The Market is Forward-Looking, Miletti Says

Your main story. Following a weekend of claims by President Donald Trump that he has the upper hand in a trade war with China, Beijing responding through state media by saying the nation is ready to endure the economic fallout. China is prepared for a protracted war and doesn't fear sacrificing short term economic interest. That's according to an editorial in the nationalist Global Times on Sunday evening joined me to discusses. Jeffrey you ubs wef Management, head of UK

Investment Office, and he joins us from landon. Good morning to your Jeffrey, get me up to speed on where on earth we are with this trade dispute. Well, I mean know, firstly in the Global Times and probably will have its own let's just say in the readership to h to a cater to us. I wouldn't put it that far yet, but at the same time, you're going to see a combination of retric and restraint as what our economists start calling it. Uh And I think there

are plenty of opportunities that China seas as well. I think there's a similar editorial, you know, and it was on the People's Daily or are somewhere else, So we noted external pressure is going to be an opportunity for reform in China and stressing that they need to play the long game as well, beyond a US political cycle or even any other economical business cycle there. So I don't think consure they're too fuss about it, but the prerogative,

but the priority remains to stabilize growth. I think that's what Beijing is looking at right ye if that's a really interesting perspective because for many people, the external pressures and not an incentive to reform domestically, it's perhaps an incentive to deep away from those reforms. The big push to de leverage is perhaps a little bit too ambitious at this point. Why is it an incentive to reform um?

I think there are two things there. You know. Firstly, in the China is realized that can't be dependent on and exports forever. The current account and export and value bad that's been coming down anyway over the last a few years or so. We've just had the fourtieth anniversary of reform and opening up exports did the job to start off with. Now there's a new growth model that's needed going up the value chain. The second part is

and on the technology side. For example, various Chinese companies have realized how dependent they are on overseas and technology as well as parts of their supply chain. So the supply chain story works both ways. Right, So now is this the time for domestic innovation? Now? Does this need perform in the education system in terms of how incentives work in China? Those discussions ongoing right now. They just

need to draw the right conclusions. Is it fair to say that we can draw the following conclusion that it seems to me that the US does have the upper hand in this trade dispute, at least in the short term. Jeff, Well, it's clear US um international exposure as far less and

you're compared to other major economies around the world. If you just look at the overseas earnings and the Dow own verses those in the dacks that see um SMI for example, it's far lower in the US, so I would say the US is less to lose at this point. But again China probably wants to play the longer game here. It just seems to me, Jeff, that we viewed China at the moment almost exclusively through the trade prison, when there seems to me there is a lot more going

on domestically. Just where are we with the Chinese economy at the moment and what kind of policy leavers are they pulling to address the issues? Um, So, two things really, you know, Firstly, on the financial side you just mentioned deleveraging has the downside liquidity and growth impact like extension being stronger, a bit stronger than asipated and perhaps so now and the conditioning is clear now the PBS, so the people's daily against stress. Now is the time for

leverage stability, you know, rather than deleveraging. It's achieved them, it's required results. So that's the first point. Again, it's not pumping liquidity back into the system, but make sure

it's no further tightening of financial conditions. Secondly, if we go back to two thousand and fifteen, two thou sixteen, perhaps the financial authority use the fiscal authorities and the PBOC the monetary authorities are not on the same page there In the end, you know, a lot could have been done, but nothing was done or very little was done um uh in good time. So this time around, it's very clear coordinated fiscal and a monetary response that's

going to come through. But again within reason. I think the pre BOC is clear keen and the regulators as well, not to unwind some of the reforms that have been achieved. But on the fiscal side, if you look at where the budget deficit is, especially on the central level, there's a lot more room they can deploy, but they're being

sparing about it. On Friday they stepped in, the authorities stepped into stabilize the Chinese currency, and Jeff, I'm trying to work out whether the authorities are uncomfortable with the pace of the decline or the overall level of dollar Shina. I think it's always about pace rather than level. And again we've been above seven before, right, and so in the level, I think it's less of an issue pace. You don't want to precipitate um You know, these are

