Pound Sinks As Market Comes To Grips With Hard Brexit

Sterling and other currencies around the world. We welcome our next guest, Dr wind Thin, Global head of Currency Strategy of Brown Brothers Harriman. Uh he's on the phone with this, Dr Thin, thanks so much for joining us. First, just want to get your thoughts on Sterling here. Where do you think this thing goes given what appears to be increasing odds for a hard Brexit. Ali, first of all,

thanks for having me on. So is a pleasure. Look, we're getting the first signs out of the new worst Johnson government, and to me, the signs are not good. That it's a lot of tough talk. He's saying October thirty one, Do or die is so on and so on, And you know they're talking about um doing away with the Irish backstop, but that's a deal breaker for the EU is not gonna go agree to that. So to me,

the u K is negotiating from position of weakness. And so these threats that it's gonna be a heartbreakting PLoud? Is it they really meaningless? Um that the EU has already said, Uh, it's pretty much non negotiable at this point. Um. So to me, I think markets coming to grips with Yes, the heartbreaks, it is becoming more and more likely. So what's the downside, Like, what's going to be the floor here for these fears? I'm sorry with the floor? Yeah? So how low can we go for sterling? Oh boy, well,

look that's a tough question. I take this take things. You know, it's sort of a weak or a month at a time. That's we think the March low March two thousand seventeen low from on ten's next big target. Let's get there and see what happens. You know, you have some people out there calling with pair dy with dollars. I think that's getting a little far ahead of itself. But look, the only thing I will say is that that the Bank of England did a scenario analysis last fall.

Was accused of being a scaremongering, but um, you know that they called for I think somewhere between ten drop and sterling eight percent contraction in GDP in the case of heart Brexit. Look, it's just one scenario, but you know, I think it's sort of any one's guess is as good as anyone others. But let me just say this that Sterling would be would be definitely sold on on

a heart brexit. So dr Sin. We have the FED going to announce their decision on Wednesday, We've got the Bank of England, the Bank of Japan also weighing in over the near term. Given that this we're getting, this global reduction in rates, is now the time to be taking a harder look at emerging markets? Well, I've been very cost on emerging markets for most this year, you know, for variety of reasons. So to me, you know, the liquidit story is obviously very positive for e m Um.

You know, the zero rates most the world getting lower, the fedback on the cutting bandwagon, um, and so that gives you a national bid for for instance, for emerging market fixed income, you know they're one of the highest yielding assets UM, but if you look at the currency and equity markets, that liquidity story just isn't enough. The global growth stories what's lacking. We've got an ongoing trade war between US and China that's really killing the regional

Asian exporters Korea, Taiwan, Malaysia, etcetera. UM, emerging market equities that have underperformed the developed market equities this year. UM. And that's again we're missing a global growth stories. I AM have just recently cut its global growth forecast again warning about the impact of the global trade wars. So you know it to me E MS a mixed bag.

I would say fixed income it looks positive from the equity story, but equities and fixed in I'm sorry, and FX are are I think are negative from the global growth story. Here's what I truly don't get, and that's sort of what the dollar is gonna do. So if we just pretend that we get what the market seems to expect point cut from the Fed on Wednesday, maybe sort of, and then we're gonna wait and see how the data pans out. What happens to the dollar. Un

that's a good point. Look the to me, I think the person I think the FEDS kind of painting itself from the corner. If you if you close your eyes and said, okay, you told me where the economy is going, with the John's report, where the retail sales are going, and you kind of ignored everything what the FED has been saying, you would say, well, what, of course we're not. We're not cutting race. But the FED has pants stuff in the corner. It tilted device just in the US

data was getting better. So to me, it's it's sort of promised this point. But I agree with what your assessment is that we're inna wait and see period. I don't think the FED would be wise to precommit to any further easing given how strong the economy looks right now. We're getting two percent growth to point one percent growth in Q two. That's been prety much trend growth um for the US UM. So the markets I think are

