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the Bloomberg Terminal, and the Bloomberg Business App. Let's check in with a professional here Seema Shaw, global investment strategist at Principal Global Investors. Sema, thanks so much for joining us this morning. Love to get your take from what we heard from FED Chairman j Powell yesterday.
Thanks for having me on. Well, I think the big thing.
The big takeaway was really that the Fed wants to coverte It's not a case of, you know, going through the inflation data. There may be a little bit of a hesitancy, but certainly Powell seem to be somewhat dismissive of those upside inflation surprises. He put it down to seasonality. So I think the big takeaway is is that if BED wants to cut rates, they need a really good reason not to cut rates. So from that perspective of sudden, it looks like three cuts are on their way for this year.
And where are you penciling in those cuts? Are we seeing those in June, July as soon as May?
So we have been.
We've had a forecast for a while for the first cut to come in June, followed by September and December. So this is fairly in line I think with where the market is pricing today, although I think the market is maybe starting to price even more cuts than before, so maybe some expectation that they could be there. But certainly for us, I think even though Powell was quite dubbish, I would actually goes for us to call HI dubbish
rather than hawkish. You still need to have some clear evidence that inflation has abated and that those two months of jat and fedure anomalies rather than a new rising trend.
Guess a little bit less than now we're going to hear from the Bank of England. What do you expect to hear from the BOE.
Well, that's an interesting one because so of course very unlikely to have any kind of change to policy. I think that that is certainly the full expectation for the market. The narrative is interesting at the moment because it's quite different to the US, where the UK is really struggling. The economy has been much much weaker than the US, and the inflation number is the latest one coming in a.
Little bit lower than expected.
So they have a clear path to cuts now, and certainly from our perspective, there is a rising chance that you get sooner rather than later, potentially as soon as June, which you know, if you do have a number of central banks moving at the same time, that will make things life easier for each other and certainly for the currency markets.
So should we still expect the FED to be leading the way in terms of central banks, at least in development markets making those decisions to cut rate.
So I think it will be coincidental, to be honest.
I think for the ECB and the Bank of England, they're fundamentals of their economies really are calling.
For rate cards in the very near future.
So if the FED didn't come in June, I don't think that's a reason to stop for the ECB in the Bank of England to put off their rate cuts, certainly, but it just so happens. I think in a way that the FED is probably going to be cutting around the same time, and I think their meeting does come first, so they will be leading the way generally speaking, though, you know, the US does have a very very different picture to what you're seeing from Europe and the UK,
which is why. But yesterday's meeting that was somewhat dubbish. I mean, you have a strong growth picture, I mean stronger. They raised their forecast quite considerably for this year. You've got a higher inflation forecast, and yet you've still got rate cuts coming at the same time as other countries or the economies around the world, which are pretty much in stagnation, if not already in recession.
All right, Sema, So for the US market here, if we are in fact in a reasonably doublish situation from the Fed's perspective, what are you telling your clients to do here.
In the US in terms of maybe asset allocation.
Yeah, look, this is a risk on time.
We have been overweighting equities in credit for the last couple of months in the expectation that the economy we expect it to slow a little bit but suddenly to avoid recession. But we've also been anticipating the rate carts, and together that soft landing with rate cards is a perfect situation for equities and credit.
Now importantly for Ecuitis, this is.
Also going to be a time where you can start to really look at the very unloved parts of the market, the bits where the valuations are still quite attractive, of which there are many. So within the US, although we do still like that large cap tech space, we are edging into that small cap space.
We think that that should do well.
The valuation gap is fairly significant and we think it could close up a little bit over the coming months. And then there's other parts of the world. If you look across the LA in American valuations there are very interesting. Their fundamentals are pretty strong. The political scene is a little bit less volatile than it was previously, So there are pockets around the world, But actually our favorite region is still the US.
And as I said, we're looking a little bit more at small cap.