a vicious circle master appreciation expectations. But if you look at reserve holdings, and if you look at the fact that between two thousand and sixteen when we have that major wobble, right be seen two thousand and sixteen, and now they really haven't unwound you know, capital controls. They were limiting you know, overseas expenditures, and I've got in laws you know here right now, and they're probably not gonna be able to buy ten handbags, you know in

the sulverages, right so because of the purchase restrictions. So all of that is in place. So I think they've got a lot more to control. It's about the level they don't want to fand appreciation and expectations on shore. Jeff, let's talk about your risk, asset exposure at the moment and how you put money to work. Five weeks of solid gains on the S and P five coming into this week. The trade story is kind of humming away in the background, but for US assets, so I don't

see it's shaping things too much. You have you on how you put money to work at the moment. Still overweight equities, but global equities were not particularly overweight any individual market. But again it's a case of managing risk it's more turbulent up ahead. You want to be decorrelated. So still you know, have that general risk on exposure, but if there are ways to actually benefit or limit your draw downs, and that's the message we're giving to

clients right now. If the markets are going to suffer from bolit Lucie, especially any correlated sell off in bonds and equities as we saw in January, then you want to have be at alternatives, you know, be it through you know, off market assets which could actually benefit from that decorrelation. So that's our approach at this point. One trade haven in the United States was the small caps.

That position is unwound and quite significant way Jeff do if you want small camps in America, Well, that's actually a less of a focus on the part of our clients, especially outside of the US. We've had more questions about tech you know, of late for example, to be honest, to give them the cell often. But again we want to take the medium to longer a point, a longer

term approach here for small caps. You know, if they actually do have the potential to benefit from the domestic similars, you actually tend to see a much stronger you know, support for current policies on the part of small and medium as sized enterprises. You know they pulled on them, for example, often likes a higher idea n f IB survey server for example. I think that's quite well correlated with them small caps sentiment. Then I think the sentiment

is there. And again if they're less exposed to the global trade picture. Um, if you just look at the over sea no revenues, I think for the broader Dow Jones in dust ronage about forty percent. For small captain it's going to be lower, and then they're in a better spot. But again we're not really interested in adding to risk at this point. It's about managing risk. Jeff. You they're great to catch up with your Jeff Ubs Wealth Management ahead of the UK Investment Office joining us

out of London. As the sanctions clock is ticking, the first round kicking at midnight tonight on Iran. The next round of sanctions all important for the all market kicking in several months time. Let's discuss them show with Dantanna bum PwC Principal and Global Sanctions leader joins us here in New York. Always great to catch up with your Dann. Good morning, to you. Good morning, John. So what do we learn later today? What happens and then what happens

again in three months. So the first tranche of sanctions being reimposed focuses on the reimposition of secondary sanction and essentially, broadly speaking, it forces foreign companies to choose between doing business with Iran or doing business with the US, but

not both. So it criminalizes in the US lens UH European companies, for example, continuing to do business with Iran, with the later phase focusing primarily on oil and gas transactions being wound down in November, So before midnight to night, how busy of companies in Iran being to secure business and execute on deals before midnight? Well, I mean, let's be clear, this is not a popular move by the United States. This is not something that even many in

the US wanted. As United States companies got into the market and created transactions with the Iranian space. Now financial services is largely out of the market and didn't engage, and there were much more limited supply. I don't think there's necessarily going to be a mad rush because this has been out there for months now. Everyone knew this was coming. What's going to be interesting is who's still

transacting tomorrow and the rest of the week. There's been talks now in the EU, and I believe a regulation went into effect across the EU member states this week that is a resurrection of the anti blocking boycott from on Cuba, basically telling European companies or companies operating Europe, you can't comply with the u S sanctions on Cuba. They've amended them to include that with Iran. Now, how that looks from an enforcement standpoint, what the US does

from an enforcement standpoint really unclear at this point. And Dan, if you're a European multinational with operations in Iran, do you have the confidence in the regulation that the EU brings forward or do you just are on the side of caution and go with the u S sanctions? You are you are on the side of caution. The EU anti blocking statute on Cuba was never enforced, it was never used, it wasn't even universally adopted. Um. This is

