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App and with the Surrounded Table.
Vishell Canduja of Morgan Stanley Investment Management vish Ow, good morning.
It's good to see you morning.
We've just had a big month of global easing, which you've recognized yourself. We've had a federal reserve cut by fifty basis points. We've had China begin to take on more of an easy posture. Is that a reason to buy bonds or sell them?
I think after the visa, absolutely by them. I think at two fifty bus's points till twenty twenty five, I think it was a tough, tough slog there, and we were backing away from it. At this point. I think we think it's fair value at this point. But I think the market is getting a little bit carried away with the stimulus, as you pointed out, as well as the one or two good data points that have come out. Doesn't change the trend for us.
Well, tell me what the trend is for you, because it's been very confusing for the rest of us. We've seen contradictory dansa across the board. When it comes to the jobs market. You can pick out the employment components of the m week, the labor differential not great and getting worse, or you could look to headline pay rolls at America and just say everything's okay. Unemployment is still close to four percent. What is it to worry about. What's the trend for you?
This inflation is very intact for us. I think Kathy might mention in the previous slot as well. I think the data points that we are getting within inflation. Definitely the ones that are a little bit more volatile are showing up, which we don't think are going to persist for a long time, or we are a big component of shelter is going to drop off, as at least from the indicators that be track. So this inflation is
very intact. Economy is still in that exuberant slash soft landing phase, so you see the growth perk up from time and again labor market being one component of that. We don't think that these cuts that they've announced, or they've started off with fifty basis points are anything to resuscitate an economy which is going into a recession. So these are recalibration cuts. They've used that word very very clearly, as.
Well pause an economy that's going into recession. What signs are we seeing of any potential recession anywhere on the horizon base and everything that everyone's saying these companies included about how strong the consumer is.
I think narrative shifts are so severe, and we've seen that since twenty twenty two. I think we saw the two one in fifty basis points priced in with two really tough NFP reports where we started to question whether these are because of labor pool increasing or people coming into the job force, or this is because of layoffs. And then I think the market got very tied up with that for probably about two and a half months, and now we are coming back into it with one
very very strong labor report that comes out. So yes, consumer is strong. Underneath balance sheets are very strong. We
invest in balance sheets, you have bondholders. One quick point also I would raise is this is the issue that people have if a big chunk of the economy is interest rate insensitive, which is because of the stimulus that you put in, and then you ensued a very low interest rate environment where all of us three finance said three percent thirty y are fixed, very similar to what Comcast you.
Say all of us, all of us wish we had done that. Not all of us did. Some of us did, and some of us did, and ones around this time. I'm very happy.
About it, and some people are pretty bitter about it. But I am wondering you actually are seeing a tick up in mortgage at least for financings as a results have how much things are coming down. The world that you're talking about with this binary risk of narrative shifts doesn't speak to a world where credit should be holding in as much as it is.
Wouldn't you think if there was a.
Risk that in particular high yal bonds should be just ticking up, sowing a little bit of a sign of concern rather than absolutely cratering when it comes to the extra spread that investors demand to own over very fair rates.
Very fair we are trying to demand a little bit and we are getting priced out. So we are at the lowest point of high yell in our portfolios. For that one reason, I think if we slotted in the way of how we look at the world fundamentals, technicals, valuations, fundamentals are strong. You can take a few companies out of that picture who are edosyncratically going through issues. Right now, technicals are fiercely strong, and that is less of a spread buyer, more of a yield buyer that is coming
into the market. Real yields are high, and yields are best predictor of total dons analyzed for the next three years.
When we look at spreads, it spreads exclusively and we compare them to a different period and we say they are just as time as they work back then multi decade sides. How difficult different is the index now versus say, pre GFC, How different is this one?
Much cleaner? Balance sheets are much much stronger. Even if growth flatlines from here at one to two percent real GDB, I think pop will be just fine. As coming back to that homeowner example, I think a lot of balance sheets can have connotations.
So can I just ask an additional question please? And I know it's difficult and I don't expect you to have a precise answer, but typically historically three hundred basis points two fifty on high yield is super super sigh. Do you need to rethink that is a new number like two hundred one fifty?
What is it? Could be?
