Speaker 1: Bloomberg Audio Studios, podcasts, radio news are.
Speaker 2: We begin this hour stocks just edging lower, with marky
Speaker 2: Btel of All Springs Global Investments, writing, we do not
Speaker 2: expect the stock market to broaden out materially in twenty
Speaker 2: twenty six. We think the strong sectors will continue to
Speaker 2: have high growth. Margi joins us now and MARKI thank
Speaker 2: you so much for being with us. You really are
Speaker 2: answering the question that Matt was just asking, which is
Speaker 2: how much do you see this outperformance of the rest
Speaker 2: of the world, of the rest of the four hundred
Speaker 2: and ninety three really taking hold next year.
Speaker 3: Well, I think for the rest of the world, it's
Speaker 3: really sort of a catch up after a long period
Speaker 3: of underperformance. And I think that the US still has
Speaker 3: some of the best fundamentals of any country in the world,
Speaker 3: and we have good momentum really this year. We saw
Speaker 3: it in the third quarter that should continue in the
Speaker 3: force and well into next year with the tax treatment
Speaker 3: lower was holding higher refunds and the very favorable capital
Speaker 3: expense treatment in the new tax bill. So we think
Speaker 3: that the US is going to be one of the
Speaker 3: better performing sectors next year in the world, really.
Speaker 1: And it does Hinge.
Speaker 2: In your view on AI remaining the dominant trade, how
Speaker 2: much is this on a currency adjusted basis versus overall
Speaker 2: in absolute terms?
Speaker 3: Well, I think the artificial intelligence trade is going to continue.
Speaker 3: But really, over the last few months, we've already seen
Speaker 3: some erosion in the price earnings ratios of some of
Speaker 3: the leading companies in AI. So the market is already
Speaker 3: making an adjustment if we're looking at some moderation from
Speaker 3: the extremely hot growth, which is probably likely, but still
Speaker 3: that says to me, that's going to be one of
Speaker 3: the sectors that have well above average growth when you
Speaker 3: look at the whole economy.
Speaker 4: So we still think that's a great sector.
Speaker 5: Well, what kind of broadening out do we get in earnings, Margie,
Speaker 5: because we have seen the mag seven earnings though still
Speaker 5: you know, massive double digit.
Speaker 1: Gains slow down and the rest of the.
Speaker 5: S and P at least says the S and P
Speaker 5: four ninety three starting to catch up to some extent,
Speaker 5: but it hasn't really been substantial.
Speaker 1: Does that change in twenty twenty six.
Speaker 4: Ye, I don't think so.
Speaker 3: I think the same sectors that have been strong for
Speaker 3: this year and a couple of years before are going
Speaker 3: to continue to be strong. The other sectors that I think,
Speaker 3: particularly for consumers, may be rather disappointing. So we still
Speaker 3: think it'll be technology industrials relating to the electrical grid
Speaker 3: and those will be the sectors, and aerospace defense will
Speaker 3: continue to be the strong sectors, and really I'll perform
Speaker 3: those other sectors.
Speaker 5: We've seen, you know, a year to date, all of
Speaker 5: the GIS sectors on the S and P five hundred
Speaker 5: are up, but real estate has barely budged. I wonder
Speaker 5: if that changes with interest rates coming down. Consumer staples
Speaker 5: is the second worst performer, and energy, oddly enough is
Speaker 5: the third worst performer.
Speaker 1: I guess because of oil.
Speaker 5: Right, but we're going to need so much energy to
Speaker 5: power these colossus data centers.
Speaker 1: Why doesn't it pay off? Well?
Speaker 3: I think really when you look at the data centers
Speaker 3: and the growth and power that we need in this
Speaker 3: country and other countries really is going to come from
Speaker 3: the gas side.
Speaker 4: So we think that gas will continue to be.
Speaker 3: In strong demand and really detached from the price of oil.
Speaker 3: And when you actually look at oil, though there seems
Speaker 3: to be a gluck today, if you look down the
Speaker 3: road a year or two, it may look like that
Speaker 3: the country's producing oil have really been under investing, so
Speaker 3: we may have not today, not tomorrow, year from now,
Speaker 3: have a big surprise to say, oh, we really need
Speaker 3: to invest more in oil. But we think the case
Speaker 3: for gas, especially in the US, the shale producers feeding
Speaker 3: into the electrical grid and the need for more power,
Speaker 3: it's really the only realistic source is going to make
Speaker 3: that sector very strong and really detached from what happens
Speaker 3: to the price of oil.
Speaker 2: How much market is really lean into the whole real
Speaker 2: world economy, the old world economy, or being dominant. We've
Speaker 2: seen that to some degree with the metal space so
Speaker 2: far this year. Do you expect that to continue next year?
Speaker 4: Yes?
Speaker 3: I think so, and I think the US is going
Speaker 3: to continue to be one of the strongest economies, particularly
Speaker 3: because the fundamentals are really on our side. When you
Speaker 3: look at the emerging markets, a lot of them have
Speaker 3: had a big comeback, but fundamentally their economies don't have
Speaker 3: what we need to really see the sort of sustainable
Speaker 3: growth in the US. It looks like we're on track
Speaker 3: to say two or maybe three percent next year, which
Speaker 3: would really put us near the high end of the
Speaker 3: range of sustainable growth around the world.
Speaker 1: I know that.
