Velocity of Risk Goes Viral

On top of that of the smp F hundred market gap reported earnings, and the Federal Reserve held interest rates steady. And sorry, as you pointed out, as a pretty serious week, So I'm gonna keep my dumb jokes to a minimum. I'm not gonna eliminate them completely. That just means that you'll have doubled the dad jokes next week, right right, But let's get right to it with our guests here joining us first time in the show. We're very happy be to have her is Sema Shaw. She's a global

strategist at Principal Global Investors. Sema, welcome to the show, Thank you very much, be happy to be here. And Sarah, one thing I noticed on Twitter this week is that my feed was full of experts on viruses. Did you notice that too? Real experts? Or want to bet they're the same experts who were experts on Iran and trade policy. It's amazing the way Twitter cultivates these, uh, these one size fits all experts for you. It's amazing you can fit in being an expert within a couple of characters

on Twitter, and all of a sudden you're hailed. And you know, I know they're experts because they have charts. You know you're a real expert if you well, are they verified? I think that's what really matters. Clearly I'm being sarcastic, but my point is that I craved to hear from someone who really knew what they were talking about as far as the pharmaceutical and the health care industry. So my old pal from Bloomberg Opinion, Max Nisson Opinion

calumnists writing about pharmaceuticals and healthcare. Max, Welcome to the show. Thanks so much for having me. So, Sima, let's start with you. You You know, I was reading one of your recent notes that obviously came out before the coronavirus and some of the highlights, um where you preferred international equities over US equities. Uh, you liked EM debt over other fixed uh income assets, cyclicals you liked, and you you've

sort of concluded that investors should be fully invested. You know, there's that old commercial though that when the world comes at you fast, and now we have this sort of I hate to call it a black Swan event, but I guess you really could call it a black swan, this coronavirus that is sort of causing people to rethink all of their thoughts that they had leading into Is that happening to you at all? Are you sort of still sticking with your your original strategy, Uh, despite all

the uncertainty around the fires. Yeah, absolutely, I think that. I mean, first of all, this is very very early days. We don't know how this is going to be transitioning through. But actually I think a lot of the themes are

still very relevant, and specifically with emerging markets. We actually like emerging emerging Asia, um, which is you know, maybe there's a lot of question to mark, say without but if anything, you know, from a it's a long term strategic positioning that we see the macro story is still pretty strong of cool sort of concerns about the growth outlook, but potentially you could see better entry points this year. I'm here, but you know you have to see how

this is progressing. That may well change China growth out like and then it put things into questions. Right, we've really seen emerging markets in Asian markets really taken absolute hit. You look at em for example, which is the Ice Shares ms c I Emerging Markets Index, which is of its market cap in China at a new fresh load

versus the S and P since two thousand and three. Um. But I also find it very interesting because last week we heard a lot of comparisons about the coronavirus that we're dealing with today two stars, and all of a sudden, this week I've heard from many people, read many research notes about how now is different and you talk about how risk velocity is elevated. Now, how now when you are dealing with an instance of this sort or a global health epidemic or any other worry or is it

can be heightened. Can you maybe walk us through where that is? Yeah? Sure, So we point to three different areas where you would expect that velocity of risk to be quicker in this kind of instance. And the first thing is asset valuations. You know, they are a lot more expensive than sunny what we saw in this kind of the two thousand three episode, which means that as we came into risk, assets were already very vulnerable to any kind of shift in global sentiment, which is exactly

what we're seeing today. So you could see sharper pullbacks in the market. And then the second thing, which to me is probably the most interesting, is a social media impact. So rewind to two thousand and three, you would see about a hundred thousand tweets per day. Today you see that amount in just one single minute, So that transitioning of fear and knowledge is so much faster again, So

that's seeing that transition to portfolios quickly. And the third thing is is probably the most important, is the global supply chain. It's a lot more complex. Um, it's a lot more intricate. So even companies that don't necessarily come across like they have a direct exposure to China, somewhere along the way, they have exposure. Boy, sorry, I wish