Yeah, I was going to say the Russell two thousand still down fifteen percent from that twenty twenty one high. Is that, to your point, an opportunity or is there any type of concern that the market is still being very much driven by those megacap technology companies.
I would say that both those things that you just said are opportunities. You know, the valuate, the fact that the small cap space hasn't performed as well. There's a bit of a catch up trade within there, and although the big cap have done very well, as I said, we're not really pulling back our exposure there. It's driving the market, but there is a movement that if you can really get this cyclical upton, which is certainly what
Power's pointing to, that should be very good news. Historically, when the FEAD has been cutting and it's been in even if it's a very very gentle expansion, that has typically been when small caps have outperformed.
So there are of course risks.
You know, if the FED is good it ends up delaying it's rat cats till later in the year, then small caps would struggle at least in the near term. So we have to go into it with a slightly longer term perspective, knowing that in the next three months you could see some significant volatility, but if you're looking out over a nine one year horizon, nine month one year horizon, then it looks fairly attractive.
In a fixed income space. Do I just stay with the US treasury market or going to try to take on some credit risk here? What are you suggesting, Oh.
We should be taking on credit risk. We have actually gone overweight to the high yield space. It has done incredibly well. And if you're just looking at CARA, if you just compare it even to acty risk premiums, high yield and IG are really presenting a fairly attractive proposition. Now there have been concerns, of course about the maturity will we know that that is building up. It's going to be probably one of the most significant maturity walls
that we've seen in recent history. But the important thing is there is that as long as the economic backdrop is still very constructive, then really we're not expecting any kind of major liquidity issues. We're not expecting managers to struggle. They will have to refinance at higher rates, but their balance sheets are pretty strong. And importantly as well, that maturity will even within the high yield space, it's biased towards higher quality. So we're still saying high quality within
the high yield. We're not really looking at the triple c's of that space. But there are still a lot of opportunities within that credit as long as you agree with us that there is an economic expansion in play and the FED is going to be cutting rates.
Over the coming months.
All right, Simma, thank you so much for your time. Really appreciate getting some of your thoughts here today.
Sima Shah.
She is a senior at Global investment strategist at Principle Global Investors.
BHILLY.
Back in the day when I was on the cell side, I'd hop on the train at the drop of a hat to go down the ball more because.
You had to go see t Rope Price. That was a huge I I vote, which I'll have you know.
I got the twenty years straight out of those clowns down there, love the t Rope Price. Some super smart people down there, man, All my clients down there were very smart. You had to bring your a game. Sebastian Page joints us here. He's head of Global Multi Asset and he's the CIO at our good friends at Trope Price down in Baltimore, Sebastian.
We heard from the FED yesterday.
Looks like they were a little bit more maybe dubbish then some people had been thinking going into that meeting. We heard from the Bank of England just moments ago, again perhaps a little bit more dubbish than they had been. So it feels like global central banks are becoming more accommodative.
How does that fit in with your world?
Yeah, that's a great question. And first, this is my first time in this studio. Super exciting. Thank you for the interest for coming into Baltimore. It we are nice with the sales side. Sometimes people refer to us as trow nice and just for the record, I want to say we're not clowns. Were serious. It's interesting that you ask about both the FED and the Bank of England, and we just had a decision on the Bank of England.
I look at the policy rates, they're about the same, you know, five and a quarter five and a half percent. Then I compare wage growth, so Atlanta Fed tracker for wage growth in the US is at five percent. I go to England, it's at six percent. Service inflation services in England is that six percent. So we're looking at I think greater inflation pressures in England than in the US,
even though the policy rates are the same. And I was just talking to our European economists and he's also worried about impending further inflation on the goods side for England because you know, it's it's an important country and the Red Sea is shut down in terms of a shipping link, so costs for shipping are increasing. So you know, I don't know everyone's bringing rates down. I'm worried about inflation. We're worried about upside risks to inflation.