Absolutely could be if triple cs continue the carnage that they've been on probably over the last two and a half months. Here you just correctly, if you take out distress from high yield, it's another fifty basis points already there to your point around that low two hundreds, if you will. We think that spreads are very commensurate to the fundamentals and technicals we are going through. We could be tight and frustratingly tight for a long period of time,
but we are not expensive at this point. Now. I'm going to second statement right after that is sure we are at the lowest amount of spread risks in our portfolios in a long time, highest quality, highest interest rate duration. Were explaining why steepeners. We don't think that volatility adjusted, you're getting paid for the spread risks that you're taking out. Triple B to double is the lowest and probably about two decades At this point. As a spread investor, I'm
always looking for more premium. I need to get too paid, need to get paid for that volatility that I'm taking on. So for fixed income portfolios, I can still diversified, high quality, can still spit out probably five to seven percent total turn in the next three years analyze, I'm taking that probability bit higher versus going down below investment rate.
When you take a step back, you said that the technicals are very strong for credit for bonds. Just in general, there's a flood of cash coming in. Where's that cash coming from. How much is coming from people who are waking up to the realization that they're not going to get Social Security or some of these other benefits when they're old and I need the income and they're going to need to really be invested and get something more reliable.
Yeah. No, I think the lock and yield effect is very compelling at this point. I think the except for the very front end of zero to two, zero to three year part of the curve, where I think the sofa should adjust as the fact comes down from the lofty levels. I think every other part of fixed income
curves have already adjusted to be steeper. So the roll down the traditional way of earning money within fixed income, and sometimes the cliched way of how we put it is the dual mandate of fixed income has high probability to be met for that long term saver that you have income toll return, and then you have the negative correlation to risky assets, which is back as inflation is coming down.
How do you hedge against the potential for some sort of geopolitical disruption and oil price is surging. I mean, there's sort of this counterintuitive connection between bonds and oil prices that we've seen over the past few months. How much are you really planning for a scenario of that type.
I think it's tough to like massively shift portfolio positioning
for that one. I think one way that we are trying to adjust portfolios is that your overweight risk were overweight credit risk not as much though over the last like three years, if you will, so we are at the lowest point of our overweight, you still have an overweight poster that if this geopolitical tensions do fled up even further, which we had a few signs in the last like two to three weeks that it could have that we have enough potential to add below investment grade
risk which will sell off and react to these geopolitical tensions. And then the back end of the treasury curve is one more less geopolitical, more deficit situation that we are significantly underweight.
Are you worried about the deficit?
We are nauseous about it in terms of the biggest post war. Again, we can throw out stats all day long, but I think the weight affects is you need to grow out of it, or you need to do something as some of the European countries are already getting onto, is be physically responsible and going through some tough time.
Do you actually think Washington would do something very tough?
I think that is one thing that they are deficits in China is one thing. How common those two campaigns are on and how aligned they are.
Unfortunately, at this point, if the deficit is one of your biggest concerns, especially on a US election, does it well? I guess what matters more for you is probably the composition of Congress.
How are you thinking about that?
I think the bas case, I think they're looking at the same numbers that you guys report on the dominal etcector as well. Uh, dead heat. But then you know centered and and and house would be split, which is actually not a bad thing for for deficits. Might be we might be looking at a Goldilocks, even treacherous goldilocks stable scenario from from.
That's the least pan out, the least bud outcomes click Congress, because they won't make it too much worse basically, but not fix it.
It's good to see you. I appreciate it. Thank you, Michelle.
To that Morgan Stanley, sarahunt Vampine Saxon would sank with earning multiples of robust levels. Any faltering in the growth story could have negative consequences, even if it is more of a stable outcome versus a deterioration. Ernie's growth is key for equities. Sarah john Us Now for more, Sarah Goo Mornick, good morning. Good to see what you make of the banks so far. Big week of gains last week off the Bank of JP, Morgan and wels Fargo not just from Bank of America. About twenty minutes ago.
I think that that is a good start, and I think that that is obviously been heralded fairly well, and you saw the other financials.
Besides, if you're Morgan move higher on Friday.
I think to your earlier discussion, it's going to be very interesting to see how the credit companies do or how the banks do.
With the lower credit score folks, because I.
Think that that's where you're seeing much more pressure and pain than you are seeing in the upper end.
So it's going to see. We'll see how that goes.
But I think that the fact that you're seeing enough spending and that the consumer looks good and even if you're looking for it, you're having trouble finding it.
I think that's good news.
Sets up retail sales on Thursday as well. Any reason to think that we come in soft on retail sales given where the consumer.
Is, I think that's hard to see right now, But I mean you might have some areas of softness, but I think in general people are still spending fairly well.
It's too early to catch up for all.
The economic disruption that the hurricanes had, so I think that you probably are going to see reasonably good numbers.