I had met Sima. Earlier this week, I was writing a Business Week story where I made that exact point that the valuation difference between now and two thousand and three. Is that is the big difference. Very different. I would have loved to quote quote you, but UM, just to trill down back to some of you know, your original strategy ideas for the year, UM, walk us through. Uh what you're thinking about international equities? Well, why now might

be the time for them to outperform the US. UM. We've heard heard this from some other smart people, and I'm just curious. Um, you know your rationale for for approaching it that way? Yeah? Sure, you know, we came into we have a view that there's going to be global growth stabilization and an opton so not particularly strong. But in that kind of environment, you would actually tend to expect more of those those emerging markets UM to

do well. Now if you even compare Europe, you know, I did have a very good year last year, the best year in about a decade, but it's still somewhat undervalued. I mean, relative valuations are not as attractive UM as a number of varias, but it is definitely more attractive than the US. So that means that coming into this year, as long as you have a growth outlook which is positive, we know that central bank stimulus is going to be in play, and this potential for fiscal stimulus in Europe.

Plus we also have taken out a lot of the politic caaris that have been weighing on Europe for a number of years. So to me, that means valuations and fundamentals are all more attractive. Same thing with emerging markets, you know, aside from what we've been seeing recently, the growth outlook is good given the reduction of the newest China trade tensions, there's room for monaty stimulus and the room for fiscal stimulus. So for us, that means international

equities look more attractive. So, like you said, it is it is early days and we need to see how this coronavirus actually does develop and then eventually affect economic growth growth. But we've already seen some estimates. I know, Bloomberg Economics is estimating that it's possible that China's GDP falls to four and a half percent. Sure, still four and a half percent growth, but low for China's standards as an emerging market country and a dominant global player nowadays.

Do you have to factor in the possibility that maybe this black Swan event is wide enough that it does derail the emerging market picture, at least in Asia and in China, and what would have to happen to get you to the point where you start reconsidering. I think that's really the key point and probably the reason why you have seen markets react in the way that they have is because it does if it were to persist, to put a lot of the global growth outlook into question.

So you know, again, this year global growth should be okay, we don't. We were never expecting it to be like twenty six where China really booms growth around the world, but it was putting a bottom kind of a floor under European growth and it was lifting merging Asia. So if you work to see China growth really persisting beyond that really sharp Q and dip that I think everyone is expecting, but into Q two and certainly into the second half, then you know, you start to take away

the foundations of that global graph outlook. And the other thing is is you know where is the China hits So we know from the consumer side that in stars it bounces back very quickly. People just differ a lot of their purchases, people go back to the airlines, etcetera. If, however, it leaks into the second half of the year and you start to see the production size, so you see

factories staying closed. Then those global big firms that we all know of who at the moment have enough stock paths to to to deliver to their customers, if they start running out, that's when you start to see a real potential growth. And that's when we would be worried. You know, seem I was a English major, not a finance major, so I'm prone to think in bad analogies, and I keep thinking about this as sort of the way, uh, you'll have like a bad, nasty cold winner that sort

of depresses g DP, maybe hurts some companies earnings. UM. Maybe some other companies use it as an excuse for their under performance, But eventually the market is very good at just sort of looking past those soft spots caused by say a nasty winner full of blizzards in the US. UM. And I'm wonder if if a similar thing could happen well as you say, you know, could the market just kind of look passed this episode, especially if the sort of the rate of growth and the infection slows down. UM.

Is that a safe way to look at it? Do you think or is there the danger that uh, as you said, if it bleeds into the second quarter, is there something more long lasting damage that can be done, uh say to you know, uh, the credit of some some vulnerable companies, that sort of thing. If this sort of lasts a bit longer than we then we hope anyway, that's that's exactly it. So as of today, the way

we sit is UM. You know, assuming a photos a point where it peaks relatively soon and then UM starts to fade out, then we would expect the market to bounce back. Now, going into again this year, with osset markets so value so value so highly and with growth solid but not very very strong, we knew that the market was really vulnerable to these kind of political shifts UM and already we've seen the US and runt right attention is already not markets, coronavirus another one, and we

