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Let's start off strong here we get the thoughts about where we're going on these markets. Sema Sho, chief global strategist at Principal Asset Management. She's based in London, but she's getting ready to do like a Midwest America trip.
Good for her.
I mean East Lansing, Michigan. I have a soft spot in my her for East Lansing, the state capital Michigan, Des Moines, Iowa, another great town. Seema, thanks so much for joining. You're giving us a little time here in New York City. What's the conversation you're having with your clients as you come through the US and meeting with your clients.
These days, Hellie, thanks for having me so. The main conversation is of course around the FED. That has to be the key conversation. And actually it's interesting because what we had seen is that over the previous six months there really wasn't a conversation about the FED, no one was talking about interest rates, and now, of course that conversation is completely turned on its head, questioning about inflation, whether the rate hikes are coming, and then of course if the market can digest that.
So do you think Kevin a Ware's just the biggest change is more policy or communication or maybe both?
I think could be both. I mean, I think communication is obviously at the moment it is the key one, and we did see that actually without the communication, the market puts more emphasis on the dots, which is the exact opposite of what he wanted. But I think as we go down the line, as we get towards the end of the year, policy really could have some meaningful changes. So much it's going to depend on.
That task force.
So you know, we're going to be thinking about volatility in the next few months around what happens to rates. But then at the end of the year there's a significant potential for a pretty big market moves around what happens from those task forces.
See what's your inflation call.
These days, we've seen oil come down, as it seems like we may have some progress here on some peace and negotiations in Middle East, what's your inflation call overall.
Yeah, so we've got headline CPR, for example, at around four point two percent by year end. The ore price coming down certainly helps, but we do think that there's structural inflation. It's going to come down further through twenty twenty seven. We do think it gets pretty close to two percent, but still above and the main reason for that is there are some other structural drivers behind inflation which are not going to be disappearing anytime soon, mainly
around the AI capex build out. So this is still a high inflation environment. We think that the FED is going to stay in hold, but I have to say, you know, clearly the risks around a potential hike have increased since last week, and so that is something which is a life edge for US.
Hi e Sema, thank you so much for journsh'ming to go to Switzerland right now. Seem cheap global strategist for phusible Global Investment to stay with us.
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David Katz, Joints, President and Chief investment Officer, Matrix Asset Advisors.
David, how do you guys think about small cap stocks these days?
Well, small caps have underperformed large caps for quite some time, so we think they are due to start to do better. You're starting to see it now. You know, a lot of that has come from smaller AI type plays that have done well within the small cap space. But we think if you look at the next two to four years of interest rates ever start trending lower, economy starts to pick up. Small caps are selling in a much more reasonable valuation than the large caps and megacaps.
What to you is the most crowded trade in the market right now? Or should I even ask that? And it's AI.
Exactly So, it's AI, but it no longer is AI like the Googles and the Amazons of the world. It's AI. The semiconductors and those benefici areas. The pricing has gone crazy. Prices are up one hundred two hundred percent. As a result, earnings and profitability and margins are rough very significantly for a lot of chip companies, and they're being valued as if it's going to stay up there forever. As a result, they're selling it very very rich valuations, and we think
that that's an area to be wory about. We would not be throwing new money into the chip area of AI right now.
So when you see an IPO seventy five billion dollars of SpaceX, the biggest of all time and whatnot, you've got Anthropic in the pipeline.
We've got open AI in a pipeline again, a jillion dollar ie. Because does I tell you anything about the nature of the market. Is it light cycle? Is it frothy? Is it just sign of a healthy market? How do you think about it? All three?
It's healthy, you're able to sell these things. But it definitely is frothy right now. If you look at chat EBT and you look at Anthropic, they're looking to be about a one trillion dollar company. Microsoft right now sells it about three point two trillion dollars. There isn't a big mode in a lot of these AI companies. As
you see Claude is now dominating CHATCHBT. Things change. So we think that ultimately you're paying a lot for those companies and we think there probably is better opportunity in the Googles and Microsofts of the world, because you're not getting a AI startup at a low valuation, you're getting it at a top valuation.
You do warrant, though, that AA sentiment could peak before fundamentals. Do you think we're getting close to that point.
We don't know when that point's going to come, but that's exactly the point. Typically the stocks are going to go down three to six months before the fundamentals start to slow. We don't think we're at that point yet, but we do think you'll probably get there in the next six to eighteen months. And we think that from a stock price valuation, they're much better opportunities in the market in other areas that are not caught up in the excitement.
What are you doing in the bond market? Do you take credit risk cure or do you just clip a four point two percent coupon on the two year?
