1 00:00:02,520 --> 00:00:07,960 Speaker 1: Bloomberg Audio Studios, podcasts, radio news are. 2 00:00:07,840 --> 00:00:11,000 Speaker 2: We begin this hour stocks just edging lower, with marky 3 00:00:11,000 --> 00:00:13,680 Speaker 2: Btel of All Springs Global Investments, writing, we do not 4 00:00:13,760 --> 00:00:16,160 Speaker 2: expect the stock market to broaden out materially in twenty 5 00:00:16,160 --> 00:00:19,040 Speaker 2: twenty six. We think the strong sectors will continue to 6 00:00:19,079 --> 00:00:22,200 Speaker 2: have high growth. Margi joins us now and MARKI thank 7 00:00:22,200 --> 00:00:24,280 Speaker 2: you so much for being with us. You really are 8 00:00:24,320 --> 00:00:27,800 Speaker 2: answering the question that Matt was just asking, which is 9 00:00:28,080 --> 00:00:30,520 Speaker 2: how much do you see this outperformance of the rest 10 00:00:30,520 --> 00:00:32,320 Speaker 2: of the world, of the rest of the four hundred 11 00:00:32,360 --> 00:00:34,559 Speaker 2: and ninety three really taking hold next year. 12 00:00:35,920 --> 00:00:37,360 Speaker 3: Well, I think for the rest of the world, it's 13 00:00:37,400 --> 00:00:39,560 Speaker 3: really sort of a catch up after a long period 14 00:00:39,600 --> 00:00:42,559 Speaker 3: of underperformance. And I think that the US still has 15 00:00:42,800 --> 00:00:45,479 Speaker 3: some of the best fundamentals of any country in the world, 16 00:00:46,159 --> 00:00:48,720 Speaker 3: and we have good momentum really this year. We saw 17 00:00:48,760 --> 00:00:51,080 Speaker 3: it in the third quarter that should continue in the 18 00:00:51,200 --> 00:00:55,120 Speaker 3: force and well into next year with the tax treatment 19 00:00:55,680 --> 00:00:59,480 Speaker 3: lower was holding higher refunds and the very favorable capital 20 00:00:59,640 --> 00:01:02,880 Speaker 3: expense treatment in the new tax bill. So we think 21 00:01:02,880 --> 00:01:04,679 Speaker 3: that the US is going to be one of the 22 00:01:04,760 --> 00:01:08,520 Speaker 3: better performing sectors next year in the world, really. 23 00:01:08,400 --> 00:01:09,240 Speaker 1: And it does Hinge. 24 00:01:09,520 --> 00:01:12,920 Speaker 2: In your view on AI remaining the dominant trade, how 25 00:01:13,000 --> 00:01:16,319 Speaker 2: much is this on a currency adjusted basis versus overall 26 00:01:16,959 --> 00:01:18,040 Speaker 2: in absolute terms? 27 00:01:19,160 --> 00:01:22,880 Speaker 3: Well, I think the artificial intelligence trade is going to continue. 28 00:01:23,000 --> 00:01:25,559 Speaker 3: But really, over the last few months, we've already seen 29 00:01:25,600 --> 00:01:28,600 Speaker 3: some erosion in the price earnings ratios of some of 30 00:01:28,640 --> 00:01:31,640 Speaker 3: the leading companies in AI. So the market is already 31 00:01:31,680 --> 00:01:35,360 Speaker 3: making an adjustment if we're looking at some moderation from 32 00:01:35,400 --> 00:01:38,600 Speaker 3: the extremely hot growth, which is probably likely, but still 33 00:01:38,600 --> 00:01:40,240 Speaker 3: that says to me, that's going to be one of 34 00:01:40,240 --> 00:01:43,040 Speaker 3: the sectors that have well above average growth when you 35 00:01:43,080 --> 00:01:44,119 Speaker 3: look at the whole economy. 36 00:01:44,160 --> 00:01:45,640 Speaker 4: So we still think that's a great sector. 37 00:01:45,800 --> 00:01:48,680 Speaker 5: Well, what kind of broadening out do we get in earnings, Margie, 38 00:01:48,680 --> 00:01:52,160 Speaker 5: because we have seen the mag seven earnings though still 39 00:01:52,800 --> 00:01:55,040 Speaker 5: you know, massive double digit. 