may well see this going through the year. But as long as there's no recession on the horizon and we know the central makes is still there plugging in that liquidity, then we would expect that to be some recovery. It changes when you have a more sustainable impact on the growth outlook, which is really starting to hurt companies from a production standpoint. So for me, that's your that's where

it tilts into the more dangerous side. So you mentioned central banks providing liquidity, and we did have a BOE meeting this week, we did hear from the Federal Reserve. Is there anything that Jerome Powell said or that the FED said in the statement that he said in the press conference thereafter, um, that you found interesting. I think the market reaction was quite a bit, quite interesting. We saw a very steep bond rally, we see stocks start

to sell off. I heard a couple of people try to extrapolate that to me that maybe markets are are trying to see what the FED thinks about the growth outlook. Maybe the growth outlook isn't as strong as people had thought previously. Do you think you can extrapolate that from what we saw or not quite yet? Definitely, not quite yet. I mean, I think it just goes to show that the markets possession with the Fed still lives, even though you know, we have a fairly good idea about what

they'll be doing for the rest of the year. There's a lot to try and read into it. I don't actually would give Powell ten out of ten for giving a really good, clear communication message. And I wouldn't have really expected to the market to be so disrupted. You know, I'm interested in that notion. You talk about emerging Asia debt. How does the trade war sort of fit into all this? I mean, I obviously that that's such a wild card with the coronavirus. I mean, can China really sort of

meet its uh it's requirements of the trade deal? And how will the US? Will they cut them some slack? Will they? You know, I think most of us believe they probably won't. UM. Some of the comments we've seen from Lightheiser and other officials seemed to indicate that, sorry, you're not off the hook just because of this issue. Um, does that make the rest of Asia sort of a little more attractive than China? It does in some ways.

And you know, one of the good things that we did see about Asia even last year was a number of these countries, you know, Asia is more than than China, and a number of these countries such as Indonesia Malaysia, really try to make some structural changes that meant that they could benefit from supply chain diversion. And I think investors should really be aware that these are these are long term beneficial impacts, so there is potential for them

to continue to benefit. UM. I think with how this progresses with the US China trade tensions, UM, it really depends on the electorate in election. Yet the government is going to listen to the electorate. If they feel like the US is going easy on China, then I think we should expect those tensions to return. If they feel like, actually we should cut them some sluck, then I think everything fades out. Where do you stand on the growth

versus value debacle? Just because typically I feel like when we speak with someone and they are more so on the international equity side, it's a valuation question and typically within the US are globally they're favoring value stocks as well.

But this month I find it very interesting, and I wonder if you are on the value side, if it's testing your patients, because if you look at SMP five hundred in excess that separate growth versus value companies, we've actually now seen the strongest month for growth versus value since all the way back in early two thousand nine, before we saw the bottom back in March of oh nine.

So can you maybe walk us through your thought process there. Yeah, absolutely, you know, we we like I like value over momentum. I think of it more from a technical perspective. So the main reason being that, yes, we see an up term, but because it's not particularly strong, the fundamental case for

shifting that into that rotation isn't necessarily there. But when you have such a dislocation in valuations, it's almost rude not to start increasing your exposure to value because when that pop comes, you don't want to be on the wrong side of it. But having said that, is it going to be a sustainable rotation when it comes through. Probably not until you get a strong growth pickup, and that may not be till the next cycle. Like you call it a debacle, I hear about it all the time.

I attribute my underperformance to the debacle of the debacle of growth versus value. Uh See. I think a lot of US investors, UM, when you start talking about international equities, they get um a little nervous about sort of bottoms up stock picking in the rest of the world. Um, they're just not as familiar with sort of you know, the reporting requirements and the and the research involved in

picking uh. Individual international companies, especially E. M. So how would you sort of express abolishness uh in international equities? Would it be in sort of E t F that track certain nations were certain say E M as a whole. You know, how how how would one US investor uh sort of take advantage of international performance? You know, And that that's a really really important question going into this year because yes, the overall emerging market story is quite positive,

but you absolutely need to know your country. Um, if you look back over the last kind of ten fifteen years, a lot of the emerging markets have pursued very sensible macro policies, so you know, they've started to take account or you don't want too many too much debt imbalance and you won't have low inflation, and they've done really well. And now going into this yet a lot of them have space to cut interest rates further, and some have