a little different. Um. This is a bit more of a hot potato issue than Cuba was even twenty plus years ago. That being said, I mean a number of large insurers and if you think about kind of how globe commerce works. Most of the major global insurers have already announced in May that they're backing out of Iran. If you can ensure trade, I mean, what chance does trade have to exist anyway. We're going to talk about the old market in just a moment, but I want

to explore that concept backing out of Iran. It's it's something a lot of us will say, but I want to know what it actually means, because the sanctions regime over the last few years has always been uncertain, and it's been incredibly fluid, and we've seen it change again. If you're a multinational, let's just say you're a European company with operations on Iran. Does backing out mean you stop executing deals with Iran? Does it mean you move offices?

Does it mean you move equipment? How does it work logistically just in terms of operations? Do you maintain a presence there? What you do? So? Given the uncertainty when the j c p o A the Iran Deal was enacted, um not many companies necessarily established a physical presence, but they did start dealing with Iran, shipping goods and services into Iran, sending people on temporary assignments into Iran. It's really elimination of deals, less so about movement of physical resources.

I mean. The important thing to note though, is with all the rhetoric around sanctions this year, this has been the slowest year from an enforcement standpoint in the U S that I've ever seen. There's been one enforcement action at the federal level. Usually there's ten to fifteen at this time in the year. So how this looks in terms of the stick versus that can speak, It's really unclear what the administration is going to do. So how

may it makes sense of that. Is it not being enforced as heavily in terms of the issues that arise because more people are abiding by some of the rules, or is it not happening because the US administration isn't actually being that forceful. So it's interesting. These cases that you've historically seen come out take years to get adjudicated to settle. So this isn't anything about near term activity. You could be settling a case in eighteen for activity.

In so, even with a budget increase that Treasury has had in this area for the first time in years, there's still a very slow move on enforcement. Despite all of the changes to the different sanctions regimes. So the big question I think is in several months time for a lot of our listeners who maybe have exposure to the all market, is what happens in several months time when that round of sanctions kicks in the target of this administration that the objective overall. I imagine they'd like

to see Iranian oil exports drop down to zero. The Chinese are saying they're not going to go with it. How does that work? It would have been simpler if we didn't have the trade spat that was kind of underpinning all of the U S. China related issues. That is going to be the real test. China has been very clear that they're going to continue to buy oil from Iran, and that doesn't look like it's going to start. I mean, frankly, you used to have a bit more

predictability in the space. Right now, it's a lot harder to tell. But based on all of the different issues that Trump is picking with China, where this could actually land in a few months time. See, I want to know how the enforcement works. Because the Chinese is settling those deals in yuan. How does the United States not incentivized but prevent the Chinese from wanting to deal with Iran,

from from not coming back those crude all impacts. There's likely going to need to be some balance, and potentially who knows, all of the tariffs speak could be the stick that you know, easing back on that for allowing them to transact at certain levels of ranny and crude. That could be part of the deal creating the issue to allow him to come in and create a deal.

From the Trump administration standpoint, what's fascinating about this for a lot of people as this is three months away and we've still got zero clarity on how this is going to work. India, for instance, says we abide by U N sanctions and now they've got a really nuance approach and no one knows what India is going to do.

Have you ever seen anything like this where three months out we could have a huge sanctions push on a country of oil exports and we have zero clarity on who's going to do what I mean, these are somewhat unprecedented times to begin with, and you know, Secretary Low as he was leaving its the Obama administration was ending

spoke about sanctions over use. Were there I mean last week there were sanctions levied against the NATO Allies government ministers as a result for the kidnapping or the perceived kidnapping of a US pastor in Turkey. I mean, this is not how sanctions have generally been used historically. And then North Korea as well on the right part, because it doesn't look like those talks a going as well

as maybe this administration hoped. Yeah that that is not entirely a surprise for those who really watched the space closely, that the North Koreans aren't eagerly handing over their nuclear weapons regime. I mean that being said, North Korea is another interesting one. Unlike Iran. People don't want to do business in North Korea, so all of the focus and making them kind of a good guy and sharing in kind of global prosperity, I mean, Iran was a very