40 00:01:54,800 --> 00:01:58,040 Speaker 1: Gains slow down and the rest of the. 41 00:01:57,800 --> 00:01:59,160 Speaker 5: S and P at least says the S and P 42 00:01:59,200 --> 00:02:02,960 Speaker 5: four ninety three starting to catch up to some extent, 43 00:02:03,040 --> 00:02:04,720 Speaker 5: but it hasn't really been substantial. 44 00:02:04,760 --> 00:02:06,600 Speaker 1: Does that change in twenty twenty six. 45 00:02:07,560 --> 00:02:08,480 Speaker 4: Ye, I don't think so. 46 00:02:08,600 --> 00:02:10,880 Speaker 3: I think the same sectors that have been strong for 47 00:02:11,160 --> 00:02:13,720 Speaker 3: this year and a couple of years before are going 48 00:02:13,760 --> 00:02:17,600 Speaker 3: to continue to be strong. The other sectors that I think, 49 00:02:17,680 --> 00:02:21,639 Speaker 3: particularly for consumers, may be rather disappointing. So we still 50 00:02:21,639 --> 00:02:26,000 Speaker 3: think it'll be technology industrials relating to the electrical grid 51 00:02:26,440 --> 00:02:29,520 Speaker 3: and those will be the sectors, and aerospace defense will 52 00:02:29,560 --> 00:02:32,720 Speaker 3: continue to be the strong sectors, and really I'll perform 53 00:02:32,800 --> 00:02:33,720 Speaker 3: those other sectors. 54 00:02:34,000 --> 00:02:36,560 Speaker 5: We've seen, you know, a year to date, all of 55 00:02:36,600 --> 00:02:39,800 Speaker 5: the GIS sectors on the S and P five hundred 56 00:02:39,800 --> 00:02:43,440 Speaker 5: are up, but real estate has barely budged. I wonder 57 00:02:43,440 --> 00:02:46,880 Speaker 5: if that changes with interest rates coming down. Consumer staples 58 00:02:47,000 --> 00:02:49,919 Speaker 5: is the second worst performer, and energy, oddly enough is 59 00:02:49,960 --> 00:02:50,960 Speaker 5: the third worst performer. 60 00:02:51,040 --> 00:02:52,200 Speaker 1: I guess because of oil. 61 00:02:52,800 --> 00:02:54,800 Speaker 5: Right, but we're going to need so much energy to 62 00:02:54,840 --> 00:02:57,040 Speaker 5: power these colossus data centers. 63 00:02:58,320 --> 00:03:00,720 Speaker 1: Why doesn't it pay off? Well? 64 00:03:00,760 --> 00:03:03,400 Speaker 3: I think really when you look at the data centers 65 00:03:03,520 --> 00:03:05,320 Speaker 3: and the growth and power that we need in this 66 00:03:05,360 --> 00:03:08,000 Speaker 3: country and other countries really is going to come from 67 00:03:08,000 --> 00:03:08,760 Speaker 3: the gas side. 68 00:03:08,800 --> 00:03:10,720 Speaker 4: So we think that gas will continue to be. 69 00:03:10,680 --> 00:03:14,560 Speaker 3: In strong demand and really detached from the price of oil. 70 00:03:15,080 --> 00:03:17,880 Speaker 3: And when you actually look at oil, though there seems 71 00:03:17,919 --> 00:03:19,560 Speaker 3: to be a gluck today, if you look down the 72 00:03:19,639 --> 00:03:22,359 Speaker 3: road a year or two, it may look like that 73 00:03:22,560 --> 00:03:26,080 Speaker 3: the country's producing oil have really been under investing, so 74 00:03:26,200 --> 00:03:28,720 Speaker 3: we may have not today, not tomorrow, year from now, 75 00:03:28,960 --> 00:03:31,160 Speaker 3: have a big surprise to say, oh, we really need 76 00:03:31,200 --> 00:03:33,120 Speaker 3: to invest more in oil. But we think the case 77 00:03:33,120 --> 00:03:36,880 Speaker 3: for gas, especially in the US, the shale producers feeding 78 00:03:36,920 --> 00:03:39,360 Speaker 3: into the electrical