space to do fiscal stimulus. Others don't have room to do fiscal stimulus, but they're going to do it anyway, because now what we're seeing is a lot of governments are starting to put to put their domestic politics ahead of that macro stability, and that's relatively new again, So you have to know your countries you have to know where those domestic hotspots are going to come about, and this is kind of where active management and stockpicking becomes

very important. Are there any individual countries that you're really pounding the table on in any that you're saying, well, keep me away, but but don't pay on the table here because it will hurt people's years reverberates like yeah, okay, you know again coronavirus aside, If we're looking out over the long term, we like some parts of South Korea,

especially even the chipmakers. We actually like China consumer discretionary, which I know, as we sit today it looked at like a tough one, but hopefully we're going to get a good entry point. And we still like Brazil because from a macro perspective it's a little bit more sensible than than many of the others. There are areas such as Turkey in South Africa which from evaluation perspective do look really attractive, but every time that there is any

kind of upheaval, they will be hit first. What's behind the chipmaker bullishness? I mean, I know I've throwned on and on about five G being just a really big game changer coming up and artificial intelligence all that is that is that part of it or is it? Is it more sort of a world evaluation story. It's more of the former. You know, the kind of the five G story is there. It's not going away. Um. You know they chipmakers have been beaten up before, but they

kind of rebound. And also there's really a boom and bust type of trade it is. And if you expect to see growth and even a growth up to and then, you should see chipmakers do well. I don't necessarily believe that it's not going to be hit by tensions, and especially on the US China stuff. One might be a tougher year, but at least be positive. Max. Let's let's bring you into this because you know, all eyes have

turned to the coronavirus this week. To me, one of the most amazing things is this notion that China is going to build a hospital in like two weeks, two to three weeks. Uh, you know, who knows if they'll meet that goal. But if they get it done in a month, I'll still be impressed. But you know, as we've talked about before, Uh, it's not so simple in the pharmaceutical world as far as getting a vaccine for

this virus on the market. Talk us through, like what is a realistic timeline to actually think of a vaccine getting through the whole clinical trial phase and onto the market with a situation like this. Yeah, absolutely, I mean for actually getting you know, a quick response vaccine to the market for a novel epidemic. There isn't really a

good precedent that. The best one I can point to is with the Bola, where it took not not one outbreak but several to actually eventually get a vaccine to market.

There's this whole sort of saga where you know, a public Canadian lab developed what looked like a promising vaccine, it got licensed to a company than another company, the company never developed it, and then when there was a new outbreak, the w h O more or less forced this smaller biotech to license the vaccine to MRK in two thousand fourteen, and then the next step, the next outbreak rolled around. Finally they were able to get it

into the fields that beyond just the development. Actually getting a vaccine into kind of a hot zone and and running a clinical trials its own side of challenges, and then finally only actually approved in two thousand nineteen. So

that's that's the good case. That's sort of a multi year But in terms of you know, if for the in this case obvious trying to speed up the development pathway from that, UM, I think you've seen at least one company saying that they're hoping to get into sort of initial human trials by April within a few months. It's a company called Maderna using sort of this new modern approach to rapidly creating vaccines and then from there, um you know, that would just be your first in

human safety tests. From there you get to larger trials and then actually figuring out how to manufacture the thing at scale, which Maderna probably can't do. UM. So we're looking at a timeline of years rather than months. Unfortunately, and obviously all clinical trials don't succeed, you know, is there most of them don't? So is is there any you know, notion to think that maybe a vaccine uh for a virus like this would have a greater sort of success rate in clinical trials just you know, because

there's so much effort being thrown out. I would hope so, and and it depends on who exactly it's going to come from. You know, there's a lot of uncertainty o there, whether Maderna's you know not will approach of work. A bunch of smaller companies even than Madurana working on it, and then over the longer term you have Johnson and Johnson, one of the few remaining large pharmaceutical companies that actually

has a big vaccine unit. They're working on something to on some you know, a nine month to a year timeline, I think was the one they mentioned that probably has a greater chance of success just given you know, the weight of resources and expertise behind it. But you know,

