seventy five dollars for SMP five

hundred companies we use consensus. Well, it's probably not a number that's all that dissimilar, and as a consequence, it suggests that equity markets certainly aren't cheap in here. But you know, we've seen multiple expansion even up into the

mid twenties in the midst of a bull market. Uh, and then you when you take it into the context of also UH kind of the once again the extension of the team to principle, there is no alternative when you look at bond yields again pressing lower than one seven on the tape, assuming that, I think what's concerning investors at the moment is the coronavirus UH tends to wane over some period of time without it obviously infesting conditions to the point where equity markets need to sell

off more to reconcile two concerns that this will impact on a more permanent basis global growth. UM, then I think that the market can sustain this multiple, if not even again expand somewhat mark what's your most contrarian call for Well, I think obviously one would be the emergence of inflation. UM. You know, it's been hibernating now for the better part of a decade, and it's probably the one thing that has the least consensus around the expectation

that will ever see it again. You can look at that by way of the tips yields at one point six one point seven on the tenure um. You can

look at it by way of Fed policy. You know, with their ear markting risks to UM the downside rather than the upside, and there are obviously lengthy pause in any kind of rate adjustments UM, and so I think that would be the one thing that given the tightness in the labor markets and any improvement economically UM that we could see potentially emerges, certainly not in the near future, but maybe out over the balance of So Marc, as I think about, as you know, Lisa and I were

talking about, we're late in what is typically you know, uh, late in the cycle. If you think about ten or eleven years of this economic cycle, are there sectors that

you like here more than others? Maybe given where we are in the economic cycle, maybe where we are in terms of evaluation, Well, I think if you look at the sectors that had recently shown some signs of life, again, they're indicative of this provement that we're recognizing here that I think is still less than convincing among market participants. But I think evolving in a way that says that one would want to have a more pro growth, more

procyclical stance. So sectors like industrials, for instance, look appealing to US energy would also fall into that camp. But has got his own idiosyncratic issues. Material stocks would fall into that campus, well, it would financials um those that are winning on a day like today, when you have this, you know, rather violent rotation from risk on the risk

off the utilities, consumer staples. Real estate investment trust makes sense as a risk caven if you're going to be long equities at the moment, but at the same time their valuations have expanded to the point where they look exceedingly rich to us. And unless this environment is going to stay once again, where investors are on their heels um from an investment standpoint, they look the least appealing among all the sectors in the S and P five hundred.

Mark Lashni, chief investment strategist, to Jenny Montgomery Scott joining us, thank you so much for being with us. Jenny Montgomery Scott with ninety billion dollars of assets under management from Philadelphia. Thanks for listening to the Bloomberg Penl 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. And Lisa bram Woods I'm on Twitter at

Lisa bramwo wits one before the podcast. You can always catch us worldwide on Bloomberg Radio