grid and the need for more power, 79 00:03:39,440 --> 00:03:42,040 Speaker 3: it's really the only realistic source is going to make 80 00:03:42,080 --> 00:03:44,920 Speaker 3: that sector very strong and really detached from what happens 81 00:03:44,920 --> 00:03:45,760 Speaker 3: to the price of oil. 82 00:03:45,920 --> 00:03:49,040 Speaker 2: How much market is really lean into the whole real 83 00:03:49,080 --> 00:03:53,080 Speaker 2: world economy, the old world economy, or being dominant. We've 84 00:03:53,120 --> 00:03:55,320 Speaker 2: seen that to some degree with the metal space so 85 00:03:55,400 --> 00:03:57,640 Speaker 2: far this year. Do you expect that to continue next year? 86 00:03:59,320 --> 00:03:59,520 Speaker 4: Yes? 87 00:03:59,600 --> 00:04:01,680 Speaker 3: I think so, and I think the US is going 88 00:04:01,720 --> 00:04:06,120 Speaker 3: to continue to be one of the strongest economies, particularly 89 00:04:06,120 --> 00:04:09,840 Speaker 3: because the fundamentals are really on our side. When you 90 00:04:09,880 --> 00:04:11,720 Speaker 3: look at the emerging markets, a lot of them have 91 00:04:11,720 --> 00:04:15,440 Speaker 3: had a big comeback, but fundamentally their economies don't have 92 00:04:15,560 --> 00:04:17,839 Speaker 3: what we need to really see the sort of sustainable 93 00:04:17,839 --> 00:04:19,960 Speaker 3: growth in the US. It looks like we're on track 94 00:04:20,040 --> 00:04:22,720 Speaker 3: to say two or maybe three percent next year, which 95 00:04:22,920 --> 00:04:24,680 Speaker 3: would really put us near the high end of the 96 00:04:24,760 --> 00:04:27,279 Speaker 3: range of sustainable growth around the world. 97 00:04:27,520 --> 00:04:28,120 Speaker 1: I know that. 98 00:04:28,360 --> 00:04:30,000 Speaker 2: Back in the day, Markie, you and I used to 99 00:04:30,000 --> 00:04:32,760 Speaker 2: talk all the time about highle bonds and investment grade 100 00:04:32,800 --> 00:04:36,160 Speaker 2: bonds and how fixed income fit into a portfolio. Increasingly 101 00:04:36,200 --> 00:04:39,440 Speaker 2: you've talked about how equities have been a better proposition 102 00:04:39,880 --> 00:04:43,560 Speaker 2: for a risk on move and frankly for returns than bonds. 103 00:04:43,560 --> 00:04:45,520 Speaker 2: Do you think that that's going to shift come twenty 104 00:04:45,600 --> 00:04:46,160 Speaker 2: twenty six. 105 00:04:47,960 --> 00:04:48,039 Speaker 1: No. 106 00:04:48,120 --> 00:04:51,160 Speaker 3: I think the bond market is a place of very 107 00:04:51,200 --> 00:04:55,359 Speaker 3: small risk and very moderate returns. So you'll get, particularly 108 00:04:55,400 --> 00:04:57,760 Speaker 3: in high yield, a little bit extra yield, maybe two 109 00:04:57,800 --> 00:05:02,200 Speaker 3: percentage points maybe three percentage point more than the treasury yield, 110 00:05:02,320 --> 00:05:04,760 Speaker 3: so say five and a half to six and three 111 00:05:04,839 --> 00:05:07,160 Speaker 3: quarter or something like that. But you really can't look 112 00:05:07,200 --> 00:05:09,560 Speaker 3: for much beyond that. If you look at the high 113 00:05:09,640 --> 00:05:12,240 Speaker 3: old market, a lot of the poor quality issues have 114 00:05:12,279 --> 00:05:15,320 Speaker 3: been siphoned off, gone into the loan market. So the 115 00:05:15,440 --> 00:05:18,040 Speaker 3: US public high yield market has a default rate only 116 00:05:18,080 --> 00:05:21,760 Speaker 3: about two percent, so it's actually quite safe on a 117 00:05:21,760 --> 00:05:24,479 Speaker 3: relative basis, and the defaults have been more on the 118 00:05:24,520 --> 00:05:27,200 Speaker 3: private credit side, which are more than twice that amount. 