So this is what a lot of people are expecting.
That the consumers have plenty of money, and that any degree of weakening, even in the savings rate, has been really tampered down by some of the recent revisions.
What's stopping you from just going full bull?
Well, I think there's still a lot of things that we don't know. There's a lot of uncertainty out there. We've got an election coming up. Yes, it seems like things have calmed down a little bit in the Middle East, But is that calm going to remain And just because we've got reports of that doesn't necessarily mean that we know what the outcome is going to be yet. So I think that there is enough out there that you
could be concerned about. And I think that you have next year a big expectation in earnings growth, so you want to see that economy continue to roll along fairly nicely.
And I think that there's, like I said, there's enough out.
There that that you could get yourself upset about or scared about, including the deficits and things that we're not talking about right now.
But at the moment that's not the focus. So right now, you know that's good frequities.
You basically describing the story of my life. I can go home and worry about a lot of stuff, but you come in the next day and nobody really seems to care about it. I am wondering whether we are seeing the risk getting skewed to the upside in terms of economic growth. We were talking to Max Kattner, who was talking about the real tail risk to him is actually an upside to inflation and a re ignition of
some of the price increases that we saw. That this could actually create the doomsday scenario that could actually stop some of the euphoria that we're seeing in equity markets. Is that the risk to hedge right now, given the lack of visibility of any other risks, particularly with respect to the consumer, I think it's.
A big issue.
I think the fact that oil prices have come down so sharply that helps a little bit on the inflation front. But I think that that's one of the areas that if you see you saw an upward CPI print just a little bit and all the directionality shifted, and is it a full.
Shift, is it a small shift.
I think that is one of the bigger risks because that's going to keep the FED from acting as decisively as it could if you have any weakness in the labor market.
So what do you want to be in equities right now? What's your favorite place to big?
I think you want to be sort of across the board, which sounds really boring and annoying.
Is that at least is equal weight.
Well, it's I.
Don't think you want to ignore the equal weight the way that you did the last time. Right so, before it was all about technology stocks, and if you underweight technology stocks, you were underperforming really badly. I think at this point the diversity and the fact that you need technology, but you also want to see what else is going
on in the economy. I think that's really come back, and I think that that's why you want to be somewhat across the board as opposed to having all your eggs and the technology.
Side is a theme that you want to run with.
This is what my Wilson and Molke and Stanley was talking about on the show that we moved from GLP ones to AI, this big and video move over the last few years.
Is there another theme you want to run with the works right now?
I think that it's good to understand what is going on with the matic investing. I think that what you're seeing with the European carmakers right now is they're saying, hey, hang on a second, we're not going to be able to go full ev in ten years.
That's not going to happen.
I think understanding the fact that you're going to have an and on the energy front is going to be important. I think it's important on a thematic sense to look at companies that have continues to get balance sheets and can really generate cash, because that's what's going to be more problematic. Even if rates don't come down dramatically but stay a little bit higher, you're going to start to see some of those companies that can't survive on their
own have more problems. And it hasn't really been an issue yet, and credit credits spreads are really tight. But I think that focusing on companies that are able to do things like buyveck their shares and paid dividends is going to continue to be very helpful.
You mentioned the US election in your notes. You talk about the political risk of volatility for equities. What happens when we don't know the outcome for potentially days or weeks.
I would not like to see that happen. I think that I don't think markets would like to see that happen. I think if it looks like any kind of protracted fight, I don't think that that's going.
To be healthy for equity markets.
But at the same time, we're almost in new It is not the right word, but we have had problems before, and we have gotten through them so to the extent that we've had challenges, and yet we all come back to a point where it's there is an acceptable answer. I don't think it's as bad as it could be, but I do not think that equity.
Markets would like that very much at all.
But are they even pricing in this probability right now?
I do not think that. No, I don't think so.
I think that they're not even pricing in a probability of a sweep of one side or the other.
I think they're still pricing in a probability of a mixed.
Government because that's generally better for equities because things don't move as fast, right, you can't make us changes as quickly, So.
The equity market is pricing in what they would like to be the outcome, not potentially what is the going to be the outcome.
Yeah, that's very equity market like though, isn't it.
I mean, isn't that what equity markets do. It's what do we want to happen. We're going to try to telegraph that and make it happen.
You know, if we keep moving this way, maybe thus it will be.
So we are deep in the heart or getting to the heart of earning season A. Which sector are you most interested to hear from?
We've already heard from some of the banks.