We clipped the four point two percent coupon in the two year. We don't think you want to take credit risk, and we don't think you want to take duration. We'd focus on one the five years. You're getting a good return. We think Ultimately, inflation is a longer term problem. The budget deficit is a longer term problem. The FED losing its autonomy is a problem. So as a result, we're
a little bit wary about longer term bonds. Short term bonds, though, we think, is a lot that you get that four point two percent return.
You've been bullish all year mostly. What's stopping you from being even more bullish today, Well.
We're sort of counterintuitive. The fact that the market's gone up so much this year and the last three and a half years, and now sales at twenty three times earnings means that there's less upside. We think if the market regresses to the normal valuation that you're more limited. We think earning growth is very good. An interesting fact,
a hyper earnings growth twenty percent or more. Earnings growth has generally not been an ideal market to make optimal returns, usually zero to five percent, five to ten percent better for stock market returns. So the fact that we have great earning growth doesn't mean that you're gonna have great stock market returns, especially going forward, because you've already gotten a year's worth of returns in six months.
Gives name two that you like, right, now because it's got to be hard to pick individual names given some of the runs we've had.
But a lot of names have not participated.
Well, that's the thing, you know, there are certain parts of the market that are very expensive. There are lots of parts of the market that are very inexpensive. So even though we think the market is originally priced, lots of opportunities. We like healthcare companies like a Metronic or a Thermo Fisher real attractive, we think, you know, also consumer staples. You know, companies like Constellation brands pretty attractive. Tyson Foods, which is a protein play, is doing quite well.
They're getting some protein free studio protein acting.
That's what the kids are doing. It's chicken, it's meat. I mean, what are you guys talking about. Go ahead, I know you've got to go there.
But basically with the GLP ones, yeah, people are not eating as much of carbohydrates, but they do need more and more protein. And the fact that you're having problems with the beef market now means more people are going to go to chicken. Tyson food benefits by any of that, and it's selling it twelve times earnings, three and a half percent yields so there are lots of things out there that are good if you have a long time horizon and you don't mind being in boring stocks.
So much of the enthusiasm is coming from the back of strong corporate earnings. But do you think investors are becoming a little bit complacent about the geopolitical risk coming from the Middle East?
We think so.
You know, you still have the Iran conflict going on in terms of they possibly a resolution, but you have problems this weekend again with closing the straits. Yet stocks are up sixteen percent in the last two months. There are at a higher level than when the conflict started. So we do think there is a lot of optimism and people are ignoring the possible shortfalls. Again, that doesn't mean we're bearish, but we do think that you're going to be in a trading range. We would not chase
the market here. If the market were to pull back five to ten percent, we'd start to buying on that dip. If it goes up five percent, you'd want to look at things that have done real well and take some problems.
David, I'm not going to call you old, but you've been around the block once or twice, been.
Around experience, experience Veteran Alan.
Greenspan passed away this morning.
Impact on the markets in general to FED in particular, gular, What are your thoughts as you think about the tenure of Ellen green spinning FED.
He was an extraordinarily smart person, did very good things, different time. He's not been involved, as you know, for quite some time, so it's not going to affect the markets now, but the markets should pay, you know, a nice respect to him because he really did a good job and was a really smart guy.
Absolutely, all right, Dave, thank you so much for joining us. David Catz, President and Chief investment Officer Matrix Asset Advisors.
Stay with us. More from Bloomberg Surveillance coming up after this.
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John mclithwait joins us here, editor in chief of Bloomberg News. He is in our London office at the moment. John, talk to us about your thoughts here on Alan Greenspan, such an extraordinary career, spending so many years, so many presidencies and reshaping kind of the Federal Reserve. Love to get your thoughts on mister green and his passing.
Well, first, obviously it's a sad day in that respect. I think he, you know, Greenspan was one of the great central bankers a multiple different levels. Really very very intelligent, also kind of very cryptic in terms of the way he often communicated to people. But I think he also had this very long sort of intellectual history, goes back all the way to the fact that he was involved with him Anne Rand and stuff like that. He went through different kind of intellectual fashions and on the whole
he ran the economy pretty well. There will always be people who question, you know, how much his loosening set up the kind of financial crisis, but you know, there were other factors at work there as well. It wasn't just him. So I think he will he goes as a giant of central banking.
What do you think is the biggest legacy that he left us with, especially now as the Federal Reserve and questions about it independence continue to hound markets and investors.
