Surveillance: Equity Caution with Wei Li

the Bloomberg Terminal, and the Bloomberg Business app. Get Lucky this Smarting Wailey's with us while kid Mornic from black Rock Wailey, thank you for being with us here in New York City. You came into this year conservative equities, the equity market rally, you stayed conservative on equities, the equity market started selling. Golf is still cautious? Can you walk us through y I have no clue just to

add that works perfect, James. But the reason that were cautious on aquities is really that if you look at where evaluations are, it's pricing in still a very modest kind of drove the outlook for the economy as well as for earnings as well. And if you look at where rates are, as you know, we have been off

the view that they cannot cut rates. Now markets are moving closer to our view, but markets are still looking at ray cuts later in twenty twenty four, and we think that actually, given how a resilient economy has been and how much the recession will be pushed out later down the line, actually ray cuts also needs to be

pushed out further as well. So equity marketing developed world are not quite appreciating some of the macro challenges that we see happening, and that's why we have been prudent now having said that, our time horizon is six to twelve months, and some of that metrics that were used

to support the cautious view is valuation based. But that is not to say that we cannot have shorter term outs of rally which we saw in January right like driven by technical factors, short squeeze driven by formal flows as well. Real money investors are telling us that, you know what, after a year like twenty twenty two, they cannot afford to miss the rebound. So they're just going to preposition for that even if they know or they fear that it could get worse before it gets better.

In your beautifully elegant note, you talk about a new regime, I'm going to label it a black rock new regime. Larry's notice, it's a way Lee new regime. But whatever it is, it's a new regime. If we're not going back to securities analysis and factor analysis pre twenty twenty,

what are we going forward to? While the new regime is predicated in terms of the Marco drivers of the current environment, that we are moving from the Great moderation with economic cycles shaped by US demand to the current environment shaped by supply and supply constraint. In particular, factor analysis is difficult because factors are time varying concepts and

factors can mean different things to different people. I interrupt, because we got to do a mathematical clinic here right now, We've got a tailor role is divergent from FED policy as we've ever seen. If you do the partial differentials of factor analysis, I get the ideas mud out there. You have no idea visibly where you're going if you do the partial differentials across any FED theory. Now do

they work at this juncture? No, thank you, at this juncture not just because of how unstable some of the forces are. Right So thinking about you know, like our star, you know, one could see actually in moving temporarily before settling back down. And given the kind of environment that we see right now, so as it translates into factors, it's it's tough to apply the old playbook to factor investing.

You know, like people say, as we head into recession, we got to shy away from value, but we're also in an environment where rates are going higher and curve in our views, should steepen over that to twelve month horizon. So we actually think that there is more room for factor value to perform, but we want to be a bit more selective, so we apply a quality tilt to the factor typical factory exposures. When you talk about rates

going higher from here, HSBC is different. Major put out a note this morning where you said the debate and bond markets today is whether to buy and hold short dated bonds at close to five percent or go for the longer ones which are almost four percent. And it goes to this belief our rates going to go higher and stay there for a longer period of time, or you know, do you want to capture just what you kind you can get at this point? Where do you fall on that debate? The former, So we like from

the end of the curve. Over the back end of the curve, you know, you take very little duration and credit risk, you get paid TBO is paying you almost five percent, and commercial papers are paying you five point five percent. You know, these are very attractive income opportunities.

And given our review that actually rates will stay longer, for higher, for longer, we don't necess cerily want to kind of go into the long end of the curve, especially given how inverted curve is at this current juncture. Turn premier should come back. It's underappreciating the degree that we're going to have to live with inflation, and we do want to kind of sit out when the value

proposition change. When will the long end start to look more attractive to you, or even risk asids start to look more attractive to you than a five percent short term rate. I think it comes it comes down to to what extent macro damages are being priced in by markets. So the reason that we currently are shying away from developed market acquity were modestly the underweight is because we don't see the macro challenges being fully priced in, so

we're bunkering down in short end of the curve. But if market pricing changes, getting closer to our fair value. That would certainly change things as well. But also we're actually on a global basis. We like emerging markets. We