We're going to be done with basically the big bank earnings by the end of tomorrow. Which really will be the company or slew of companies that give you the best sense of whether people are a little bit over their skis in terms of risk.
If you think about what's going to drive what we think about the consumer, you're going to be looking on all the consumer side stuff. But if I think about the entire economy, I want to hear what the industrials have to say, and I want to see what they have to say about margins, what they have to say about labor costs, material costs, because that's going to set
us up for twenty twenty five. And that's I think the big question is, like, Okay, we've seen some really good earnings growth in twenty twenty four, We're expecting more earning growth in twenty twenty five. Do we have the underpinning ability to do that and to get those earnings through? Because if we do, then the bullishness is not wrong. But if you're starting to see cracks in that and you saw individual is that intiosyncratic?
Is Nike having a problem because Nike's having a problem. Is this having a problem.
If we see broader problems like that, I think that then the question starts.
To come what's happening next year?
If you don't and you see much more stability and you see companies saying, hey, you know what, we've really got to handle on these costs and we're able to push prices just a little just enough to keep margins in good shape or growing a little bit, I think that's going to be important.
Is there any sector that you're just completely avoiding?
Not at the moment, but I think that there are places where you want to be careful and you're always looking for companies within individual sectors that have their own dynamics. But at the same time, I think some of the consumer. You have to be a little bit careful for reasons like Nike and the individual idiosyncratic problems that you can see. But I don't think that there's anything that you would
say absolutely I want to stay away from here. I mean, it's interesting that the IEA is taking numbers down for demand, and yet we're taking global growth numbers up for China, right, So one of those things is not correct where you go from there.
I don't know. Materials have certainly been hit pretty hard on the back of both.
Oil coming down and some of the other stuff, But I don't think that you want to be completely out because there's still places to make money in those sectors.
Sarah.
Let's got to see you, Sarah if I'm hired Saxon work. We begin this out with stocks at all time highs as earning season rams up. Max Kenner of HSBC still bullish. A powerful combination of dubvish fed China stimulus, low near term EPs expectations, and subdued sentiment leaves us very bullish on risk assets. We find it incredibly tough to form a bearish narrative from here. Max Kenna joins us. Right now, Max, you've talked about why you're bullish. Let's talk about where
you're bullish. High yield credit overweight even with spread sta type Max.
Why, Yeah, good morning.
I think look, when you look at your high old credits fora its actually they are still you know, pricing in a bit more premium than the US high held counterparts. We did close the US high old overweight that we had really for a long long time earlier this month. Overall, however, I don't think you know, it's an environment where you want to be in risky credit over equity as anymore. I think it's particularly you want to be in equities in particular.
Yes, you've want to be a bit overweighted.
And emerging market dead and highield credit in particular. But this is the environment. This is the sort of environment that Lisa was just describing. That is that any news and all of the good news or all of the news is good news, and that is particularly favorable for equities and in particular for the US.
This is echoed the fund manager survey from Bank of America this morning. Max, I went through the land a little bit earlier, but really it sounds like you wrote it. The biggest jump in investor optimism since June twenty twenty on Fedcutch, China stimulus and a soft landing Max. The question you ask in your own research of yourself that you get asked all the time, what would it take to make you bearish? Is that question alone? What makes you bullish?
Not alone, but definitely it's one of them. When we look, for example, at our sentiment and positioning indicators, the interesting thing is that actually the bearers and the bullish signals, so the buy and the sales signals are still pretty much on balance, pretty much the same. So what we're seeing is that sentiment.
Overall is still pretty neutral.
So I think at least when we speak to investors sort of the overall backdroppers investors are pretty constructive, they're pretty positive. But I think overall there's still a bit of caution going into the election. Going into you've got geopolitical uncertainty. You don't really know around the labor market. Fine, we had one good print around the labor market, but is it really out.
Of the woods.
So there's a few questions around the cracks and the
labor market as well. Around the strengthen the US economy, and that keeps you know, investors in a really really weird position where they keep telling us, yeah, right, kind of constructive, but at least, you know, in the near term, a bit more cautious, and that is reflected in our sentiment and position in indicators in the last couple of weeks throughout that actually we had them closer to a bias signal despite equities that at all time I then
closer to a sale signal. And that alone is really part of the reason why we're so constructive and so polish.
Max.
There was a time when no landing was thought to be negative for stocks because essentially what that would mean would be inflation that didn't come down and bond deals that remained high.
Why is that no longer concerned?