That's a good point. I think he was a very strong advocate of Central Bank independence. I mean, sometimes you forget these things that you forget how different the world was at one time. But the fact that you ended up with Paul Volka, Alan Greenspan, obviously people like Ben Bananke afterwards. The whole presumption of what they did was that the Federal Reserve should be separate and independent. In places like Britain where I am at the moment, you know,
that was also a more recent things. It's this is not something that has always been there. It's a kind of reputation has to be built. And it's interesting the way that Jay Powell has managed to sort of defend that, I think actually relatively successfully against Donald Trump's attempts to sort of intervene in that area.
John, like the switch gears here a little bit and focus a little bit on what's happening where you are right now in Great Britain. Here Starmer said he would step down in Britain's Prime Minister, paving the way for Anny Burnham.
To succeed him. John, I'll al for you to just give us a little perspective here.
It was just two years ago that mister Starmer won the office seemingly with some pretty broad support.
What happened in the past two years.
Well. The interesting thing is that people like me always used to be rude about the Italians for their degree of political volatility. But what seems to have happened is that England Britain has become more like Italy, and Italy has become more like Britain, with Georgia Maloney now holding on to power quite solidly. I think when you look at Starmer, a lot of people, me included, thought that he knew exactly what to do. You know, he came in,
it seemed, with a very efficient campaign. He seemed to be heading towards being a kind of Blair Part two. He seemed to be friendly to business, especially with his Chancellor Rachel Reeves. And really I think it shows two things. One is that Britain is much harder to govern than it was before Brexit, certainly, and secondly that you know, but it wasn't just that. I think he just didn't come in with an idea about what exactly he was going to do. He was quite sure footed overseas in
terms of foreign policy. I think he handled Donald Trump on the whole relatively well. Although Trump made a predictably catty comment about him yesterday. But on the whole he did that quite well. But at home he always seemed at see. He got into trouble almost immediately with a silly thing to do with kind of c expenses. He then did this thing to do with pensioners and the winter fuel pavement, which sounds like something rather archaic but effectively as a way to help people keep warmer in
the winter. That kind of blew up. But on the other hand they hit him, and especially Rachel Reeves really did quite a lot of damage to the idea that this new version of a labor party was something to could get on with business. So he ended up losing on both sides, and suddenly in between this he started being kind of outsmarted by his own MPs. Normally, when you come in with a massive majority, you know that
should be a sign of strength. But in a strange way, that that sheer number gave people room to rebel when they wanted to, and that made it very difficult. So yes, it does show that Britain is very hard to govern, but I think most people would admit that Starmer didn't make He certainly didn't govern as well as he can. Campaign to become prime Minister.
And do you think that Andy Burnham will he be seen as a continuity candidate or a change candidate. I'm just thinking of what the biggest policy difference is we could see under a potentially Burnham premiership.
That's a really good question. The answer is, we don't know. He's emerging with something that you people talk about Manchester Manchsterism, and it's a bit like an American governor coming in to be coming into the White House where people tried desperately to work out, you know, what they did in Texas or what they did in California, and then trying to work out how they could apply that to the
federal government. With one massive difference is that you know that when you become president you have to go through lots of campaigns and things. In this case, kind of the basic starting point is Andy Burnham has been a successful mayor of Manchester. It's quite a long career in the Labor Party, and he's enormously more popular than Kirstar, so let's give him a go. But nobody, as you
point it out, really knows exactly what he thinks. To the left, he's saying, look, I want to take people talk about the way he sort of nationalized the buses in Manchester to the right. When people talk at Mansterism, it's really about quite a lot, doing quite a lot of things with business and working out how to kind of boost growth in that way, and that again has
been something that Starmer has not been good at. So at the moment he is a kind of blank slate which works brilliantly if you're running to be something, because everyone can paint their hopes, dreams, fantasies on you and think that you're going to be all these things at the same time. But at this precise moment he really needs as a plan and a direction and then to say look, we're going in this way, and he really needs to bring the kind of parliamentary party behind him.
John, thank you so much.
We really appreciate getting your thoughts here and your perspective. John mcadd wait. He is the editor in chief of Bloomberg News. He is in Bloomberg's London headquarters at Queen Victoria Street there giving us some thoughts on the passing of Alan Greenspan one hundred what a nice life there of full life, and then as well as the latest on the changes.
In Stay with us more from Bloomberg Surveillance coming up after this.
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Come back to these markets. We do that with a somebody does this stuff for a living. Molly Parni, partner and president at Jackman Asset Management. She's a graduate of Williman Mary University. I was just on the campus.
Of Wayman Mary a couple weeks ago. Beautiful as ever down there in Williamsburg. It's a great place to visit. Molly. Let's talk about these markets here.