vaccines are something they're understood comparatively well. The question is, you know, rapid development for a new virus, how effective it can be, how rapid you know that trade off um and you know trying to do it is rapidly possible. Still having something that's effective and safe is still sort of an unanswered question. We have seen some various biopharmaceutical stocks rallying on the idea that maybe they will be the one to come out with a vaccine, and you

you think about how long this takes. Sure, you need to develop the science, there's plenty of regulations, you need to deal with. But you also wrote a great column on how kind of for some of these pharmaceutical companies it's it's not really top of mind for them, or maybe not in their best interests to go about working to create a vaccine for an epidemic or a pandemic.

I mean, why is that so if in the case that you know, you actually develop a vaccine for an epidemic, if it's successful, it controls in and then you're done.

You know. Um, the biggest revenue drivers for from school companies, UM, you know, they're they're chronic medicines for chronic conditions, things that people took for years, or medicines for cancer, where you know, you can charge a really high price because comparatively few people get every subvariant of cancer that you're you know, the little tiny segment of lung cancer patients

in your medicine targets. So, um, you know, there just isn't that ability to to charge such a high price in these cases because you know, more often than non infection diseases are in LUSS, they break out in less developed countries. Um. And you see that these new viruses they tend to be transient. If you look at Stars. You know, they were a good way along on a

virus than it petered out. So there's just not an incentive to have the sort of rapid development capacity to throw resources into something that might not ever generate a return for you. And uh, and that's why another reason why I'm skeptical of these companies that are popping, in addition to the fact that some of them, many of them in fact, don't actually have the sort of proof you'd like to see, um that they can actually rapidly

generate a medicine. You know, you you'll see them put out these sort of press releases every time there's a pandemic scare and then not and there. Yeah, then there's the question of would this actually be profitable, which is, you know, an unfortunate question to ask, but it's a really real one. And it's why you see fewer companies focusing on this fear with the capacity both for vaccines and another sort of key issue for antibiotics, where the

pipeline of new products is miniscule. Uh. You know, a lot of a lot of big companies have just entirely given up on it, and that that's another potential source of a pandemic at abiotics in bacteria. The profit problem is even worse there because if you develop an effective new antibiotic, the biggest incentive is to use it as

a little as possible so resistance doesn't develop. So it kind of points the need for a different incentive structure for these public health issues than the one that we currently used to to get companies to develop innovative medicines. And I know I've seen stories about how China itself is trying to develop a vaccine um, but I don't really know much about China's pharmaceutical industry and and the

sort of development process. There is there any confidence to be had, any hope that they themselves could could come up with a vaccine. There's certainly that hope, Although obviously not as long of a history of successfully developing medicines, especially novel ones. It's more robust than it used to be. You know, you've seen a greater wave of approvals of medicines. Both a lot of them tend to be you know, sort of copycasts of medicines that have already you know,

validated targets. Things we've already seen as supposed to holy novel medicines but you know, they're they're the ones who have the greatest access to virus material. They're seeing what it looks like every day. So I'm hopeful that that there might be a developed enough infrastructure there to to get this done and at least not now, you know, to begin to build it up for you know what inevitably will be another epidemic in the future. Sarah, I

think that's uh. It means it's time for our tradition. The craziest thing I saw in markets this week, and I gotta say I was impressed when I told Max about this thing we do. We said, oh, no problem, I see I cover biotech. I see a crazy thing every day in the market. It really is to be so high hopes for Max. Max hit us with the craziest thing you saw on markets? Okay, the craziest thing I saw this week was a small biotechnology company called veer Um, already up on the news that it was

working on an antibody medicine for for the virus. Then um, I'm not sure if he's the CEO or the chairman, but George Skang Goes affiliated with the company, former Biogen CEO, got on TV and then the stock pumped. An additional Um, you know this is something that only happens in biotech, where like this tiny piece of incredib we speculative news in this case about a company that you know has the barest track record you know, is still working on

getting medicines to market. It's like, no, we're gonna do this, We're gonna do it real fast, and then not even mentioning, you know, doing it profitably, which is another wide open question. So, um, you know that that's something to watch in biotech in general, and you know specifically when you see these epidemics, Um, you know those stock pops are are really not based