I think it will be a concern again when it's properly no landing, when we really start talking about, hey, candor fed not cunt at all anymore, or may they even have to reverse cause and may they even have to hike again. Let's remember that was the case what we had in twenty twenty two, when you know, all of a sudden, in all of these episodes, there was way more ratetikes being priced in, and that was the time when credit spread suffered, when equities suffered, were pretty
much everything so off. We had the same environment in September October last year again where we had Jackson Hall saying it's higher for longer, we can't cut rates at all. We had the same environment in March April this year when the rates market was starting to price a possibility of rate hikes. Once that comes back, and once that is really properly coming back into the pricing, then it will become a problem for valuations.
Across all the risky assets.
But let's be honest, right now, we're so far away from that, right We've gone from sort of nine ten cuts by the end the next year, we've gone.
To six cuts. So what that's just a reflection of.
Good growth, good earnest growth, good profitability, good GDP growth, And we'll take it right and only once really we're going to see sort of one hundred and eighty degree shift the FED not even saying pausing, but we're done. That would be a problem I think for risk ass.
So is there just to put a bow under this?
How much are you basically saying that if the FED were to come out and say that they were only going to cut by twenty five basis points this year, and it only had a few more before they might reach neutral. That could be at or it really has to be something more definitive where you start to see INFLA should reaccelerate in the material way.
No, I think it would have to be something more definitive, and it would to put a bit more precise I think it would have been, or it would need a really one hundred eighty degree shift from what Powell said during Jackson Holl. Remember Jackson Holl two years ago was saying, you know, he was saying, there will be pain. There will be pain for households and businesses. That's what we need. That is what is required to bring inflation down last year, and Jackson Holl was all about higher for longer.
This year.
It was all about we don't like more pain, we don't seek more pain, we don't welcome it, will act against it. So it's literally bringing in the FED put again. And let's remember there's a way way different level of rates compared to the twenty tents. They've got an awful
lot of room to cards. So if say, for example, one of the next two to three payroll data actually do come below expectations, they have a lot of room to say, fine, now let's the next time, we'll go fifty again, and that can cushion any downside for USSET. So the fair put, now, I would argue, is much more credible even compared to the twenty tenths. So it would need a really, really dramatic, much more significant shift to become a problem and start becoming a problem for risk assets MAX.
When you look at the Bank of America Global Fund Manager survey released this morning, the three top tail risks are geopolitics, inflation, US recession in that order, What do you rank as the biggest risk?
Now, I think it is actually inflation. It is the rate side of things. I mean, overall, we've got to figure out what is the biggest one.
Is it more.
Towards recession or is it more towards inflation and rates. If you are of the view, like we've been for the last two years, that the US is not going to go into recession, that really in the market is underestimating the strength of the US consumer, the strength of the underlying US economy, then by definition your biggest risk has to be rates. And you know, at some point perhaps yields increasing by so much again, either the velocity or the level that it starts becoming a problem for
valuations across the board. Again, the reason why I also think it's because it's the biggest risk, because if that really materializes, there is nowhere to hide. Remember in March April this year or Q four last year, everything sells off. It's air quarters, it's credit, it's emerging markets, it's rates. Everything sells off and the only thing the only place to hide is the dollar. So from a hedging and from an assellocation perspective, it is by far, I think the biggest risk.
So, given how bullish you are, you potentially in the no landing camp.
Now I wouldn't call it no landing. So I think the market really always exaggerates a bit. Right. You guys were talking about short term inflation expectations. Let's remember we started at sub two percent short term inflation expectations at the start of the year. They went all the way up almost to three percent, we went down to one point seven, we're back up to almost two and a half. We're backing down a bit. So the market always goes from oh my god, it's total no landing No, it's
total soft landing. It goes from one extreme to the other. I think the reality is that it inflation. You know, we have this inflation shock, we have disinflation, and now we're just not quite down to two percent, right, We're a bit stuck. That is actually not a problem. It's not a problem at all for earnings. It's actually good for earnings because it's a nominal figure. It's good for nominal growth. And that I wouldn't call it no landing.
I think the market is getting a bit too obsessed around these definitions and always swing from one extreme to the other. I would say it just continues to be a really supportive environment for nominal growth, and that is an environment that is particularly supportive for equities.
And Max still bullish and it's good to catch up Max Candida of HSBC with your equity market at all time highs. This is the Bloomberg Sevenants podcast, bringing you the best in markets, economics, angiot politics. You can watch the show live on Bloomberg TV weekday mornings from six am to nine am Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen, and as always on the Bloomberg Terminal and the Bloomberg Business app