Hello, and welcome to What Goes Up, a weekly markets podcast. My name is Mike Eagan. I'm a senior editor at Bloomberg.
And numbldna hire a market support at Bloomberg.
And this week on the show, you probably heard about this, but the Federal Reserve signal this week that even though they paused this month, central bankers are expecting to lift interest rates again this year. Yet the stock market took it all in stride and is continuing its riproaring twenty twenty three rally that's been largely driven by hype around artificial intelligence. So what are we to think about a
week like this? Is the equity market right to fight the Fed this time given all of the optimism around AI, or is it time to sober up and get with the feds program. We're going to get into it with a fund manager who manages a global equity fund. But first, Voldana, I'm very excited for our Craziest Things segment because.
Can I give a hand in giving a spoiler?
All right, that joke's not going to make sense till later in the podcast, but I will confirm it's a good.
Joke and listeners, Yeah, I'm really sticking my neck out.
Here also a very off color joke, but.
Yeah, it's actually really terrible. You know, our guest, he's joining us for the first time ever, and he probably thinks we're just two big weirdos.
Which is true.
Yeah, it's true, but I really don't want to keep him waiting. It's Mark Barribow. He's the head of Global Equity at Jennison Associates, which is the fundamental equity business of p Jim. Mark, thank you so much for joining us.
It's great to be here.
I promise our little intro will make a little more sense later, but maybe just to start out, you can tell us about your at Jennison and what you do there.
I'm the head of Global Equities at Jennison, so we managed global equity portfolios, international equity portfolios, and emerging market portfolios, both small, MidCap and large caps, so that whole spectrum and our specialty at Jennison is growth equities, and all of our global products are growth oriented.
So Mark, did what we heard from Jrome Pow this week change your thinking at all about what took spect for the rest of the.
Year, Not at all. The big hit the equity markets took last year was in response to the change in Fed policy. We got the big rate increases, unprecedented really for any rate cycle in the post war era, and that speed led to valuation declines across the board last year, but particularly growth stocks, which dropped relative to value stocks to their lowest level since the crisis eight. So the setup coming into the year is pretty good on a
value from evaluation perspective. And now the markets are just reacting to earnings news and normal fundamental things, and that's why I think it's looking pretty constructive.
Mark how difficult is it for the Fed to get its messaging right going forward? Like they didn't hike this time, but then they came out saying we do want to continue potentially hiking further later on this year. They see growth actually being better than they had anticipated prior to yesterday's meeting. It's such a like, how difficult is it going to be for them to actually message this to the market and investors.
They overshot on the downside, they're probably going to oversheet on the upside. That's typically what the Fed does. Let's say eighty to ninety percent of it's behind us, So I think that's why the markets are moving on.
You, Mark, As I mentioned in the introduction, artificial intelligence, following the release of the latest versions of chat Cheap is really captivated investors' attention. But I do think what's fascinating. There's a lot of hype, but there does seem to be some fundamentals attached to the theme, almost immediately when you look at the outlook from a company like Nvidia. I know, one of the top holdings in your Global Opportunities fund Oracle last week saying their cloud revenue is
really getting juiced by AI as well. Yeah, I'm sort of reminded of that old cliche that in the gold Rush, most people that got rich were the merchants selling the picks and shovels. And to me, I feel like you know, in this gold rush, it's the chip makers, the cloud companies that are the picks and shovel merchants of this.
I'm just curious, though, with that all said, how you're thinking about AI as far as separating the hype from where the true prospects are the potential for fundamental improvement for various companies and various sectors.
Sure, I mean, well, at first I would absolutely agree with you that the infrastructure layer that allows for this accelerated computing to go on is the way to play AI right now, because we're in the R and D phase. The applications are just getting developed, and it is going to be a tectonic shift in technology for the next decade. It's the biggest thing to happen since the mobile Internet,
and so we're very excited about it. But again, the best way to play it is through the infrastructure required to do this computing. So that starts with high end semiconductors, it starts with cloud based computing workloads, and I think investors will do quite well in that. And then as we move forward, you're going to see more and more software applications embed this technology that's already starting, but it's going to accelerate over the next year. This isn't a
long term thing. You're not going to have to wait three to five years to see what happens. It's going to start to come into every application that's important for productivity purposes in the next four quarters, and then we'll start to see separation like who's got the winning formula, who's developing unique applications that we couldn't even dream of. Maybe old companies that maybe new companies, we don't know. But what's important, this is a real advancement in technology.