You throw a lot of a black swam in the form of an Iranian war, you throw all kinds of geopolitical unrest at there, but corporate America continues to come through with very strong earnings.
Is it as simple as that?
It sounds simple, doesn't It's it's unbelievable. But you know, these things can go up into the right for quite some time until until they don't. And we've all, i mean, we've invested through the dot com, the telecom boom, and bust all of what we saw through the Actually, it's interesting that the S and P two thousand to twenty ten was flat.
It was like it was flat because they pulled forward.
All the returns in the dot com bubble, and it took that long for the market to actually move up again. It's just we haven't seen that in a very long time. We've instead seen mid twenties returns every year, seems like for several years.
What about memory cycle? Your notes lean heavily on that. Do you think AI has permanently changed memory cycle or our investors still underestimating the risk of yet again another downturn.
Yeah, it's a great question.
We have a pretty substantial position in Samsung, which we think, like we like to do at Yakman, we like to get exposure without paying for it. We focus very much on the price that we pay for investments, and here we get to participate in AI without having to pay the multiples that we're seeing in some of the other memory players.
We're actually looking at.
You can you can invest in Samsung and in three years of their forecast you will you'll make the market cap. So so there is there is risk and memory it's historically been a very cyclical industry boom bus cycles, et cetera, et cetera. Uh, until until this giant tail wind came along. And uh and it's driving all kinds of purchases price. I mean they're taking price there. Uh, I mean they're
they're big booking out capacity. They're we're hearing things that some some customers are even helping to fund capacity build out. So it's it's quite a big deal. We didn't see that in our thesis. We actually invested in Samsung and at the size when we thought it was just a good, really inexpensive memory player, and then this giant tailwind shows up, turns out to be one of the bottlenecks and all the AI build out and it's a really nice place to be.
So how do you think about value when when you look at an individual name?
Is it relative to the peer group? It's a relative to the earnings you guys forecast.
How do you guys think about values when you think about entering into a name.
Yeah, well we have we have a really interesting well it feels like a lost art because we're actually looking at the business itself. We're looking for what kind of free cash flow does a company generate, and we look back a very long period of time to be able to tell how does it behave in different market cycles and in different kind of economic environments. And so we've got we've got a portfolio built with companies that we own and we're and we're the kind of of we're
thinking as an owner when we make these investments. So for Samsung, when we're looking at a three to four times kind of payback on the total market cap, that's the kind of bargains that we're looking for in the very best names in our portfolio.
But it's always looking.
At forward forward rates of return, the free cash flow that these companies can generate, and how much risk we have to take to make some of these investments.
You can think about like a triple A bond.
You have very little risk in a triple A bond, so you actually get paid less, right, But at the same time, if you have a riskier investment, you ought to be paid more in for a great return to be compensating for that risk. And it's that some of how we've generated our returns through some pretty tough tough cycles over their thirty year history of Yakman.
How are you thinking about diversification within equities and even across that within the fixed income market, because it seems like it's getting harder and harder to diversify.
Yeah, it's a pretty, it's a pretty. There's a lot of crowded trades out there, for sure.
Actually we don't. We're actually generalists.
We approach investing like we own the business and uh, and so we have a variety of different companies across different industries, and we actually are quite comfortable taking some outsized investments in companies that we believe strongly in. So you'll see names in our portfolio that are that are much larger than the rest because we're looking we see just a sort of an outsized opportunity in those in those investment pieces.
All right, Samsung, the high tech, I get that. How about U Haul that seems low tech, but give us that story.
Yeah, it's pretty, it's pretty low tech.
I don't know if you've ever rent to the U haul and took it on the road, but it's uh, we love it because every time we see a U haul drip truck driving around, it's advertising the company and uh, you know, it's it's like Kleenex. Right, These trucks are ubiquitous. They've got like this gigantic network, you know, of different offices all over the country. And then they started building
into the self storage business. And the self storage business is one where you have to put in a lot of capital up front, the units are not least and so you've got this sort of j curve effect as you get into the self storage business. But slowly but surely they've been using the cash flows from the truck business to build out what's what's one of the leading self storage UH properties in the country. Right, they're not they're not very good at breaking out their product lines,
the lines of business, kinds of accounting. So it's actually takes a bit of work to really understand the trucking business versus self storage. But based on a recent there's a there was a recent UH self storage company UH basically the number five in the market.
If you apply those kinds of metrics, you get the truck.
Business for free, because it's it's very it's a very it's a great business and very much kind of owner occupied because the family owns and controls a huge portion of the company.
Got it, Molly, thanks so much for joining us. Always fascinating discussion.
Molly Peroni, partner and president of Yachtsman Asset Management.
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