different situation. European companies, global companies have been Iran for years. No one had been in North Korea. Dan Sanna Baum always great to catch up with you and get the inside on what happens next and potentially how companies have got a deal with a new sanctions regime that is implemented once again, the clock is ticking. The first round of sanctions kick out tonight at midnight. The next round

on oil kicks in in about three months time. PWC's principal and at Global Sanctions Leader great to catch Hell we do down and Milletty is a managing director lead portfolio manager for Wells Fargo Asset Management, and she joins us from the lovely state of Wisconsin. And thank you very much for being here. Happy summer to you. Is there no is there no worry in your life right now? Do you want something to worry about? Oh, pim, I

have plenty to worry about. And for anyone who really knows me, they know that I am a professional warrior at heart. Um, I spent all of my time worrying and having a job in this market and dealing with the stock market every day. I think most of us spend a good majority of our time worrying. But you also have to have a lot of conviction and a process and other things to extract the emotion out and

to be able to operate every day. Okay, Well, the reason I bring up the concept of worrying is that you've described your the current situation is no matter how much time you spend worrying about the market, all you do is experience accelerating growth. Yeah, well, the the economy is certainly experiencing that accelerating growth, and the market, I know, is forward looking, and the market also has been going up, and so certainly the market anticipated the economy to be strong.

It has been, And even with a lot of fears and challenges that we hear every day in the headlines, the market continues to kind of slowly march higher. And I think that tells us that for the most part, we you know, the market at least is predicting that the the stock market will continue in the economy will

continue to accelerate from here. And then I think, you know, I know, certainly for the last two years, one of the headlines that I see quite often and that I hear about and people challenge me on all the time is the length of this bowl market and how long

it has lasted. That when you think about the cumulative returns that we've gotten over the last nine plus years, it's actually twenty five lower the cumulative return of this last ball market cycle than it than historical bowl market cycles have been um And so again, you know, history is no certain judge of what's going to happen in the future. But if the headline read that this bowl market cycle has produced lower cumulative returns with an accelerating economy,

there's a possibility that we might look at things differently. Certainly, the market probably wouldn't act any different. The story would still be the story, but the headlines might be a little different. Right. Well, here here's a just maybe just to put it into a little bit of short term context.

If you look at what the SMP has done since the beginning of May, we've seen an increase of about nine so it's worked off all of the turmoil that we experienced from the beginning, let's say, from the end of January. Do you do you think that that's going to continue or is this sort of a head fake? In in a certain way, I think that the market strength will continue, but not without volatility. So would I be surprised if we get a correction? Now, I wouldn't be.

I wouldn't be surprised at that at all. In fact, as a bottom up stock picker and a money manager, I would actually welcome, you know, this, some volatility to allow us to continue to find names and companies selling at a discount UM, and that's what we continue to look for in this market. But there's also been some divergence between the names that have really outperformed in this market and names that have truly lagged while their fundamentals

continue to improve. And so that's what we're paying attention to, because I think the risk reward is what the you know what what investors should be paying attention to right now and making sure that each investment they make they try to chip the risk reward into their favor. Well, just to give one example of a fund that you hold some responsibility over is the Wells Fargo Opportunity Fund. Correct, Okay, so you're today you're up nearly seven percent, So good

on you. That's really up there with the S and P of five. When I look at the holdings, alphabet E Trade, Financial, Sales Force, okay, those are pretty well known. But then you start to get to things like Leva, Nova, Sherwin Williams and Webster Financial and bio rad Laboratories. Can you offer a guide as to what counts as an opportunity for that fund? Sure? Absolutely, I mean that's exactly. We do have some names that are all known, um,

in the market. Certainly Alphabet, but even that name represents a name that has lagged some of the other thing names and actually looks more attractive relatively on evaluation based the name that we can justify. But a name like live and Nova certainly a name in the medical space that we think is you know, although the stock has performed well, we think it's a name that's been ignored

by a lot of the market. And you know, this is a MidCap company, you know, around a six billion dollars heart lung machines based in the UK, based in London, right right, But they have some technology and development that's even more dynamic technology that will show some good growth, we believe. And this is you know, a good quality management team showing some great growth. We they have trials that are going on right now that looks to expand

a lot of their markets as well. So we think this will be a name that a lot of other investors start to pay attention to. We've been in the stock for quite a while um and certainly other investors we believe will also find this name attractive. And what's the what's someone what's the one major mistake that you notice investors make over and over again. How certainly buying the things that everybody loves, it's the easiest thing to do. Um. It's easy to buy a name that is going up um.