It's going to be utilized aggressively, and so I think investors should definitely try to position for it.
Yeah, and Mark, the other narrative of the year that sort of has gone hand in hand with AI is what I refer to the top heaviness of the rally that we've seen this year. The big megacap tech stocks are really dominating the gains. And I'm curious how you approach that as a fund manager. You know, as I mentioned, Nvidia's one of your top holdings, do you have any limits on sort of how big of an allocation you can give to one stock? Does it worry you at all?
This top heaviness? How do you think about that when you're managing a fund like this?
First, I would say, if you own these stocks in your portfolio, you're really happy. Yeah, So I have no complaints about the concentration of the market. So there's a couple of reasons behind it. One, we started the year at very low valuations because of what happened last year. Secondly, these companies are generating among the highest levels of free cash flow you can find in the global stock market, and that's one of the reasons investors are flocking to them.
It's because you don't have to take a lot of risk to participate in a market rally. And investors still are a little wary about what's happening out there because the FED is tightened so much. So I'm not saying there's a flight to safety, but there's a flight to quality, and so they're benefiting from that. And then of course the AI boom has ignited a catalyst for future growth,
and that catalyst really wasn't here a year ago. We didn't know where the next wave of investment spending would occur, and now we know, and so that clarity is leading the true companies that benefit from it to lead the market.
And then other things are participating. And so what I would say right now is as we go into earning season the summer and go into the fall, you've got to be careful because you don't want to be exposed in stocks that participated in the rally but in reality have nothing new to offer the marketplace, because those are probably.
Correct and mark broadly speaking, what is the base case on AI for the average investor, for instance, So why might somebody be buying stocks right now based on the AI thme. Is it the idea that these companies have so much cash and they, as you said, maybe will be putting some of it towards research and development, et cetera.
Well, you want to be in the ones that one are positioned in. The infrastructure build out in Video is an easy example.
We refer to.
Their earnings release on May twenty fourth is the big bang because in my history of doing growth equities since the nineties, I've never seen a company raised guidance for a quarter by four billion dollars. That's unprecedented. So their data center revenue is effectively going to double quarter over quarter from four billion to eight billion. And again these
are numbers that are staggering. So in Video's valuation, ironically, it has been declining the last month, not going up, even though the stock is because the power of that earnings revision is so huge. With fundamental strength there, it gives investors more confidence that you're not buying into hype, you're actually buying into real demand strength, and that's very good.
Other beneficiaries, of course, are Microsoft because of their asure cloud and their big investment and chat GPT, and of course you have Google Cloud, and Google of course has deep learning. It's also an AI expert, and Amazon's aws will probably benefit as well. So you have different ways where you're going to see positive revenue and earnings revisions hopefully as the year goes on. From that pure investment spending.
I think that's why the stocks are doing well, and you don't have to get ahead over your skis yet thinking about what are the new applications that are going to come out that are very exciting I can't miss. You don't have to worry about that yet. That'll develop over the next year mark.
Earlier in the year and late last year, it felt like the consensus really believe that a recession was inevitable. Now's the year goes on, I think it's much more debatable whether this proverbial soft landing can actually perhaps maybe be achieved. But I'm wondering how much of that plays
into the outlook for growth stocks. If we do see a deterioration in the data, rise in joblessness, lower GDP, or even negative GDP, how big of a risk is that to this whole AI theme and the capital spending that goes along with it, that is propelling it.
Okay, First, on the recession outlook. I mean, the recession has been pre announced four or five times every quarter. Here maybe it happens. But we had a big downturn in home construction last year. We had a big downturn in Silicon Valley last year, big layoffs as you know. So you've had these rolling recessions and different segments of the marketplace over the last year and so far this year. I don't know what if we created one point seven
million new job that's not a recession. It's steady state, slow growth, so fueled by a powerful job market. So we probably do get a soft landing. I think that's what the market is coming around to believe in. Now, what does it mean for growth stocks. It's really bullish for growth if you go into a soft landing, because the average company is seeing a slowdown in its earnings, whereas growth companies will be putting up hopefully on average,
double digit earnings growth. And that's quite a differentiator in a slowing, uncertain market environment. And that's indeed what we're seeing in our portfolios. We looked at this data the other day because we've just gone through a big earning season and for the first quarter, that weighted average growth in the portfolio was around fifteen percent. For the S
and P five hundred, it's three point two. You're finally getting rewarded for that growth again once that big reevaluation reset occurred last year.