have an overweight, very modest overweighting emerging market equities. So think of our view currently as almost a bar bow in between the short end of the government bound market in the US and emerging market equities on the other On the other hand, given where the pricing and evaluation sits at its current juncture, the last thing I would say is that this is an environment with very heighened macro and market volatility. We have to change our views

very quickly. We've already changed our views twice and we're still in February this year, so you know, like it's it's very dynamic. We finish on China. Pmis the savenick, that's the reopening comic. We have the view that actually reopening for twenty twenty three should carry growth to something with a six handle for twenty twenty three, and that is off the very low basis of twenty twenty two

with a three handles. So clearly things have to be kind of viewed together thinking about long term growth trend. But we currently think that the growth pivot that we got a flavor of the December A Central Economic Working Conference actually will be further reinforced at the two sessions that are coming up in two weeks time. And the pm I data actually could also could also give further evidence of the two that growth would would come through

in this reopening restart dynamics in China. But but but over the longer term though, structural growth in China is very challenged. You know, by the end of this decade, we're seeing China growth stabilizing with a three handle. So we're talking about longer term challenging but near term restart opportunities that we want to lean take a six percent GDP this year and then back down to levels like

three percent. Invest Just so you're aware, he's in the final rewide and the pharaoh two hundred and seventy day outlook. It comes out March in the first quarter, change your view three times. So then he puts, I'm not sure that would work if I actually did this, professor, but you know that's what we do here at Bloomberg Surveymance. We waited a quarter wait later, flat Ron, wait. Thank you just awesome. As always, thank you very much, right now and enjoy to having our studios as someone who

has immense help through the pandemic. David Page's head of macro research at ACTS Investment Managers. Great to see you here with us. I'm going to cut to the chase. I love one of the words you used, asynchronous, because that's what it feels like to me right now. Can

we have a slowdown? Maybe not an NBEER recession, but can we have a quote media recession, whatever that phrase means, but some parts of the economy do okay, Yeah, And I think the point that we make with asynchronous is that you can have slowdown in all of the economy, but at slightly different times, and that might defy the

NBA definition of recession. So what we're thinking, and we're getting some of it in the day to now, we've got this sort of nuance coming through from trade, We've got this nuance from the tree, so that's probably weak in the first half of the year. The consumer looks pretty solid though, and I think it's as we move into the second half of this year, particularly if we get the slowdown and coming through in the labor market,

that you'll see a softly in the consumer side. So typically, and this is why recessions are so difficult to forecast, at least in terms of timings. You get a synchronized slowdown, and that's when you see recession. If you get it asynchronously one quarters negative, then perhaps it's flat, then it's negative again. You know, remember we've already had two quarters of negative growth that the nbare looked completely through, and that wasn't a recession in that was just last year.

So we could get a sort of saw tooth pattern of GDP come through, which would be a muddle through and I guess typically that would be a soft land rounded up German yields are up up solidly today, I might point out, I'm looking at the ten year yield. Three point nine six is a round up and a ten year year old. Okay, that's one story, but the other story is the disinflation. To come model your trajectory

of US disinflation. So we think that headline inflation is going to fall back to a round possibly just under three and a half percent by mid year, but then by mid year, but then by the second still by we are a French house, but so sometime around June. Yeah, but then as we move into continuous as we move into the second half of this year, we're expecting it to stay in that three and a half four passage.