And that's kind of you know, momentum investing. It's another thing when you're buying a name that has some challenges, that has not performed in, especially in a market like this, right. And so when you're buying a name that hasn't gone up the rest of the with the rest of the market, you're asking yourself what what's wrong? Right? That goes back

to your concept of conviction exactly. And you have to know and understand the company enough you understand what you're investing in, and so you have to have some kind of investment thesis. Do you know why you're investing in this company? And and so if you understand the reason why, yes, you can be wrong, but you're going to feel better that you understood at least why you did that. Right.

If you if somebody says, hey, invest in the stock because it's going to go up, and you put money there, you know it's already up, and you put money there and it goes down a lot and you don't understand it it's going to be bad. So I think it's that's the worst mistake. We got to leave it there. But I want to thank you very much. And Letty

Managing Director, Lead portfolio Manager, Wells Fargo Asset Management. Well, the topic is a PepsiCo and Nui is stepping down as the chief executive officer of the Food and Beverage Alliant and here to tell us a little bit more about the company and its future prospects is our own Kenneth Shay. He is our Bloomberg Intelligence Senior Analyst for Food and Beverage. Ken say, thanks very much for being

with us. You know, I was looking at a ten year chart of PepsiCo versus the sm P five hundred plus the SMP five consumer staples sector, and it is not a nice picture when you look at PepsiCo the total return a hundred over the last ten years, but the SMP hundred and seventy one and the subsector that consumer staples sector a hundred and fifty two. Is this is going to be remembered as a positive time for PepsiCo. Yeah, Hi,

PIM will be with again today. Um. You know, PepsiCo has had a good run over the years, I mean in a tough space, and the consumer staples area has been beset by just you know, tough pricing competition, and consumers are moving to more healthful food worked it's not as easy to make UH you know a profit margin. Is that the mass produced goods that you know were more familiar with UM. But to her credit, I think

and way should distinguish herself. I think in the consumer product space is that she made a heavier bet on product innovation and growing internally through organic UH sales means, as opposed to the big acquisition that may or may not work out that many of its other peers pursued. UM. So I think it's a it's it's a very strong record she had on a totally term basis. Again, depending on the time you measured over those ten years, it's

pretty competitive with you know, the broad consumer big names. Okay, but even looking at the performance, let's say of Coca Cola over that same period of time, UH, Coca Cola has outperformed PEPSI, it has UM and UM. You know, there's a benefit I guess in this UH study to be concentrated. Coca Cola has been principally a beverage company didn't have a food assets. And there's two ways to

look at it. I mean, during some periods when you know, when uh, the beverage business became a very tough one and they go through cycles like other businesses, PepsiCo could offset that with its food business. UM. In UH more recent times, though, being a concentrated beverage company seems to um be the way to go. UH. Having said that, though, UH, and that circles back to PepsiCo, I think one of the first things that new CEO is going to be tackling is the is the big challenges that it's set

North American beverage A division is undergoing. Would an acquisition help it? Might you know again that the concentration on being an eternally generated innovative company UH. May you know, critic may say, well, maybe she didn't utilize her balance sheet as much as she could have to make acquisitions, particularly in growthier areas in the developing markets, particularly in Asia. UM, and so you may see a stepped up there for there. What about a split between the beverage side of the

business and the food side of the business. Isn't this something that at least was discussed because of the participation of Nelson Pelts and try and fund management in PepsiCo. That's right. A few years ago there was a big push to make that separation. You know. Injured made the case that there are some significant benefits of UM keeping them keeping them together, the business rationale essentially being you know, the size of the company and the scale gives it