So your funds obviously are doing well this year. But at the same time, you said today's markets are among the most challenging we have seen in several decades. There's a lack of visibility, contradictory indicators. Can you talk about that.
Yeah, it all starts with the pandemic, right, So we had the V shaped recovery during the pandemic. It shocked the global economy. The growth companies did very well during the pandemic because they were supplying everything from streaming entertainment to laptops needed to work remotely. Digital transformation of companies as they accelerated their cloud deployments to make everything work.
And so we had a big demand surge and then the hangover post pandemic as you adjusted to more normal rates of spending growth and for the whole economy, of course, we had this apply chain problem which led to the inflation and that's eason. Now as supplies come into the market, you're no longer constrained on any number of products, right, and goods inflation has turned negative, services inflation still positive.
That's a very complicated environment with the FED being as aggressive as they are, because the Yell curve would suggest we go we might have a recession, but of course the Yell curve predicts lots of recessions that never happen, so that's not a certainty. And then you have different economies around the world doing different things, which is actually beneficial. So the US might be slowing, whereas China's coming out of the pandemic finally, so that's a good offset to
might slow down here. Europe seems to be doing okay for Europe, not a problem. There's a lot of cross currents that are very challenging. Now, getting back to one of the other point that was raised earlier questions the other thing that's likely to happen we think in the next couple of years is a lot of good support for a number of US investment areas. And the reason is we have this unprecedented combination of public industrial policy,
which we've never had before. So we have the US Chips Act, which is going to lead to the onshing of semiconductor manufacturing in the United States. That's tens and tens of billions of dollars of capex that will occur here on top of the Inflation Reduction Act, which is again leading to multi billion dollar build out of electric vehicle and battery manufacturing as well as alternative energy systems.
So we have tremendous structural support in certain areas of capital spending wich we've typically not had in the US, which is structural and secular and has years to run, and we're in the early innings of it, so that's also very exciting. These are very positive trends that are occurring, maybe as the overall economy slows, but if you're invested in those segments of the economy, you're actually seeing strength.
It's really important from a stock selection perspective to weed through those all of the different parts of the market and just focus on those that have really good secular demand strength, because I think that's going to work.
You know, Mark, there was a chart I must have seen about a thousand times this year that basically showed the Nasdaq one hundred and the inverse of some treasure yield, whether it's the ten year yield or the real yield, and the thinking being that a lot of people thought there was this negative correlation. As interest rates go up, growth stocks should suffer for her. That's obviously if that correlation existed, it's been demolished in the past month or two.
I think there's many cliff Astness and others who would argue that that was a bogus correlation to begin with, that we're being fooled by a simple overlay chart like that. I'm just curious how you're thinking about that relationship between interest rates and growth. Is it a valid headwind to growth stocks as an asset class? And I know you like to focus on the quality with the strong balance
sheets and the strong cash flow. If you're thinking of growth as a factor on its own, does interest rates worry you at all about it?
Historically the correlation wasn't there, but it was there with a bullet in twenty twenty two.
Yeah, as you.
Said, it's broken down this year, so it's not working anymore. I think the only important part about that correlation is just the step function change. So if you do go from an interest rate environment that's been there for a long time and then you jump rates up several hundred basis points pretty quickly. That's a lot to ask for from evaluation perspective. You are going to get compression, and we did get that. But once that happens, it's over. Now.
It's just the way we look at it. It's made the best company win, right because you reset valuation across the system globally, and now we'll see who has the best growth and earnings growth, and that stock's going to win. That's our you.
I need to give a shout out to our colleague Katie Greifeld, who sometimes fills in as co host on this show, for thinking of the next question. But I want to pose it to you as well. I'm wondering what you think of the two areas of the market that are super hot right now, being totally polar opposite. One is AI and the other is money market funds, which are still seeing tons of cash coming in.
Yeah. I mean, if you can get at four percent or five percent yield and then the taxi jumpt ones even better on a tack s adjusted basis, that's stiff competition for stocks. So I think it's really hard for the average stock to compete against that, for sure. But one of the reasons AI related names are doing so well is they do offer good competition because they have the prospects for perhaps very strong growth going forward and very strong current demand. So that looks relatively safe. So
that's how I would explain that. And then you're right, you have that deep void in the middle that's not really doing anything.