on much. I'll say for my crazy thing, I was scrambling a little bit this week and I immediately went and looked at a couple of biotechnology companies, although I decided not to go that route so we won't overlap. I'm going to start a combo blockchain and biotech company, and it's just you know, it's been tried. Alright, Sora, what do you have for us this week? And the craziest thing you saw on markets? All right? So I didn't stick with biotech, but I did, in a way

take the easy way out. I have to do Tesla because it really is just on freaking believable. Back in June, Tesla was trading around one dollars to share. Now after reported earnings this week, sure we got a revenue be the company projected it will deliver at least five hundred thousand vehicles this year. Cash flow did look strong, but we saw it jump even further. And now shares are worth roughly six hundred and fifty dollars, so more than triple what it was worth really just half a year ago,

just a couple of months ago. And it is just unbelievable because I feel like so many people out there are rooting against Tesla, and you get short interest in the company and it's sky high. People are just waiting for this to unravel, and so far it just has not been even close to happening. Yeah, you wonder how much the short interest is part of the rally, right, You wonder how much covering never ending a short bed against Elon. But it is just crazy. It's pretty good.

It's pretty good, alright. See we well, I'm sure this is the craziest podcast you've been on all weeks. So you are on the hook to for the craziest thing you've seen this week. Okay, well, look, we've all heard of the coronavirus. I'm guessing we've all heard of Corona beer. Where are you going with us? Yeah? You know, it's worrying. From January the eighties to January, the number of searches of Corona beer virus in Google jump by two thousand

three Corona beera virus. And the most worrying thing of that is that it means that it wasn't zero before, so people were already searching for something to do with Corona beer. So I wonder if what's going through people's heads. Do they think that this is originating from Corona as in the Corona beer or I hate to imagine what's going through the heads of these people. Maybe we could just start selling the naming rights to viruses to sort

of help raise some money for research. I don't know. Well, this is something I was thinking about because you think about stars, you think about murders, you think about ebolavirus, and we are talking about this virus that originated out of Wuhan as the coronavirus. But technically the coronavirus is like a family of virus says it's not actually the name of it, but it was actually named. But I think it's a name that none of us feel comfortable

pronouncing over and over again. I'm glad you didn't say you were also thinking about naming rights for us, because it is terrible thought and I'm kind of ashamed myself. I'm absolutely not thinking that. Will leave it to you, all right, to your your turn. Well, of course, my craziest thing has to do with the coronavirus too, and it's this massive sell off in carnival cruise lines stock because there was a ship in Italy where someone started, uh coming down with some some symptoms that may have

been coronavirus. And I think it's like seven thousand people on this ship all of a sudden quarantined ship. I mean, what a nightmare. But I think it really it's you know, it's worrisome from the point of how quickly this type of thing could go pear shaped, you know, how how the paranoia about this could really um start affecting the economy, even if the even if the actual human toll has not yet gotten that bed outside of China, um, just

the paranoia about it. What do you think about that at all, sort of that the psychological effect on confidence, absolutely, I mean even in stars. Actually a lot of the impact was from the uncertainty and fear which stop people from going out and socializing in public places. And you're already starting to see that effect. And also again it's like I said, the social media impact, that rush of fear just goes across the world very very quickly. Now

I don't like to socialize in public places anymore. I'm kind of a loner, Sarah, so are you. I don't I don't really get that sense from you. Mike. I don't like to. I do you know when you're forced to. My wife makes me go, Ingle makes you and you have no choice but to say yes. But we will certainly be tracking the spread of the virus over the next week and any market fell out that may come or may not come. But with that said, Semasha and Max Nisson, thank you so much for joining this show today.

Thank you very much, Thanks so much for having me 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 Sarah Ponzach, Mike is a Reaganonymous, and Max Neeson is at Max Neeson. You can also follow Bloomberg podcast at podcasts.

What Goes Up is produced by Tofar Foreheads and edited by Darrell Dillard. The head of Bloomberg Podcast is Francesca Levie. Thanks for listening, See you next time. BA