119 00:05:27,480 --> 00:05:28,839 Speaker 4: And we think that'll continue. 120 00:05:29,040 --> 00:05:32,039 Speaker 3: And as I said, no room for capital appreciation because 121 00:05:32,120 --> 00:05:34,920 Speaker 3: most bonds in the high old university training above their 122 00:05:34,920 --> 00:05:37,719 Speaker 3: face value, so we can have the old fashioned capital 123 00:05:37,760 --> 00:05:40,760 Speaker 3: appreciation that we would talk about in years past. 124 00:05:41,040 --> 00:05:43,600 Speaker 4: Just the math just isn't there, Margie. 125 00:05:43,600 --> 00:05:47,559 Speaker 5: I'm just an equity simpleton, so this is a little 126 00:05:47,560 --> 00:05:49,400 Speaker 5: bit too much for me to understand. Why do we 127 00:05:49,440 --> 00:05:54,320 Speaker 5: have credit metrics getting better and better Torus and Slock 128 00:05:54,360 --> 00:05:57,400 Speaker 5: put out a note about it today and defaults falling 129 00:05:57,640 --> 00:06:00,520 Speaker 5: at the same time as bankruptcy is hit the highest 130 00:06:00,600 --> 00:06:03,480 Speaker 5: level since just after the Great Financial Crisis? 131 00:06:03,480 --> 00:06:05,880 Speaker 1: How does that work out well? 132 00:06:05,920 --> 00:06:10,040 Speaker 3: Because the public high yield market, Number one, they have 133 00:06:10,080 --> 00:06:12,560 Speaker 3: not gotten the poor quality issues and may have in 134 00:06:12,680 --> 00:06:15,800 Speaker 3: other years because those have been siphoned off into the 135 00:06:15,800 --> 00:06:18,080 Speaker 3: private credit market. So you just don't have those very 136 00:06:18,200 --> 00:06:22,640 Speaker 3: vulnerable names. And secondly, during that period of zero interest rates, 137 00:06:23,279 --> 00:06:26,240 Speaker 3: many high old companies took advantage of that to restructure 138 00:06:26,279 --> 00:06:28,919 Speaker 3: their balance sheet, to pay off their bank lines, to 139 00:06:29,040 --> 00:06:32,080 Speaker 3: issue new debt at very very low coupon rates of 140 00:06:32,120 --> 00:06:35,200 Speaker 3: pre refund issues that might be callable or coming doing 141 00:06:35,240 --> 00:06:38,039 Speaker 3: a couple of years. So actually the high old bond 142 00:06:38,080 --> 00:06:40,920 Speaker 3: market as a whole has never had such a strong 143 00:06:41,040 --> 00:06:45,640 Speaker 3: balance sheet overall. And secondly, the supply is really pretty 144 00:06:45,680 --> 00:06:50,159 Speaker 3: modest compared to the insatiable demand for higher yielding securities. 145 00:06:50,400 --> 00:06:52,480 Speaker 3: So we think the high old market is a little 146 00:06:52,480 --> 00:06:54,080 Speaker 3: i would say, an island of turnquility. 147 00:06:54,160 --> 00:06:55,680 Speaker 4: But it really looks pretty good. 148 00:06:55,880 --> 00:06:57,920 Speaker 3: The only criticism is you aren't going to get those 149 00:06:57,960 --> 00:07:00,880 Speaker 3: types of equity like returns that we see in other markets, 150 00:07:01,120 --> 00:07:03,080 Speaker 3: especially if the FED is very much. 151 00:07:02,880 --> 00:07:06,400 Speaker 4: On even keel relative stability. 