And that's that's why we've always said the FED is not going to be in a position to be able to ease in the second half of this year, which markets have repriced quite significantly now. But we also think it takes a little while throughout twenty twenty four together down and they need to crack the labor mark. Well, here's the thing. And when you're talking about an asynchronous recovery and a muddle through, isn't that problematic for getting

inflation down? Isn't a muddle through eventually allowing certain industries to possibly see price games that will keep inflation higher even as you see sort of the year of year camps getting more complicated for the others. Yeah, So to be clear, I mean, our view is still that we do see a mild recession a stress mile but we

are looking at consecutive quarters to growth. But yeah, right, I mean, if we see this asynchronous growth is just slightly firmer than that, then the labor market doesn't loosen by quite as much, and that'll take a little bit longer for prices to fall ultimately an asynchronous slow down and below trend growth. You know, this is the sort

of the baseline that Fed chair Power talks too. We get below trend growth coming through from the economy, the labor market eases a little bit, and that's enough to see inflation fall back. We think it'll be more than that, but that's exactly the risk. We were joking earlier about how we have a show of people coming on and saying we have no clue, and then people ask us and we're like, we have no clue because this is such a difficult time to really have a sense of

what's going on. But I'm wondering how we can even be sure that that's enough to bring inflation lower? Right? We can't. Right, So, if you have central banks that at least vocally are adhering to a two percent target of inflation, how do we know that we're not going to see a six percent FED funds rate and a four percent ECB target which is now priced into the market. And I think that's the key risk. I mean, the central banks are pretty clear that they don't know either.

I mean, we can roll back fifteen months, we know the forecast erarors that we all made include in the central banks in terms of the inflation outlook, and the central banks seem to have learned that lesson. But the point of that is that now central banks are using backward looking information to judge when they've done enough with their forward acting tools of monetary policy. So they're looking in the rearview mirror. They're not, I don't think, looking

too much in inflation. The headline is obviously important, but it's the labor market that gives them the long steer as to inflation, and they're using that data to judge when they've done enough, when they know that rate hikes are still going to have a lagged impact on financial conditions going further forwards, and that I think is the biggest risk if you're using backward looking information to judge when you've done enough with your forward acting tool. It

sounds like a recipe for overtightening. Beautifully explained, and I guess the ex post is becoming ever more ex post. And there's some ramifications out there we've observed just as one theory, the tailor rules completely messed up right down towardston slack over at Toparlo models at near nine percent, almost ten percent. Bullard is saying of Saint Louis is saying, let's go. There's others in the ECB saying the same thing, let's go. Is their value to the urgency the doctor

Bullard speaks of, Yeah, I think so. And I think the move that you would get if you followed a Bullard type approaches is much more consistent perhaps with FED history, that you could see the rates move a little bit higher to peak, maybe you know, even towards a peak of six percent, But then once you reach that, you would break the economy. You would have to see rate

cuts follow quite quickly. And I think what the bulk of the committee wants to achieve this time around is a peak that isn't quite as eyewatering as that, but it is held in place for a little bit longer, and that provides the restrictiveness that slows the economy further before we let you go. The belief in lagged effects. Is that enough for the FED for the ECB to pause at a level before they see the ramifications of

their forward tools. No, they need to see some impact comes through, and they need to see that in the labor market, in particularly for the US five hundred and twelve thousand is absolutely nowhere near enough to see a slowdown in economic activity and earnings gross Average earnings gross needs to be closest three and a half, and they'll

need to see that before they pause. David Page, thank you so much, greatly, greatly appreciated in our studios here David Pages with EXA investment manager, Sarah Mouth joins us, right, I'll just jump into it A chief investment officer Vine, Sarah, what has changed in your outlook in the last week or so? We have whipsaw, we are in shock back

and forth. What has changed in the nouvene placement? Markets are adjusting to the fact that the Fed has more work to do, and this is monetary tightening is not taking a bite out of the economy. This is bad news for inflation and bad news for the market. So I think the markets generally stay in a trading range and the FED stays in a holding pattern with rate hikes and then a pose until we can get some kind of break on inflation in terms of wages or

shelter or spending on services. And we're just not really seeing that yet, and that's why we're we're generally thinking that the market's going to have trouble, continue to move

the upside likely trading range or downside risk. From here, let's talk about the way lead point that basically it's not worth necessarily going into the long end of the yield curve at four percent if you can get five percent the short end, because you could potentially get higher yields and you could potentially get a better opportunity elsewhere.