Yeah, well, it kind of goes to what you said earlier about it really being you know, when you look at a market that NASDAQ one hundreds up what thirty percent this year, you think, yeah, you think, oh, it's this speculative frenzy, but it really is a chase for quality and maybe safety on the other end of the
barbell with the money mark funds. But I've got to confess this is one of those nightmare scenarios for me when I have to pronounce the name of a company that I'm not sure how to produce in the video. In video, I can say in video, this is one of those companies I've read. I've read the name a million times is, and I'm not sure I've ever said it out loud. I'm going to say Hermes Ermez is that how you say, Mark.
Is she right about easier than the video?
I'm gonna you say Hermie, you say Sayers International, Yeah, I purely in French. It's whereas we say in Philly Ermes. I did want to ask you about Ermez and another top holding of the fund, lv m H two sort of luxury good famous luxury European luxury good goods providers. I mean there's two fcs surrounding companies like this that I've heard this year. One is the China reopening will unlock a lot of demand from China. The other is high end consumers like Vildana over there are so many
they are immunes to inflation. They'll keep spending. They're not pinching pennies because cpis Ferrari another one, another one. You know, I'm curious your rationale for having these Ferrari, LVMH, Air Miz. What's the rationale with having a heavyweighting in these guys.
Sure, it's very interesting because side by side with Nvidia and Microsoft and Apple and Broadcom, we have LVMH and Airs and Ferrari. So what makes them appealing? First? Their business models, they're direct to consumer models. In other words, you can only buy their product from their stores or their website, So Louis Bhutan or air Man or Ferrari,
and you can't get access all their products. They'll sell out very quickly because they ration their most popular products to maintain exclusivity and protect pricing and margins, and they control the distribution so they don't get into inventory problems. They have pricing power and direct to consumer brand models are the best in the world and they just happen
to have developed them over time. And so what you've seen is the return on invested capital for these companies has been rising quite significantly over the last decade, particularly compared to say European market average, and that's because of
the business model superiority. Then you get to the economics of their customer and yes, it's true higher and consumers are less exposed to inflation problems and pinched paychecks and all of that, but the majority of the customers for luxury are actually Neil and gen Z around the world. It's not your old wealthy people, and so there is a fashion element, there's a social element we don't quite understand, but the spending is quite strong, so we like the
customer mix. They do a very good job managing their business, keeping supplies tight, maintaining that exclusivity and pricing power, and for that reason you generate really strong margins and cash flow. And again it's hard to find that consistently anywhere else, but we have found it here. We really like the industry from that perspective. But again we only go with
the big leaders. We don't go across the industry. There's only a few brands that have this capture the moment with consumers, and we just like to stick with those brands.
Interesting millennial angle there. It confirms my image of Wildana. Drive it around in your Ferrari with yorks Vatan bag filled with I did have it ermes Thai one time, hermes Thai one time, but it was actually a hand me down from my older brotherhood. Very much more of a passionate stuff than my Joseph A. Beggs mark. I think we've established that I did not take French in high school, but I did take Spanish, so I can
pronounce another stock in your top ten. I don't think a lot of us listeners are familiar with this one, so maybe you can talk to us a little bit about Mercado Libre.
Oh yeah, that's one of our favorites. So there, you know, think of them as the Amazon of Latin America or the Ali Baba of Latin America. So they span the entire region with an e commerce platform which is the largest and in Latin America, even in the biggest market, Brazil,
e commerce is very underpenetrated. We estimate, for example, in Brazil it might be around ten percent penetration of the market, whereas in the US we're well above twenty China is almost thirty and so there's a long runway of growth for them if they continue to execute well to get more and more people online shopping. And it's different about e commerce markets in emerging markets versus developed like the
US is. You usually get another facet to the platform, and in the case of Ali Baba, it was financial technology. In other words, how do you get people to buy
online whenether they don't have credit cards. You create an internet based payment system and you allow people to load money onto that, and then it becomes a de facto payment system, not just for your e commerce site, but people use it offline at a gas station, at a farm stand, at a grocery store, pay your utility bills, pay your Netflix bill, etc. Mercado Libra has the most valuable payments platform in Latin America as well, called Mercado Pago, and it's a big growth engine for them and a
huge source of profitability. So when you think about financial access in Latin America or other emerging markets, it's really important because they typically don't have access to state of the art financial services. So once you start a payments platform just to fuel your e commerce platform, all of a sudden, you can start offering all sorts of financial services on top of it at low feet and the banking system doesn't offer it to the majority of the population.
So again you have another huge addressable market, unmet need in the marketplace being solved for by technology companies. So that's that's why we like it so much.