Speaker 2: Back in the day, Markie, you and I used to
Speaker 2: talk all the time about highle bonds and investment grade
Speaker 2: bonds and how fixed income fit into a portfolio. Increasingly
Speaker 2: you've talked about how equities have been a better proposition
Speaker 2: for a risk on move and frankly for returns than bonds.
Speaker 2: Do you think that that's going to shift come twenty
Speaker 2: twenty six.
Speaker 1: No.
Speaker 3: I think the bond market is a place of very
Speaker 3: small risk and very moderate returns. So you'll get, particularly
Speaker 3: in high yield, a little bit extra yield, maybe two
Speaker 3: percentage points maybe three percentage point more than the treasury yield,
Speaker 3: so say five and a half to six and three
Speaker 3: quarter or something like that. But you really can't look
Speaker 3: for much beyond that. If you look at the high
Speaker 3: old market, a lot of the poor quality issues have
Speaker 3: been siphoned off, gone into the loan market. So the
Speaker 3: US public high yield market has a default rate only
Speaker 3: about two percent, so it's actually quite safe on a
Speaker 3: relative basis, and the defaults have been more on the
Speaker 3: private credit side, which are more than twice that amount.
Speaker 4: And we think that'll continue.
Speaker 3: And as I said, no room for capital appreciation because
Speaker 3: most bonds in the high old university training above their
Speaker 3: face value, so we can have the old fashioned capital
Speaker 3: appreciation that we would talk about in years past.
Speaker 4: Just the math just isn't there, Margie.
Speaker 5: I'm just an equity simpleton, so this is a little
Speaker 5: bit too much for me to understand. Why do we
Speaker 5: have credit metrics getting better and better Torus and Slock
Speaker 5: put out a note about it today and defaults falling
Speaker 5: at the same time as bankruptcy is hit the highest
Speaker 5: level since just after the Great Financial Crisis?
Speaker 1: How does that work out well?
Speaker 3: Because the public high yield market, Number one, they have
Speaker 3: not gotten the poor quality issues and may have in
Speaker 3: other years because those have been siphoned off into the
Speaker 3: private credit market. So you just don't have those very
Speaker 3: vulnerable names. And secondly, during that period of zero interest rates,
Speaker 3: many high old companies took advantage of that to restructure
Speaker 3: their balance sheet, to pay off their bank lines, to
Speaker 3: issue new debt at very very low coupon rates of
Speaker 3: pre refund issues that might be callable or coming doing
Speaker 3: a couple of years. So actually the high old bond
Speaker 3: market as a whole has never had such a strong
Speaker 3: balance sheet overall. And secondly, the supply is really pretty
Speaker 3: modest compared to the insatiable demand for higher yielding securities.
Speaker 3: So we think the high old market is a little
Speaker 3: i would say, an island of turnquility.
Speaker 4: But it really looks pretty good.
Speaker 3: The only criticism is you aren't going to get those
Speaker 3: types of equity like returns that we see in other markets,
Speaker 3: especially if the FED is very much.
Speaker 4: On even keel relative stability.
Speaker 3: It'd be different case if the FED were going to
Speaker 3: slam on the brake's check up interest rates. But that
Speaker 3: doesn't look like that's on the horizon at all. So
Speaker 3: we think the high old market for what it is
Speaker 3: is a modest yield, modest risk, and some investors like that,
Speaker 3: and that's so for that it's a good sector.
Speaker 1: What does this mean for private credit? Margie?
Speaker 5: As we go into twenty twenty six, and I see
Speaker 5: all of these non bank lenders in Blue Owl, Apollo, KKR,
Speaker 5: Blackstone underwater for twenty twenty five, they haven't performed for
Speaker 5: equity investors well.
Speaker 3: And that reflects the fact that many many of transactions
Speaker 3: that were done were in the poor quality companies that
Speaker 3: really don't have the ability to improve their balance sheet
Speaker 3: to raise their growth and it was really just sort
Speaker 3: of play on spreads of the cost of money versus
Speaker 3: what they get. We think that'll continue, and actually that's
Speaker 3: a market that is now larger than the US high
Speaker 3: yield market. It's more than doubled in the last five years.
Speaker 3: So it's really a case of that's where all the
Speaker 3: marginal dollars have flowed to, and so that will be
Speaker 3: where the marginal risk will be. And I think that
Speaker 3: as we've seen when there are bankruptcies or blow ups
Speaker 3: in that market, it really hasn't washed over into the
Speaker 3: bank sector, hasn't washed over into the high yeld market
Speaker 3: with squads widening out, because the market has distinguished. Those
Speaker 3: companies that are under pressure got way too much money
Speaker 3: from the high old market, where it's more of a
Speaker 3: because of the better balance sheets and the credit outlook
Speaker 3: and moderate use of funds. When you look at high
Speaker 3: yield bonds, the purpose of why they're borrowing money more
Speaker 3: than more than half, maybe even close to three quarters
Speaker 3: in the last few years, have been to refinance other debts.
Speaker 3: So they aren't going crazy with paying themselves big dividends
Speaker 3: or to make acquisitions. It will turn out to be
Speaker 3: too risky, so that's really, it's a very attractive actor
Speaker 3: looking at the fundamentals.
Speaker 4: Really.
Speaker 2: MARKI Patel of all Spring Global Investments, wonderful to see.
Speaker 2: Thank you so much for being with us.