And so if inflation stays hot, the FED in theory drags their feet. We see cuts either extend out longer. Where are you putting money to work if that plays out? And that is the case, because right now I'm looking at Nasdaq one hundred mini futures are up almost one percent today.
Yeah, let me give you three trades if you want to think about upside risk and inflation. Number One, in bonds, you know, go short duration. We're short duration. We have a cash overweight and a credit overweight. It's not a massive position for us, but we're short duration. Number two, in stocks, you have value versus growth in the value universe. You have energy stocks that are sensitive to inflation, and I think that overall values poised to upperform growth, especially
because growth is rally read so much. If we get upside surprises and inflation going forward. And I'm not talking about going back to nine percent that we had, I'm just talking about inflation above expectations the consensus that it's really coming down smoothly, which is not. And the third trade we have in our portfolios is real asset equities. That's a diversified portfolio of stocks, including energy stocks, metals
and mining metals and reats. So you get a position there that gives you, over time some equity exposure as opposed to just going into tips, and that responds to inflation in a kind of like four or five x response to the surprise, whereas tips would be more one to one. So it's a higher optane kind of inflation hedge.
On a global scullcus, I know, you're head of global multi asset at trow price, where globally do you see some of the best opportunities Because I think I've been hearing more and more people talk about emerging markets, and I'm always a little concerned about that because isn't China like a third of the MSCI and why even invest in China?
So how do you think about global allocation?
So globally we're neutral between stocks outside the US and the US. The US is clearly the strongest economy, but a lot of this is already priced in. Look, we have raging debates in ours Allocation Committee about China because we've had an overweight emerging markets. We like to lean against the wind. We like to be long asset classes when they're really stretched, really cheap, and everybody's on the other side of the boat. If you do that over time, you can do well. But right now it's a huge
debate about China. And you know, those that are worried about China are taught on my committee, are talking about structural changes. This is not the same place to invest as it was in the past. Nonetheless, you're so stretched there, it's like a coiled spring. You could see a rally. You could definitely see a rally, So you know, you try to stay close to neutral again there.
Looking at the US market and videos up another two percent today, it's up eighty two percent year to date. Super Micros up two hundred and fifteen percent met as up forty three percent. Two questions, One, what are you doing with this whole momentum trade and how far? How much further can we extend? And secondly, I look at
the Micron earnings. They're going to have their best day in thirteen years and they're up to eighteen percent on AI growth, So like, can they keep going further with the fact that sales are smashing expectations?
Look, I love that question because I'm working on this with the research team this week. I'm writing a note for our internal research platform with a cute title that is, do you have fomo on the momo because of Yolo?
Well, that's goin.
I thought about this for you. I know it's going to be on the show you're in the media game talking points. Here's the counterintuitive conclusion that we're finding momentum is working better than it's ever worked. I have data going back to early nineteen nineties, even data going back further. It's never worked that well. You can if you look
back twelve sixteen months, you would Here's here's a dumb strategy. Okay, you could just rank the stocks in the S and P five hundred by trailing twelve month returns, pick the top ten, hold them for a month, repeat. Okay, if markets are efficient, finance professors will tell you this should not work well in history. It's never worked that well, so maybe not so dumb as strategy. Now, when do we get worried about momentum And that's why our conclusions
are counterintuitive. We're not that worried about it, even though it's extreme, because it wasn't extreme before the last three bear markets. When momentum is in its stop quintile, the four return for stocks is an average of fourteen percent. Now there's a big there's a big caveat there, which is there's a fat tale, which is two thousand when
we had the mother of all momentum crashes. But the difference between that momentum crash and the situation we're in right now is that the situation we're in right now, momentum stocks are supported by fundamentals. There's huge momentum in fundamental so quality and momentum are moving together. They're both performing well. If you do an autopsy of the two thousand bubble, it was junk stocks, non earners with momentum.
Yes, that was my belly wick back in the day.