152 00:07:06,640 --> 00:07:08,359 Speaker 3: It'd be different case if the FED were going to 153 00:07:08,400 --> 00:07:10,960 Speaker 3: slam on the brake's check up interest rates. But that 154 00:07:11,040 --> 00:07:13,200 Speaker 3: doesn't look like that's on the horizon at all. So 155 00:07:13,360 --> 00:07:15,800 Speaker 3: we think the high old market for what it is 156 00:07:15,960 --> 00:07:19,960 Speaker 3: is a modest yield, modest risk, and some investors like that, 157 00:07:20,120 --> 00:07:22,120 Speaker 3: and that's so for that it's a good sector. 158 00:07:22,560 --> 00:07:25,400 Speaker 1: What does this mean for private credit? Margie? 159 00:07:25,400 --> 00:07:27,920 Speaker 5: As we go into twenty twenty six, and I see 160 00:07:27,960 --> 00:07:32,240 Speaker 5: all of these non bank lenders in Blue Owl, Apollo, KKR, 161 00:07:32,600 --> 00:07:37,880 Speaker 5: Blackstone underwater for twenty twenty five, they haven't performed for 162 00:07:37,960 --> 00:07:40,600 Speaker 5: equity investors well. 163 00:07:40,600 --> 00:07:44,800 Speaker 3: And that reflects the fact that many many of transactions 164 00:07:44,800 --> 00:07:48,200 Speaker 3: that were done were in the poor quality companies that 165 00:07:48,360 --> 00:07:53,360 Speaker 3: really don't have the ability to improve their balance sheet 166 00:07:53,400 --> 00:07:55,800 Speaker 3: to raise their growth and it was really just sort 167 00:07:55,840 --> 00:07:58,560 Speaker 3: of play on spreads of the cost of money versus 168 00:07:58,680 --> 00:08:01,840 Speaker 3: what they get. We think that'll continue, and actually that's 169 00:08:01,880 --> 00:08:04,520 Speaker 3: a market that is now larger than the US high 170 00:08:04,560 --> 00:08:08,200 Speaker 3: yield market. It's more than doubled in the last five years. 171 00:08:08,480 --> 00:08:11,200 Speaker 3: So it's really a case of that's where all the 172 00:08:11,240 --> 00:08:13,560 Speaker 3: marginal dollars have flowed to, and so that will be 173 00:08:13,600 --> 00:08:16,280 Speaker 3: where the marginal risk will be. And I think that 174 00:08:16,520 --> 00:08:19,040 Speaker 3: as we've seen when there are bankruptcies or blow ups 175 00:08:19,080 --> 00:08:21,680 Speaker 3: in that market, it really hasn't washed over into the 176 00:08:21,720 --> 00:08:24,480 Speaker 3: bank sector, hasn't washed over into the high yeld market 177 00:08:24,560 --> 00:08:28,000 Speaker 3: with squads widening out, because the market has distinguished. Those 178 00:08:28,080 --> 00:08:31,680 Speaker 3: companies that are under pressure got way too much money 179 00:08:32,000 --> 00:08:34,760 Speaker 3: from the high old market, where it's more of a 180 00:08:35,040 --> 00:08:37,480 Speaker 3: because of the better balance sheets and the credit outlook 181 00:08:37,800 --> 00:08:40,040 Speaker 3: and moderate use of funds. When you look at high 182 00:08:40,080 --> 00:08:44,240 Speaker 3: yield bonds, the purpose of why they're borrowing money more 183 00:08:44,320 --> 00:08:47,040 Speaker 3: than more than half, maybe even close to three quarters 184 00:08:47,040 --> 00:08:50,640 Speaker 3: in the last few years, have been to refinance other debts. 185 00:08:50,679 --> 00:08:53,600 Speaker 3: So they aren't going crazy with paying themselves big dividends 186 00:08:54,040 --> 00:08:56,520 Speaker 3: or to make acquisitions. It will turn out to be 187 00:08:56,559 --> 00:09:00,280 Speaker 3: too risky, so that's really, it's a very attractive actor 188 00:09:00,320 --> 00:09:01,600 Speaker 3: looking at the fundamentals. 189 00:09:01,600 --> 00:09:01,880 Speaker 4: Really. 190 00:09:02,240 --> 00:09:04,719 Speaker 2: MARKI Patel of all Spring Global Investments, wonderful to see. 191 00:09:04,840 --> 00:09:06,040 Speaker 2: Thank you so much for being with us.