Do you agree with that stance. I think generally that is going to be the case going forward, with now about three hikes getting priced into the markets with a FED and then again no rate cuts in the future are likely a pause and then an inflation doesn't break if you'd even see more hikes from there. I think it is the short end the yield curve that's going to continue to look more and more attractive versus the

long end. So where are you looking for in terms of getting some sort of returns other than the short end. Are you starting to see opportunities and industrials as we were talking about earlier, Are you starting to see opportunities in retail like Target that came out with expectations that

we're disappointing, but everyone still seems to be cheering. So starting with retail, I think, you know, consumer and the employment markets are going to be the piece of the puzzle that determine the depth of the timing of a recession. So consumer, I think is at risk. That's on an area that we're incredibly interested in. We're more on the conservative side, looking for quality companies and also some beta

outside of the US. So starting in the US with quality companies, companies that tend to grow their dividend, they tend to have strong balance sheets, they're more recession resilient, provide you some income protection going forward. So this is everything from infrastructure companies that are backed by utilities and waste management all the way over to companies like Linda or Coca Cola, which tend to be a bit more

defensive in a volatile market. Now, outside of the US, we think emerging markets look attractive because evaluations There also the dollar which may not be as strong as it was last year, and also China continuing to reopen. I think em finally has a tailwind. You could see some upside there. It's kind of a balance bet there. That's saying a little bit more conservative in the US because of the continued rate hikes that we see and the potential for a recession that may be delayed but likely

still comes. How does use of cash play in I mean, the Journal's got the article out on one trillion share buybacks. We saw cheval and mister Wirth make a statement today define use of cash for nuvine. Well, first of all, just going to look at energy companies, I think that we've seen this with them for quite a number of years. They are more focused on returning cash to shareholders than

on pulling barrels out of the ground. That's keeping supply type for energy companies, and we agree that oil prices likely have more upside because demand remains reasonably strong supply remains tight. Now, cash is an interesting asset class in the sense that it is paying good yield. My caution in terms of cash those courses that the market send a price in a recovery well before we see any of the data. So it's a timing issue. And when you're trying to time the markets usually that's generally a

loser's game. So while it's important to keep some cash in hand, I would continue to look for areas where you see good value and these are areas like non US markets, particularly emerging markets. Also an alternative, private credit tends to be more resilient during a recession. If you look at historical down draft in the market's private credit tends to hold up better, and then conservative equities like dividend growers tend to be more resilient. That's where I'd

be looking to put my cash. So I'd be rude if I didn't ask the Nuvine heritage. Should we take advantage of municipal bonds this morning? I mean fundamentals versus the valuations of municipal bonds are at a mismatch because of the strength of the economy and the tightening that's not impacted the economy. Yet municipalities still look very strong,

So fundamentals are strong, valuations look interesting. You're seeing total returns in municipal bonds and also areas if taxabil fix incomes such as leverage loans that still look very attractive to us. And again that's why it's important to make sure you use your cash wisely, because you are seeing entry points that you haven't seen in years or even decades. In many of these asset classes, such as fixed incomes.

Sarah I've always wanted to ask you this question. How did Neuvine become the largest manager of farmland assets on the planet. Yeah, this is an historical asset class that we've been very heavily invested in all the way back to when the TIA days as our parent company. It's an asset class that we thought was very resilient. It's a great asset class as a head to inflation. So it's just a very strong asset class and important obviously

to society. We've built it over time and it's become I think, in a world where equities and fixed income have become very correlated, alternatives such as farmland have been a very important piece of investors portfolios, and they continue to be correlated this year as well, even when we were expecting that to break. Sarah just wonderful. Us always ceremontic that of new thing. Ken Leon joins us right now, director of Equity Research. It's CFI truly with decades of exposure. Kenn,

is this any way to do business? I mean, you know CFA one, you got a John Dear and your report, maybe you've got something else and this and that, and now we've got one hundred and eighteen page power points with a welcome from mister Solomon, a state of the franchise from John Waldron's Shinali basket. Will speak with mister Waldron at twelve doing very important and then we have one Goldman Sex. Is this a branding exercise or do

