UBS’s China Bull

it's justified? Or should investors likely be wary of the rally? And if you only came here for the big reveal of the craziest things we saw in markets this week, don't worry. We will close the show with that tradition. Uh, Sarah, bad news for you again this week coming from once again. I think I got one week of aprieve, one week of you saying that you don't automatically win the title.

I'm back to win in again, guarantee. I don't know, maybe our guest, maybe our guests will surprise us with some even crazier things, but that mind, it's pretty good. But joining us for the first time on the show, very happy to have them. Barry gil, head of investments at UBS Asset Management. Barry, Welcome to the show. I would be here with and also joining us from the Bloomberg Consumer team. She's a reporter and editor. Where's many hats is Bloomberg? Sally Bakewall Sally, welcome to the show.

Thank you, Barry. Let's start with you. UM. I write to be sort of shocked at how resilient the stock market is given the events going on in China. I guess I'm a little surprised it snapped back as far as quickly as it has, but I think everybody is alert there. They're trying to play the map from stars. Everybody understands how long that took to play out. Says

there's a little bit of jumping the gun. But as soon as people anticipated that things were going to move into the second derivative and start to flatten out in terms of new cases getting in ounced, the risk appetite is there. All the fundamentals are pretty broadly bullish, UM, and people have continued to be underinvested in this equity bull market, So in some ways it doesn't surprise me.

It's been made pretty clear that sure people like to compare the current coronavirus to the likes of Stars back in late two thousand, two thous three, but the times were very different. But you alluded to the fact that Stars took a much longer time for it to really run its course through financial markets. Do you get the sense that, sure, this is behind us, we don't yet know whether or not the virus has peaked yet, or do you get the sense that, know, the probability is

that volatility is going to continue. Big moves don't happen in a vacuum, and we can't completely called the all clear just yet. Look, I think there's a little bit of hope going on that the containment efforts have sort of coulter aize the problem earlier than if you if you go back to Stars, and this is obviously the only event that we can sort of in our investment memory that we can go back to, So we may overplay the analogy. But then there was a cover up

going on. There's been pretty much full disclosure taking place this time. The challenge I think coming out of this particular problem is that because the reaction has been as swift as it has, the likely impact on g d P is potentially even greater, um, particularly in agency seeing data points coming out to support that than people that anticipated. So there maybe a little bit of bad news associated

with the reporting of that going forward. UM but uh my, my guess is that that everything happens these days and gets priced in a heck of a lot quicker than it would have done fifteen or twenty years ago. And as a result, UM, I think it's just going to play out. It's fine, So sort of a bitter medicine for excuse a really bad pun as far as the economy goes quarantining these cities basically shutting down, it seems

like a huge chunk of the consumer economy. UM. And I know reading one of your recent notes, you you sounded pretty bullish about UM, China, especially the consumer in China becoming more affluent, uh more sort of a you know, a domestic focused economy rather than an export focused economy. Um. Does this just delay that sort of progress or is there any chance of any sort of permanent or semi permanent damage to consumer confidence in China? I don't think

there is a recipe for that at all. I think the trends taking place in China are inexorable in nature. They're truly structural um, the growing middle class, the focus on the domestic economy, there's a lot of things going on. There's a real break that takes there's a sort of

a bifurcation that's taking place in the market there. But I'm bullish both on the consumerization of the of the Chinese economy, the premium ization phenomenon that's taking place there as people get um wealthier, and then whole bunch of disruptive things that are taking place from the technology standpoint over there, and I think that those are going to play out over the next ten or twenty years, and

and nothing like this will get in the way. In fact, if anything, you could argue that one of the lessons this and this is not directed directly at the consumer element element of the economy, but when you have an event like this and you have to shut down factories, and what you figure out is, we'll hang on a second. We now have people in these factories, We've now just shut down the productive capacity of a region because of this event. How do we actually figure out how to

automate from here? So in some ways it's going to accelerate some trends that are already in place. One stat I saw that was amazing to me Bloomberg Economics. Uh, Tom Orlick, the the head of Bloomberg Economics, kind of lowered his forecast for first quarter GDP growth UM untill about four and a half percent. Was six percent at the end of last year, so slow by uh, you know,