overestimating the Fed's capacity of the cut rates. If you look the January FED funds contract, it's still implying nearly three cuts this year, and given what's going on coming, I just don't think that's gonna happen. So once the hopefully the markets recalibrate the FED easy expectations, that should

be the next leg higher for the dollar. I remained dollarish just on the underlying strength of the US economy uh and sort of my outlook for FED policy as a result, Dr Winton, thank you so much for joining us. As always. Dr Thani is a global head of currency strategy for Brown Brothers Harriman here in New York. Here's a news flash for you. I may buy an iPhone. I have an iPhone five s E. You know how small that phone is. I may buy one, and Apple

definitely wants me to. The company reporting after the closing bell tomorrow expected to make about fifty three billion dollars in sales. Joining US now is Dan, I was Managing director Equity Research at Wedbush Securities. Was a twelve month price target of two thirty five and an outperform rating. Dan no doubt Apple is going to make a lot

of money. Is it going to be enough? Look? I think this is just another proved me period for Cook and Cupertino to really show that iPhone demand is stable, to slightly improve and going to his next cycle, especially China, China of all iPhone upgrades. That's going to be the key focus this quarter. We continue think it's gonna be

a ho home quarter. That's another step in the right direction. So, Dan, I think if you know, if you're an Apple shareholder today, you have to feel pretty confident that this company can make the big, big pivot from being an iPhone story to being one of services, subscription fees and things like that. Um, how confident are you that this company can make that

that pivot? Look, we're confident, and ultimately so the core of our both thesis on the name because iPhones take a step back, three million iPhones in the window of an upgrade opportunity over the next twelve eight months. But the monetation of services, that's the golden goose, and today it's only fiftcent penetrated. And in our opinion four hundred billions to four and fifty billion of the valuation of Apple.

Is the services business well fair? But that's not going to be like this quarter or the next quarter, right, So I feel like we've been waiting for the big replacement cycle for a long time. Is it going to happen? Is it going to happen? This year. Is it going to happen with the shift of five G, Like, what's going to be the actual trigger for the volume of phones that we're gonna have to see Apple Cell? Sure,

it's a great question. I think five G is going to be the silver bullet catalyst in terms of the core upgrade opportunity. But in between now and then, I think you'll see stable hundred eighty million to two indred million type of iPhone unit years. And if they're able to do that with services being amid to high team grower, this is a stock that continues to get rerated in

our opinion, makes new highs. And that's why right now many yelling fire in a crowded theater on Apple, whereas the stock that continues to grind higher, I think to China overhang has been a twenty impact in the stock. So Dan just recently uh app, I think last week actually Apple bought Intel's or announced they're gonna buy Apple's

Intel's phone business. What's the strategy behind that acquisition? That's all about five G. That's them doubling down on five G. Intel back was against the wall in terms of ever since the Apple qual Calm truth, Intel that business was basically for sale. They got on the cheap and this is really cook an Apple doubling down on five G going into this next massive cycle. In our opinion, it was a smart acquisition and ultimately was a cheap price.

So what do you think it's gonna So how we set up because usually, like the typical play was Apple's going to guide low and then surprise hi and you get that nice boot. That's no longer really the playbook into Apple earnings. So what can we expect when the stock is already treating it to nine to ten? Yeah, I think this setup is an inline quarter with a

beat on services. Really what the street needs. The big focus will be about the September quarter guidance and just quote, we'll call it qualitatively how the company is thinking about iPhone demand going into the next year. But the biggest number is gonna be China. You need to see the China iPhone number. We stabilize to show some sort of slight uptick relative to a you know, we'll quote an

improving decline. That's really the key because ultimately Apple stock is going to go up and down with China of iPhone units. And I think there's many out there that I think the anti Apple, call it pro Huaweian China nationalist movement had been a huge negative on iPhone styles, and that's gonna be key for them to show that that's not the case. So Dan, as a reformed and

rehabilitating media analysts here, I've often said that exactly. I've often said that, you know, as Apple pivots to more of a services company, they should really think about the content business. And I know they've dipped their toe in the past in terms of creating some content, acquiring some content,