Really interesting, you know, it's great to hear. We don't often talk to global fund managers with global discussions, so it's educational to hear about these companies we might not know so much about. Well Mark Barrabou, he's the head of Global Equity at Jennison Associates, which is the fundamental equity business at PGIM. Thanks so much, Mark, We can't quite let you go just yet. Though. We do have a tradition on the show where we all must discuss
the craziest things we saw in markets this week. And well, don I'm gonna pick your brain on this one.
Wow, you're still going with the jokes. The jokes are as you said, in bad taste.
The very bad tastes. Yeah, but you started it, so it's all your fault I did. I'm not going to get Lindy a hand on that.
Oh my god, Okay, this but this really was It's it's a market. It's a market, yes, but it's also a really creepy, spooky story.
Right, No more, Ado, Without further Ado hit him with the craziest thing.
The manager of Harvard's medical school morg got in trouble this week for stealing body parts and then selling them. This was a huge story on the terminal. So this guy, he allowed buyers into the school's morgue. They chose body parts from donated donors. Yep, and he transported heads, brainskin and bones to his home in New Hampshire.
Now you were thinking, all right, is there these for organ donations organ transplant which would be a high dollar value I'm obviously most obsessed with the price discovery on the body parts. You know, you hear kidneys selling for hundreds of thousands and millions. Maybe, but no, this is like Cat's creepy corner, like a retail store selling like macabs. Yeah, scary stuff. I'm going to go one further because I did the due diligence to get some price discovery on
these body parts, and I'm not sure you did. So I think that means we can play our little game show. The price is precise, and I regret to inform you Mark, you're now a contestant on that he doesn't want the prices very good.
We're gonna test your Are we talking for transplant or petsod?
It's more like a novelty market. I'll give you an example. I apologize this all is in very bad taste. It but one guy purchased a bunch of human skin. I can't even.
Say, Oh, this is so bad.
He purchased in Pennsylvania, my home state. It's just embarrassing it would be Pennsylvania. He purchased a bunch of human skin, then he tanned it and turned it in. No he didn't, Yeah, which I gotta say, oh my god, I personally I am an Oregon donor if someone took my skin and made leather out of it, maybe a LVMH handbag or an Ermes mark shaking it marks about the mark's about to end this soon, he's gone anyway. Prices precise, and
what happened is the payments. Of course, where else would they be made?
But Venmo, I'm surprised it wasn't via crypto.
Yeah, maybe there were some that we don't know about. One customer purchased a human head. Oh my god, human head number seven to be specific. So he would let these people into go shopping around in the moor to decide what they wanted.
This is so wild.
So human head number seven was paid for with a Venmo payment. What do you suppose the price was for human head number seven?
Twenty thousand dollars?
Twenty thousand dollars mark? What's your price's precise? Guess for human.
Because I'm not prepared for this at all, but I would say less than a thousand.
Oh, that is why he is the head of fundamentals and I'm not one thousand exactly? What yeah, yeah, one thousand for human head number seven.
Because Pa do you know if you're getting right price.
It's a very thin market. Not a lot of liquidity in this market. Which there's a joke, but don't make it. Don't make it. There was one venmo payment with the memo that just said brains with five eyes. It's winter Bucks for the brain.
Oh my god, I.
Think I've even disgusted myself with a segment.
This is horrible.
It's horrible, but Veldona secretly loves it.
You can go No, I just was interested in the story.
Mark. We apologize for that segment. We have to be okay, we have to be true to our mission here and that is truly the craziest thing. It really is.
It's wild. There was some other stuff. There were some other good stories.
Maybe Mark has a good one. Mark, you got any good crazy stories for us, any good crazy.
I don't have anything. I don't have any I can't compete with.
I'm so sorry, Mark, he's never going to come back on.
Well that was Mark Barrebeau of Jennison at p JAM. Really quite a pleasure to talk to you and hear your insight on everything going on in the markets these days. Mark, We really appreciate your time.
Thank you. It was great to be on and hopefully you'll have me back.
Yeah, we're gonna pick you my god Mark, I'm sorry and thank you. It was great to have you on.
Thanks, we'll see you later work.
What Goes Up will be back next week. Until then, you can find us on the Bloomberg Terminal, website and app, or wherever you get your podcasts. We'd love it if you took the time to rate and review the show on Apple Podcasts. Some more listeners can find us, and you can find us on Twitter, follow me at Reaganonymous. Wildna Hirich is at Bildona Hirich. You can also follow Bloomberg Podcasts at podcasts. What Goes Up is produced by Stacy Wang. Thanks for listening, See you next time at mentan