China's standards. But it's amazing to me that there could be any growth at all in this economy in this quarter given what we're seeing on TV and yet twice the pace of the US growth. Still, it's just remarkable. It's just a dis engine of growth, regardless of the fact that it's slowing. Well, this goes back to the earlier point that I was making. I think we likely underestimate the severity of the impact in this quarter. So we've had the snap back in the market, then you're

going to report on the real data. It's probably a little bit more. It's probably potentially significantly more pronounced um in the first quarter as a result of this, But

then the snap back will be equally hard when things stabilize. Right, we haven't yet gotten the economic data that shows the period that encompasses the virus, and as we start to get that through February, we will start to see it say there's a possibility that it comes through worse than expected, we see another bout of volatility shake markets really around the globe because you are bullish on China. Uh, would you say that's an opportunity for you to look for

opportunity and where would that actually be in that event? Absolutely, it's very likely that when that reporting takes place of past data, it's actually coinciding with real time data in terms of new cases, etcetera getting announced, and the market is a forward looking mechanism, and it will spend a lot more time focused on that second derivative kicking in

rather than the reporting of the bad data. In fact, once you get over the data um it really gives the all clear to the market because we can't really see any other major hiccups that could affect it from there, at least over the next few months. You know, Sally, when it comes to us consumer companies that are your focus, it's hard to even think of a company that is not somehow exposed to China, either as a supplier or

as a customer. Uh. And I know you've you've just been typing your fingers this week with trying to cover it all. But what are some of the highlights of what the consumer companies are saying about the virus? Yeah,

I have no fingers less um. Well, I think it's been a really interesting week because US companies have now had a bit of time to digest and see how it's going to play out, and that corresponded with a busy week for earnings where they have had to talk about the impact because they can't really get away with not um. Enough time has passed for them to need

to be able to show they can do that. And so we have had companies like Capri which is the owner of Jimmy Chiu Vasachi Um Tapestry which owns Coach and Kate Spade and State lawder is another one, and they have started to say how it is going to impact their sales and profit this year. A few of them have reduced their guidance for revenue their profit profit forecast for this year um and that for a lot

of them. Actually, their China business isn't huge, but they have invested significantly into the country because, as you mentioned, you know, it's got this rising middle class and they want to make sure they can capture that opportunity, and so that I think is why it's a big, big deal for these companies and why they are expressly seeing a dent. When companies have come out and given a forecast for the future, have they been relatively open ended?

I think of Apple, for example, when they reported earnings, they just gave a wider range than expected because it's very difficult to actually estimate at this point in time what the true fallout was going to be. I know Starbucks has made clear how many stores are closed, and Nike said they will feel a material impact from the coronavirus. But do we actually have a sense yet of what the numerical impact could be to a couple or many of these companies, bottoms, lines, and what that might mean

across the board. Yes, some have given specific amounts of profit impact. Others like Starbucks you mentioned, have said we are not going to we don't know the impact and we can't assess it, so we're not going to incorporate

in our guidance. So have our guidance as as it should have been and as it was, and that obviously makes it difficult for investors, and perhaps it's why we we saw with the companies that I mentioned earlier, you know, capri Esday Lawder, Tapestry, they all saw their shares lift because they had otherwise good news or relatively decent good decent news um but this great unknown and this threat which they tried to address. I mean they all mentioned that there might be an impact that didn't seem to

really hit the share price at all. That was almost one of my craziest things I saw this week story story work. But you basically said this company, that company in this company all came out and said this is going to have a material impact on earnings, and their stocks all rallied after they were honest, truthful. So I can almost imagine, you know, when the first quarter numbers come out, you could imagine some sort of earning Zex coronavirus impact being reported. I mean, is it going to

be as simple as that, Barry? I mean, is the market going to accept that take, you know, basically ignore some bad numbers for a quarter, whether it be the economic data and earnings or could it caused a little bit of jitters. The market is pretty good at separating what's an exceptional event from what's a structural change the dynamic. I'll tell you, if there's a re acceleration in cases or something like that, then and this looks starts to look like a Q two phenomenon, then people will start

to think about it very, very differently. But I think for the moment, given the the risk appetite in the market, people are going to just look right through it. You mentioned earlier on that the fundamentals are moving to the upside, And something that's really stood out to me through this earning season is the fact that if you look at forecast ADPs, it's pretty much hung in there at eight

and a half percent. We haven't really seen the deterioration that you typically see when you enter a new year. So can you give us a sense, Sure, maybe profits are hanging in there even amid all these worries considering the corona of virus. But what is it um that does cause you to be so bullish as it relates to fundamentals across the board? Oh? Look, I mean, we discounted a lot of stuff in in snapped back from a very low level really at the end of twenty eighteen.

But a lot of the things that people were really worried about in twenty eighteen, you know, kind of come, they've kind of passed, right, And if if anything, I would say, sitting here looking at things like the recession risk that people were fearful of, it's a lower probability in twenty now than it was maybe in You've had the loosening of financial policy by the Fed and really across the board for central banks, So that takes time to flow into um into the broad economy as well.