but really jumping into the deep end. And I look on the balance sheet with billion dollars in cash, do you think envision over the next several years that we might see Apple make a big content acquisition somewhere along the line. Yeah, that's really been our call. Our call is for coments typically been shy of M and A outside of Beats over the last five years, that they're going to have to signfically acquiring content. I think they do go into deep end the pool on a larger

content acquisition. You know, we've talked about meter studios like MGM showny four in terms of ones that can look at I also think it's important when you look at the Intel that was an acquisition a billion dollars. I think it just shows that you're starting to see applicat a lot more equissive. I think contents next step that's key to putting fuel in that content engine on the services side, with that launch coming up later this fall.

Is that really Apple's m O I mean, and something I get because they're trying to vertically integrate their business, so they just do it themselves rather than like outsource, if that makes sense. But content is just such a cash burn, I mean, is that really something that they're equipped to get into. That's probably one of the biggest debates in the name because ultimately on the services side, they even lad to the game versus Election, Netflix, Disney

and you know it's called streaming vendors. But that is really what they need to further monetize, and that's really going to be a proved me situation for Apple on the content side. But I also view it just step away from content, it's also as a distribution. If you think about what they're really trying to do now with this next services pieces, distribution monetization put further fence around the one point four billion active iOS devices to date.

That's the key for Apple and that continues to be the key of the evaluation. It's the install basis to molonization the services. No doubt that's approved me, especially on the streaming side as that continued to be a crowded space. Uh Dan. Cash on the balance that I mentioned about two five billion UM, what do you expect them to do? I'm looking at the dividend yields about one point five percent. What do you expect them to do with that cash?

Are they gonna give it back to shareholders perhaps in a more aggressive way, Well, they've probably about being cash on neutral where they're basically given that away through whether it's bad backs for dividends. I think dividends are going to keep that one in half, and I think there's been pressure for them maybe to go up there a quote above two bread and keeping it in the short of suitets about one and a half percent divid and

yields key. I think by backs is ultimately going to continue, and ultimately it's really gonna be M and A that's gonna be the trifactor strategy. And I also do think investors have started to get a bit frustrated because the buy back strategy and dividends. It's obviously great for income investors and David investors in any way to see it, but you really want to drive growth here, and when you look at M and A, that's the key. And

you know, work at Microsoft. Microsoft's company for many years didn't do M and A. Then they started to get aggressive and Alton, when you look at Lincoln and some of the others, there have been some of the genius acquisitions that Nadella has pulled off. Dana, I have thank you so much for joining us once again. Dan is a managing director equity research for What Bush Securities. Joining us on the phone from New York City taking a look at Apple. Time to check in with Bloomberg Opinion.

We're joined by Bloomberg Opinion columnist Max Neeson. Max covers biotech, farmer and healthcare for Bloomberg Opinion. He joins us live in our Bloomberg eleven three oh studios. So, Max, we've

got another healthcare deal here, give us the latest. Yeah. Absolutely, So this is a deal that combined ends Viser's legacy unit basically all of its drugs that have lost patent production or facing generic competition along with with some other chunks of its business and are and it's kind of innovative novel branded drugs with with Mylin, which isn't a

similar business. It makes generics, it makes biosimilar as it has an OTC business as well, And it's basically a move to to kind of separate Viser's higher margin, more rapidly growing business from something that was increasingly becoming a drag on the company and from Mylin. It's an opportunity to kind of turn the page on on four years of kind of continued share price declines, lots of scandals and overexposure to put's been a really tricky U S

generic market. This is a bit of a broader business. So for the milind Visor tie up, though, isn't the Myland management still going to be like running the whole show or running the board at least? And isn't that bad because don't we like don't like them? I mean

a lot of people don't. But it's they're going to be a majority of the board still the chairman, but but the CEO is going to be a long time fiser fed and also they're they're redomiciling back to the US away from from the Netherlands, where they had kind of this complex and strange corporate governance structure that a lot of people didn't like. So they won't be quite