And I took those companies public, but now we've got real companies, real cash flow. Sebastian, thank you so much for coming. We really appreciate you being in studio here. Sebastian Page, he said of Global Multi Asset and CIO at t Rowe Price Bran Lynch duringes she's head of mar Get Insighted Equities. In so, Brianna looks like I'm just looking at Estero Labs. It's performance yesterday, Reddit today, What do you make of this IPO market these days?
I think that many of the companies that have been waiting to IPO hopefully see Asta and say, oh, okay, hey, this is a good sign. This is a good sign that the market may be right for us. Obviously, Esteria Labs, given that it's in the semiconductor space and they're catering to cloud computing and AI technologies, they're able to kind of, you know, capitalize on the investor demand there. And I think it kind of brings back to what a lot of companies will be thinking, how do I make AI
a part of my story? And we've seen that with Reddit to talking about how data licensing to language learning models will be a big part of their future revenue opportunity. So certainly a very different company than is Sarah Labs, but an interesting one that I think will be a little volatile to watch today.
Yeah, that'll help ask respective Reddit that Bailey's been reporting on about this data aspect to it and getting some kind of AI play into that story. I'm not sure I buy it. What do you think, Brian? Is that is that a reasonable pitch? Is that a reasonable reason to take a look at this company?
Reddit?
It's not a guaranteed revenue driver. We saw, you know, even this past week that FTC is investigating what data they actually share with these partners they have. You know, is it okay that they share that? If they were to have a cease and a system where they can no longer share this data, that would be a big problem in terms of their future growth opportunity, because you know, they've seen their AD revenue grow twenty percent, not a number that's exciting a lot of investors. The real bull
case is on this data licensing opportunity. So if there's something that hinders that, you know, it makes the story a little less desirable.
And Brian, this is a deal that was marketed at thirty one to thirty four bucks. Pricing it thirty four seemed like there would be some divide when I talked to venture capitalists and investors on valuation and valuation expectations. What's your read of at pricing at the top of the range.
Yeah, the price at the top of the range, obviously, you know, gives some sense that there is strong investor demand for this company. We haven't seen a social media platform go public since Pinterest back in twenty nineteen, so perhaps there's some pentep demand there. But when you look at Reddit versus some of its public comps, it's a smaller player and it's not profitable, so it doesn't have you know, this perfect story for those looking to invest
in the next you know, emerging social media company. And to the fact of emerging, this is a nineteen year old company. It's been around for a long time. And you know, a question with a lot of these private companies is how much growth is left because they've grown so much in the private markets.
Brian, are you surprised that we haven't seen better more ipox activity over the past I don't know, six to nine to twelve months. I mean, we have stock market indexes at or near all time highs.
What's the what's the problem here?
Yeah, I think all the macro indicators would suggest that the market has been or should have been welcoming into IPOs. But we saw with kind of the Clavio instacart ARM group that went public this fall, they had lack lost their IPOs. That being said, ARM is now trading at double its IPO price. So another one that's really you know, capitalized on this demand for the AI market, Astera Labs, I think will be a good indicator for the market. And it's more of a pure tech play than Reddit.
So if I'm a private tech company considering my options, maybe my business looks more like a Stera than it looks like Reddit, and that makes me feel good about
the opportunities in the market. But we're hearing from you know, the heads of Naise and Nazac that they had these deep pipelines of companies that are preparing to go public and really there's a finite period of time that they'll likely do that, you know, given the election coming up later this year, the volatility that could come with that. So I think if Reddit has decent performance, it will certainly encourage others to follow if Astera alone doesn't.
Do that, Brionn, At what point do we see private equity back companies going public again? We saw bright Spring and Amor with its own kind of different flavors within investors in holdings. Are we going to see companies kind of or management teams just really ripping off the band aid and going public.
Yeah, I think it depends on kind of you know, what the story is, and if it's something that they think will appeal to public market investors. You know, Birkenstock, you know, as a private equity back company on public last year along the same time as you know, Instacart and those others performed okay but not great, So I think, you know, similarly, those companies are sitting on the sidelines.