Called it a six to nine month lag, so that's feeding into as well. And then think about all the things that we're going on in the manufacturing economy associated with trade UH last year and and for parts of eighteen, and we've had at least a Step one resolution, which gives companies the ability to plan a little bit further. So all of the manufacturing markers were really started bottoming out and starting to tip tap up. For me, the

big shock has has been the impact. I mean, we really thought that we were gonna have an acceleration in growth, and the coronavirus, amongst other things, has has primarily the virus has really um held everything back. And so the

move in the tenure has been dramatic. The initial move in the equity markets has been dramatic, but those underlying cyclical dynamics will play out over the course of the year, and as long as this is a one off event, they should be the dominant the dominant factor for the subsequent three quarters. And that's why, UM, I don't think you see a lot of move in the earnings estimates at the moment, because you can kind of once people ring fence that there are so many other variables going on,

and people were easily conservative. Um, you should be okay hitting those numbers by the end of the year. You know, you mentioned the tenure yield UM and obviously you did a great job of explaining why the equity market might be able to look past this. Some of the other markets still seem a little cautious oil obviously, I mean, they have to contend with just the obvious supplying demand

issues going on because of this. But that tenure yield is still sort of closer to the lower end of the range we've seen, I mean, is something like, uh, you know, closer to two towards the end of the year. UM started rolling over even before the coronavirus got about one and a half. It's now about one. Is that just the nature of the bond market to to be a little bit more pessimistic about the future, or is

that a cause a concern for for an equity outlook. Look, this is a question that I sort of grapple with on an ongoing basis, because all of the things cyclically seem to be pointing towards more labor bargaining power, tighter labor capacity, slightly more optimism. All of these things are a recipe for increased inflation across the broad economy. The Phillips curves not dead, not dead, that's the term kinked,

not dead. Um. And I do think that's that that is one of those things is that you don't see any change for a long time, and then you see a lot of change very very quickly. Um. But I think there's this structural bias. The low rate or the lower for longer phenomenon has been with us for so long that every time you get a hiccup like we've

just had, it sucks people back into that story. And there are very I mean, there's a powerful secular argument around low rates, which would be in simple terms, forget about the low growth story. But in simple terms, the internet disintermediate or really the Internet being a deflator on the services economy, which is obviously sev GDP. But that's a really, really long term phenomenon um. In the medium term, these major cyclical factors that I've talked about really should

be the things that that that play out. But there is momentum to that legacy story, and I think it's going to take some real optimism and a real broad cyclical uplift to sort of break the back of that. But frankly, I'm stunned at where the tenure is at this point. All Right, I think it's that time, Sarah, It is that time, all right. I know you've got a crazy thing from a listener of the show. Why don't you start with that? We did so. We actually had a terminal client reach out. He goes by the

name of David Back. He's a credit analyst in Virginia UM and what he said was it's rare to see a firm reorganized under Chapter eleven and re emerge in a completely different line of business. Children's clothing retailer Jim Boree announced plans to exit bankruptcy protection and begin anew as anyone have a guess, I'm gonna say, a blockchain biotechnology company focused on coronavirus vaccines. It's a very good guess, but unfortunately wrong. No, you're very wrong. Um. But as

an artwork authentication service. Uh so of course, yeah, of course, why not? Why not? Right, there's a natural connection between children's clothing and artwork authentication. But it was a really good example, uh and just very interesting. Uh, trying to give you insight into how companies try to reorganize themselves to stay relevant, stay alive. That's pretty good. I encourage that kind of to reach out to us again, to rethink. Now I still want Yeah, we'll see about that. So

did they tell us? I know, I told you about our our gimmick here the craziest thing. What do you have for UM? I wondered if you would mind if I substituted the word crazy with beautiful, cra beautiful, all crazy beautiful. So we had Peloton announcing its second quarter results this week UM and guidance for its next quarter

missed estimates and the chares slid. But some analysts, who I think must all own Pelotons, got really quite poetic with their notes, and one of them wrote that the company was climbing the hills of worry with a steady cadence in reference to its stationary bicycles. And then another who wrote that upside in the second quarter was in part at the expense of the third quarter is faster ordered to delivery time shifted units forward. However, the endless

said not to sweat the ship. Yeah, too much time. I think they they're just fishing to get the headline one of our in one of our headlines. They just got it. That's right, right. Was there any impact from that very controversial commercial for Peloton on on sales. I think the main impact was on my productivity and the productivity of my colleagues. Were discussed it at length. The amount of memes are gifts that I saw over the

past week. Examt for Peloton did report earnings um with the woman from the commercials all publicity is good for That's very true, especially for that woman. She got all sorts of yes, she did for that so and probably got a free bike out of it. I imagine, all right, very pretty stiff competition, and we haven't even gotten the

mind yet. I can't I can't go down the beautiful I guess, like I mean it's kind of the uh uh, the elevent in the room the I've been One of the arguments that I've been using when I've been thinking about the equity markets in particular, is that we've never had a real period of speculation and optimism UM in the market. There's been isolated pockets of it right where things, and certainly twenty seventeen was a period of a lot