as entrenched. And I think the fact that you know, Fiser, a Fiser executive at the end of the day, is going to be someone leading the company and then CEO, how their brush who has been kind of the nexus of a lot of the controversy is moving on. I think there's a perception that that Fiser is is going

to be staring to ship to a certain extent. It's also kind of a bigger chuck at the assets also, So I was reading the Bloomberg intelligence note on this deal and I didn't even know there was this subsector of healthcare, the specialty generic drug sector. So generic doesn't sound good to me. Specialty sounds pretty good to me. So specialty generic is this a market that's even growing or is this just it's not really growing. I just gotta get scale and ring as many costs out as

I can. So, Uh, the generic side, it's been basically in free fall for the past few years, just a lot of pricing pressure, kind of these buying consortiums of different people in the healthcare industry kind of combining to to kind of force these these prices. Ever downward specialty

there's a little bit more room. You know, different people have a different uh definition of that market, whether it's just particularly complicated generics or or things that are still have you know, a brand, but do face potential generic competition, So that market there's a little more potential for growth. The degree to which this organization is going to this new company is gonna be able to grow as is

kind of the big swing factor for its valuation. It's a lot of old drugs from Fiser that are going to decline, but those will kind of have to be encountered by by new generic products, by biosimilars, and by basically just doing everything you can to prop up those sales as long as possible. So at the same time, though, they're gonna have a bazillion dollars in debt, right like dolls in debt, I mean, so that's seams rough if

you're an our shareholder of this new company. It definitely does for for Milan actually, which which kind of this says a lot about the position there, and they will be less levered after this, after this steal just because you're you're adding a lot of revenue and EBITDA from from Fiser. Uh, you know, it is a lot of debt.

But the nice thing about the specialty to Neeric business it does generate a ton of cash, which is why Fiser was able to attack on some debt and and take twelve billion dollars back out of this steel for for the continuing innovative Fiser company. So it is a lot of debt, but they're still going to be able to pay it down and pay a dividend. It's it's uh not as exciting, but it is highly cash generative. So what does Fiser do now that's a two thirty

five billion dollar market cap company. What's the growth story here? It's substantially better than it was prior to uh this when the steel was announced. Now it can kind of focus on medicines that have a longer pack life, have more room to kind of grow and expand as opposed to being saddled with you know, just this year alone Lyrica. It's a pain drug. I'm sure you've seen the ads for it all over the place. That that just lost

that just is facing a generic launch. So that's gonna cost them billions of dollars in sales over the next several years and basically wipe out and if they've kept it around, wipe out much of the benefit from from what is going well from any new launches. So this will be a much better looking business from a growth perspective and also a more focused one. It can instead of kind of managing this this beheamoth of of a

diversified business. It continues to to narrow the focus on on just putting out new medicines that that will have an opportunity to expand. So what other big companies quickly need to be sold off? Jan j trimmed down. So, Jane J. I think if there's one that's never going to do it, they're the one. They They've they've kind of always made the case that, you know, origin our business works better, we like the stability of having another unit.

But I think there's no far of a business out there that won't consider trying to kind of separate out some of their their older medicines, because that really does create a lot of trouble, creates a lot of volatility where you're kind of constantly fighting the battle between new

and old medicines. Max Nison, thanks so much. Bloomberg Opinion Columns Max Nis and you can read more on this and other stories from Bloomberg Opinion at Bloomberg dot com, slash Opinion and on the Terminal by typing O P I n Go. Yeah, we want to take a look at the commercial real estate business. We're seeing signs that in certain parts of the country, UH might be softening a little bit. To get the latest, we turned to