advantages with procurement, distribution, synergies in marketing. Uh. I mean they both have the direct store delivery routing system for instance. That's a comparative advantage this company has versus many others who don't UM. She felt that also reminding consumers that, you know, getting a Pepsi soft drink while you're having a bag of chips may make a lot of sense, and since many do do just that, UM, there's some

natural synergies there. Having said that, the growing gap between the performance of the Freedom A division and foods in general and that of North American beverage is now widening to the point that I think it really is prudent to take a look to see if there's a fit. How does it fit. Do they have to own a hundred percent of it or maybe a majority interest? To keep control of it. I think all these things are gonna be on the table going forward. Ramon Laguarta, he

is the candidate to take over for Indian NYE. What is going to be his biggest challenge. Well, again, it's gonna be the North American beverages. And he's no, um, you know, stranger to it. Um. You know, his background is very much international. He understands the role that it can play and the opportunity that's out there. You know, PepsiCo stands with international has been a very prudent one. It has a lot of joint ventures as opposed to

outright you know owning some of these developing markets. Uh. So it's taken a prudent stance in that. Yes, it wants to tap into the long term growth opportunity at some these markets have. At the same time, you know, it has to be disciplined with what it's spending to get there. Um. I think, um, you know, over long hold to growth. I think Miss silic Wark is going to have to make some quick decisions to say we're

gonna stick with beverages. We need to make a bet, uh in a bolder way in terms of how we're gonna how we're gonna do that much appreciated Ken Shay, Bloomberg Intelligence senior analysts for the World of Food and Beverages, talking about the transition at the top of PepsiCo, and here to talk about the transition at the top of PepsiCo. But in another context, I want to bring Jordan Holman

are Bloomberg Managing Diversity reporter, and Jordan's you know. One of the things that, of course is striking is that the injury Nui is the first was the first farm born chief executive of Pepsi and also the first woman to lead this consumer products company. Uh. Does the legacy that injured Nudie leave make it easier for women too take their rightful place at the top of these major corporations.

That's a really interesting question. Um. She held the company for twelve years, and during her time she was much looked at as you know, a strong female leader. But what we're seeing is that a lot of females chief executive officers who stepped down are being replaced by men. So while Pepsi now has UM, you can now say that they've had a female chief UM officer, we don't. They're not, you know, coming up with another one anytime soon.

Is it because they haven't yet to develop the talent or is there a natural inclination to always go with what may be perceived as the safe choice, which is to hire a man. I think we're still getting like as society is still getting over those perceptions of who can lead UM. We're very much still in the phase of companies having their first female chief officers, so that is still UM. The talent pipeline is there, but phil in it with the women who can take over UM

that needs to be more of a push. Well. We notice, for example, in the aerospace and defense industry, that Cathy Warden is scheduled to become the chief executive of North Grummant. Is there something about that industry that ends up tipping the scales towards a woman CEO. I'm not sure if his industry UM is industry specific. I think what you really need at companies or champions who will promote women and who will, you know, make it their mission to

make diversity at all levels. For example, Land of Lakes is named uh openly gay woman as their CEO, bet Ford. That's still a first to have a woman as an openly gay person. So once we get over the humps of the first, then we can have conversations about just having a level playing field, right, because I was noting, for example, that Lockheed Martin is run by Marilyn Houston, chief executive of the defense contractor. As far as the consumer products business is concerned, is there a lack of

diversity at the top of consumer product companies? We've seen a mix. Um, there's definitely been women's CEOs at the top of consumer products. But once again, I don't know if it's more so the company that you're running based off of the products that you're selling, or the people who are saying, you know, I believe in this person,

they can help my company. Um, and if you have more women at the bottom of your company, who who's in your pipeline to raise at the top, then there's a stronger possibility that will stop having just the first with this hap female CEO. Indeed, all right, thanks very much. Jordan's Holman are a Bloomberg Managing diversity reporter on changes at the top of PepsiCo. Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud,

or whichever podcast platform you prefer. I'm on Twitter at Tom Keene before the podcast. You can always catch us worldwide. I'm Bloomberg Radio