of multiple expansion. But I would say the dynamic in Tesla's stock in the last few days UM for a very large cap company is one of the strangest things that I've seen, and it's certainly for somebody who's sort of been structurally bullish, and I'm very very much the cycle I've been wanted to buy that we want to buy the dips, and you want to stay invested until you see the same levels of commitment and optimism that

you see typically the end of other cycles. When you see events like that, you either ask is their market structure issue going on, or is there some sort of level of speculation that I haven't picked up broadly, And so you you watched situations like that to figure out if they're sort of signal in the noise, and I can't parse it at the moment, but it was certainly odd. I agree that that was bizarre. It's the type of thing you see in like a penny stock where it

only takes a few thousand bucks to move. Unbelievable. I mean, I heard comparison thrown out there a few times this week, but I think anytime you see a stock jumped that much, especially the likes of Tesla, which was an extremely heavily shorted company, very polarizing, it definitely captured everyone. Let me be very clear, this is nothing like yeah, but the

fact that this is what at least spurred comparisons. Um, but yeah, very still different, right right, All right, Well I've got I've got two crazy things, a bonus one. I'm allowed to bonus crazy thing, right, do I get to Oh, you go first. I'm just because I'm tacking

on to Barry as well. So sure, Tesla shares did surge, but Luke Kawa, our colleague, point it out and looked into the options market, and if you had bought calls on Tesla that paid out at one thousand dollars, then your investment would have risen nine thousand, eight hundred percent through that would be good, which would be good. Um. I I saw a couple reddits um about Tesla with people posting how much they had made by buying call

options on Tesla. Uh, call it luck, call it whatever you want to um, but some serious money was made. I wonder if they on the way down after or if they lost it all because they were they were too stubborn. Well that's pretty good, all right. Well let me give you one my bonus crazy thing. It's that guy, the junk bond trader at City Group in London. Guy

makes a million pounds a year. Uh. They called him stealing snacks from the from the cafeteria, so they suspended a million dollars year, a million pounds a year junk bond trader for stealing snacks. So that was pretty good. But that is not the craziest thing. The craziest thing, actually, I I have to I'm kind of cheating because I got this from Cameron Christ, our columnist, but I added him so I feel like I can kind of claim his his crazy things. And it's about the Baltic Dry Index.

You know, it's the index of prices for cargo ships. People very often bury. I don't know if you've ever done this, but people try to sort of force this sort of macro signal onto it when you really shouldn't because of There'sola Superviolatl and there's sort of you know, supplying demand issues within the shipping industry. Fuel prices are a big deal this year. They're moving to a more environmentally friendly fuel. But if you were to take this as a macro indicator, it would look like the Great

Depression right now. The thing is just completely collapsed. One day decline or something. The Baltic Cape size index fell one day. But here's that. That's not even the crazy part. Here's the crazy part is there's this website call Splash two four or seven, I'm sure you read it, Splash two f seven, industry website that checks these things. And they tracked what's called back hall cargo ships and they found that the rates for back hall cargo ships were

negative eleven thousand dollars a day. So it's like the the negative yielding bond of the ship in world. In other words, you could charter out your boat to someone and you have to pay them eleven thousand dollars a day to do it. And I was trying to wrap my head around why This possibly could be the idea that people don't want to move into a region that well, go on, go on, move into a region in which

you have a virus that is spreading. So if people don't want to go there, you would potentially have to pay them. I think that is a big part of it. It's they call it uh ships repositioning. So I guess the the cargo lines from say l A to Asia I just been shut down for now, and so these ships are repositioning from the Pacific to the Atlantic. So for that privilege, the owner has to pay someone eleven eleven grand basically to move him. So if only I knew how to drive a boat, I'd be uh a,

you're gonna get into the business. Mike's going to be gone. Next He'll be calling in from a ship in the middle of the ocean. Uh eleven grand to day. I'm gonna go get my I like the London Trader story better. Okay, they're they're both good. It's pretty good. They're both good. Would you say it's enough for him to win the definitely not anyone but Mike. Oh, Mike is the judge. Always a little bit of a biased competition. There was never even really supposed to be a competition, but then

I just kept paying. Yeah yeah, yeah. But with that said, it said they were all good this week for a way time. Yeah, we'll leave it there for now. Sally Berry, thank you so much for coming on the show this Thank you What Goes Up. We'll 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 interview the show on Apple podcast so more listeners can find us.

And you can find us on Twitter, follow me at at therapont seck Mike is that anonymous and you can also follow Bloomberg Podcasts at podcasts. What Goes Up is produced by Toper Foreheads. The head of Bloomberg podcast is princesco Levie. Thanks for listening, See you next time. Fo