Tarrell Gates. Tarrell's the chief executive officer of Vertus real Estate Capital with three point four billion dollars and assets under management, based in Austin, Texas. U Tarrell, thanks so much for joining us. I just wonder if we could start off with you giving is just kind of state of the commercial real estate market. Where are we today? Well, we've been in a tenure expansion, just like every other

risk asset class out there. Um, we're at all time highs when it comes to valuations, So that gives a lot of people pause. Having said that, UM, we continue to go. We continue to have a very positive environment for commercial real estate investments. And when you look at real estate relative to other risk asset classes like stocks

and bonds and private equity and commodities, et cetera. You can say, from a relative beauty perspective, a relative beauty contest, it looks really quite good compared to the other asset classes. So how much of it doing well is because we have low global central bank rates and how much of it is actually the underlying demand and line business is

doing really well? You know, it's it's really both, right, So your first point is really important because what's unusual about the current escalated valuations is we don't have a private debt bubble like we've had in the past. When you look at the last several bubbles of commercial real estate, obviously the most recent being the global financial crisis or two thousand six, two thousand seven leading into o A, you know, we had some really aggressive lending standards going

on that doesn't exist today. Now. Some would argue we have a bit of an equity bubble which is fueled by a debt bubble on the public sector balance sheet. Right, So the federal government obviously, through all of its easy measures, has levered up its balance sheet, pumped a lot of liquidity into the system, which has driven valuations across all risk asset categories very high. Simultaneously, that liquidity has also influenced demand, so you have a scenario where there is

a lot of demand. As you suggest, unemployment is very low GPS growing albeit slower than most people expected to at this particular point in the cycle. Um and have expensive pricing, but all the rest of the fundamentals remain really pretty positive. So Tarah, I know you guys, your firm, you focused on alternative property type investments. Give us a sense of what those given us some examples of what

those would look like for you guys. Yeah, absolutely, So we don't invest in what's known as the basic food groups of commercial real estate, which is where about all institutional real estate assets are held, things like multi family

and office and industrial and hospitality and retail. Of course, where we focus instead is in property segments that we have found to be resilient during economic downturns, things like health your assets, so that would be senior living, medical, office, and related things like educational assets, student housing, charter schools, early at and then probably our biggest conviction asset class

right now is what we call workforce housing. Workforce housing is simply quality, affordable housing for the average US renter. You guys well know, particularly where you're located, we have a housing affordability crisis in this country and for a number of years we've been trying to be part of the solution to that particular crisis, and we think you can deliver attractive risk adjusted returns investing in that space.

So you're definitely not alone in particular. You know, I know that KKR is putting a lot of money into specifically things like senior housing. Um, what are valuations like, how have they changed? How much more competition do you have right now? You know, we've seen a lot of new entrants into our categories of the last several years.

And bring up KKR. If we took the top ten, the ten largest fund managers in the commercial real estate space, I think about seven of those have made investments in my property types in the last four or five years, which was not the case prior. What it's done is, on one hand, it's really challenging because it's driven valuations higher, as you would imagine, but it's typically valuations in portfolios,

So we see portfolio premiums today higher than they've ever been. However, one off deals still art have not grown at the same rate as we've seen portfolio deals, so you can still find value if you will, in the cracks and the crevices. The other thing is is when you look at the big guys when they come into a space, that also, I guess you would say validates the space.

It creates more liquidity. So we see far more liquidity when we go to sell assets today, and we are always actively buying and we're always actively selling now typically when we buy, we're buying one off and when we sell, we're selling a portfolio, and we see a lot of liquidity for that for those kind of transactions, more so than we've ever seen in the past. So I think there's a there's a lot of positives despite valuations being impacted with which make it harder to buy but better

to sell. Arrol Gates, thank you so much for joining us Terro Gates as chief executive officer for Vertus real Estate Capital based in Austin, Texas, giving us a breakdown of the commercial real estate market. Thanks for listening to the Bloomberg P and L podcast. You can subscribe and listen to interviews at Apple Podcasts or whatever podcast platform you prefer. I'm Paul Sweeney, I'm on Twitter at pt Sweeney. I'm Lisa abram Woyit's I'm on Twitter at Lisa abram

Woits one before the podcast. You can always catch us worldwide. I'm Bloomberg Radio