The different diference there is that those investors have less likely held those investments for ten fifteen years and maybe have a little bit more leeway in terms of holding in the private markets versus an early stage investor who at this point is very eager to sell that investment and return capital to LPs and invest in new things. So the pressure dynamic there for liquidity is a little different.
Briann.
I'm looking through your notes here today. One data point you provide it really jumped out at me. The percentage of public companies has dropped thirty five percent since the mid nineteen eighties when I got my start, while the percentage of private companies has jumped by forty three percent over the time period.
Same time period.
Wow, So, I mean that just shows you kind of how the capital markets have changed. I can stay private longer, I guess than maybe trying to get the public markets.
So is anything they're going to change, do you think?
I think that's a dynamic that's not going to change anytime soon. There's just an abundance of capital available in the private markets, more so than ever before. I think the companies that will feel the pressure to go public are these late stage companies that have already raised a ton of venture capital. They have a lot of pressure from those early investors and shareholders for liquidity. Those aren't likely going to be the ones to go public in
the near future. But to your point, if I'm a three four five year old private company who can raise plenty of capital at the earlier stages in the private markets, I don't have to, you know, disclose on my financials. I have a little bit more privacy, almost like as I'm growing through the space, I don't have the daily mark to marks. That for a lot of companies sounds
like a better position to be in. So I think companies will continue to stay private in those early mid years and look to go public later in their life cycles than they did ten fifteen years ago.
What's your what are your expectations for deal flow and IPO volumes in twenty twenty four, because when I talk to bankers, it still feels like the year twenty twenty five keeps coming up.
Yeah, I think that a lot rides on these early IPOs and how well they do. They're certainly lentsy of companies who want to ipo or are feeling the pressure to ipo, but they are a little nervous to rip off the band aid. Last year's IPOs didn't really, you know, give them the boost of confidence that they needed to do that. So I don't think we were certainly not going to see a twenty twenty twenty twenty one year, but maybe we see a more normal IPO year than
we did last year. You know, when you look at this year, already, proceeds are up one hundred and sixty nine percent versus last year deal counts up fifteen percent, So the spigott, I guess, is widening a bit. There's more flow happening, so I think, you know, having a normal year versus a blockbuster year or an extremely quiet year is probably the right thing for the market now.
Brian, thank you so much for joining us. Really appreciate getting your comments and your insights. They're prea and lynched. All right, your daily look at the front pages around the world. List me tell you what do you see in the newspapers this morning that got your attention?
All right, We're starting with the New York Times. They're saying New York City schools they're dealing with a spike in problems from kids. They're not behaving that well. A lot of the issues are those lower level dissurbances. Educators are saying, though, students are still having a hard time emotionally after the pandemic, so that's what they're relating it to. They're saying kids are having trouble talking things out, so now they're hitting, they're fighting, so you have those kind
of issues. They have issued from the police department. It says last school year there were more than fourteen thousand school safety incidents. But if you compare that to twenty eighteen twenty nineteen before the pandemic, there were just over eleven thousand. So they're saying kids are getting frustrated, they don't know how to deal with their emotions because that's what the pandemic turned them towards. So that's the issue.
Because that's a year and a half of homeschooling and all that remote learning and frustration.
I guess maybe you.
Can't pay these teachers enough, is my simple takeaway.
I know it's tough, and especially as a parent of myself, like knowing when the kids came home what these teachers have to deal with because the parents were turned into teachers in a way at that point. Too.
Goodness behind us. Okay, what else we got?
So we're talking about couples meeting on Discord, not the average dating This is not a dating app. This is Discord. Okay, So what Discord is? It draws in about two hundred million monthly users. But it's an online community. So it's like people with hobbies. They share similar interests, so they go on and they form these groups. It could be anything like astronomy, fans, you know, fantasy football fans, anything like that. So instead of you know, using the apps
that's swipeping, No, they're going on here. They're going into these groups and in those groups, that's where they're fine their ma their love interests. So it's kind of like thinking about the modern version, you know how like we used to go to the bargle wherever meet people and people, but instead of going into the bar, going into these online communities, and that's how they're starting to meet people.