you guys like you learn anything out of these soirees. Well, it's great to be here and Goldman is probably best in delivering messages and road shows. I mean that's what they do as an investment bank, and it's all about what they're doing right first and then they're going to get the hard questions later. They speak to client franchise and essentially this means that everyone wants to do business with Goldman, particularly the investment bank and also asset and

wealth management. But what's interesting here is that there's a lot of hard questions about their strategy from three years ago to kind of button up with shareholders. They got a thirty billion dollar authorized buyback, and they're talking about capital efficiency because they still are regulated, regulated bank. It's a lot of questions today to summit from an amateur

that would be me, folks. Stephanie Cohen shows up at page I believe fifty four, and what she basically says is, can you give us two years to work this out? Is that how you read it? Ken Leon is there saying we needed twenty twenty five hope and prayer. So the Goldman brand supposedly was going to conquer the consumer market and it didn't, and that might have been being too confident. And I think it's block and tackle the next two years, which will be profitability and return of capital.

But the missing question here is that's great to be a great investment bank, but to be a great financial service company, you have to have recurring revenue, work through the cyclical parts of the market. And you know we're talking about Schwab, black Rock, these are stable Morgan Stanley Goldman still is an agent. It is really dependent on client servicing. That is always difficult to get a higher evaluation. At the same time, I don't think they're going to

make any big acquisitions right now. They just want to kind of have a calm where they can tell shareholders we're going to be more efficient, we're going to use less capital, and we're also going to find ways to be profitable and be smart, because they certainly weren't smart

with their strategy before. So there is a really big question within this, which is how are they going to expand more into that stable kind of business, the asset management that you're talking about, without making an acquisition, without making major investments, and without even laying out any kind of path to do so in this presentation. And when you look at their presentation, it's not going deeper and bigger in terms of asset management or alternative investments because

that's very choppy. It's going to be or the wealth management side, the advisory side, or in areas like Larry Fank had, which was from getting the eye shares with ets. So in time when they need to look for a more predictable, recurring revenue stream and a lower source of funding, you know, it might be some of the custodial banks, or even State Street, which has a great etf franchise.

Goldman would never look this way, but the market is saying, even if you execute and you have several quarters of great earnings out of the investment bank, we're not going to give you a higher multiple. So that's really the conundrum they have, and I think those are the questions that are going to come up today. There's also a question about its existing consumer facing platforms and thinking about Marcus as well as some of the credit card partnerships.

And right now dal Jones Welshteret Journal is reporting that David Solomon, the CEO of Goldman Sachs, we're saying today that Goldman sax is considering streets alternatives for its consumer platforms businesses, including green Sky and their partnerships or credit card purchases with Apple and General Motors. Does this mean that they're going to reduce their footprint and sell some

of those businesses in the near future. I think if it's any of the businesses that require significant capital, the answers yes. For others which are transaction driven and they can leverage with partners, they'll certainly find ways that it could be incremental revenue and profit. But the big play is over, you know, Ken, I looked at the first grid chart all of the paige I think it's page five here, and they go against their leading peer, which

is a Campbell's soup. It's like a Ministrony soup of this firm, this firm, this firm Belogny. The leading peer group compare is Morgan Stanley. To end this conversation, what did James Gorman get right? James Gorman basically didn't go afar so I have. He was looking for adjacent markets like the workforce for oh one k with e trade.

He paid premium, but he got leg Mason. He got established businesses, versus sitting in a room and saying we got the best brand, which is Goldman, and organically we're gonna create businesses. It's very hard to do in financial services. That's the difference. Tom Kenley, I'm thank you so much. A brief there from the esteem Kennley on cf right. Subscribe to the Bloomberg Surveillance podcast on Apple, Spotify and anywhere else you get your podcasts. Listen live every weekday

starting at seven am Eastern. I'm Bloomberg dot Com, the iHeartRadio app, tune In, and the Bloomberg Business app. You can watch us live. I'm Bloomberg Television and always I'm the Bloomberg Terminal. Thanks for listening. I'm Tom Keane and this is Bloomberg. Will be Go