So I've never heard of discord. I have to admit, it's kind of like a competitor to Reddit.
It was one of the things that the youth were hanging out in during the pandemic. I think the fascinating thing on the story though long distance relationship between Stuttgard, Germany and Birmingham Alibim.
Was they're doing it via video conferencing, and that couple actually they met each other's parents, but they travel together. They still live apart. They're trying to make it work, but I don't know. I mean, you're getting married pretty soon.
Bailand married soon.
Fashioned.
Well, some of those are leading to engagements, which it needs to us. From my next story, this is about the owner of Zales, you know, Jared Jewelers signat Jewelers saying that sub couples are waiting to get engaged this year. That's because of what we've been talking about, you know,
inflation and certain labor market. It's pushing there to you know say yes, dates back a little bit, which is a turnaround for the company because they were saying that engagements would rise this year, but now they're kind of doing a little bout face. They're saying, well, actually no, it's not gonna happen.
So still the engage ring that hasn't changed, right, that still hasn't changed.
It's just how many people are going to buy them this year.
So sales is big, right, I mean I think there were like one.
Of Sales and K Jewelers too, that's their other that's their other one.
So they own own all of that.
K Jewelers and Zales.
Yes, that's significent.
Yeah, But the number of engagements, it's recovering. They had this like dry dating spell during the pandemic. A lot of people went through that. But two point one million couples became engaged last year. But it's still the lowest in the number of years really we'll see.
I don't know.
Yeah, I got engaged during the pandemic.
But you got engaged during the pandemic. You got engaged during the during the pandemic.
September twenty twenty two.
I think, okay, that's kind of the end of the day.
Yeah, I guess, yeah, life was kind of normal. I forget what when we timestamp these things.
I just think, you know, I just for me. It was when she got the vaccination done. Move on.
Yeah.
They made me come back to work on ride the subway every day, so I figured that that's got to be the end.
That's that's an indication, right, yeah, yeah, all right, what's what's a crookie?
So a crookie? You remember the crow nut?
It was like the fig the Big Faith in New York. No one could get them.
You waited on these lines forever. They sold out. So now you have the crookie. It's this new pastry from France. It was from Paris. It's a mash up between a croissant and a cookie. So some have the cookie in the croissant, some have the cookie, you know, surrounding the croissant. It's all these kind of different ways. But there's a place in the city. They have Janey's Life Changing bake Goods. Okay, they have three locations. They sell for seven dollars and
fifty cents each, so it's a big place. But they're selling out within hours. I mean at this place they own, they're only offered on Tuesdays, Wednesdays, Saturdays and Sundays. That's it. So people line up, they can't get them. There's another place set a Pawnees.
That's another place.
Where you can get these, But it's just the hot new craze. I guess people are.
Bored and they just want something different. I don't know.
We were in the city in the East Village over the weekend for a friend's birthday, doing a pizza tour, and I was the amount of places you walk by where you're just like, only in Manhattan would people wait in line for forty five minutes to buy a nine dollars coffee.
I don't know. I'm not yeah, I don't know it.
I guess it's just to post a picture on Instagram.
I don't know. And again, where did you get the story?
This was the New York Yeah, yeah, good stuff.
Lise Miteya, thank you so much. We appreciated here.
This is the Bloomberg Surveillance Podcast, bringing you the best in economics, geopolitics, finance, and investment. You can also watch the show live on YouTube. Visit the Bloomberg Podcast channel on YouTube to see the show weekday mornings from seven to ten Eastern from our global headquarters at New York City. Subscribe to the podcast on Apple, Spotify, or anywhere else you listen, and it's Alwaysloomberg Radio, the Bloomberg Terminal, and the Bloomberg Business app.
Mm hmm