Speaker 1: Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney, alongside
Speaker 1: my co host Matt Miller. Every business day, we bring
Speaker 1: you interviews from CEOs, market pros, and Bloomberg experts, along
Speaker 1: with essential market moving news. Find the Bloomberg Markets Podcast
Speaker 1: on Apple Podcasts or wherever you listen to podcasts, and
Speaker 1: at Bloomberg dot com slash podcast. You know, one of
Speaker 1: the stories that I've been hearing more and more about
Speaker 1: over last year or so is you know, as China
Speaker 1: turns more inward, if you will, and they continue to
Speaker 1: deal with COVID zero, however they're going to proceed from here.
Speaker 1: Maybe one of the best growth emerging markets out there
Speaker 1: is India. Uh And that's kind of what I've been
Speaker 1: hearing more and more. And it's a rural opportunity. It's
Speaker 1: always been a growth story, but maybe even a little
Speaker 1: bit better here. Josina Krishnan joins US. Managing partner at
Speaker 1: l of Our Equity UM joins us from India. Joson,
Speaker 1: I thanks so much for joining us here. I'd love
Speaker 1: to get a sense of what you folks at l
Speaker 1: of Our Equity are doing. How are your approaching India
Speaker 1: these days? Thanks for having me on the show. And
Speaker 1: it's music to my years and the recognition for India
Speaker 1: as a market and it's really emerging these days. Uh
Speaker 1: Elva has a unique personality type, if I may call it.
Speaker 1: So we're a cross breed between venture capital and private equity.
Speaker 1: We typically form a highly concentrated portfolio by a venture standards,
Speaker 1: we have very low lost ratios and yet we go
Speaker 1: on right at the beginning at early stages, very often
Speaker 1: being the first and suitial capital. And part of the
Speaker 1: reason is that we have a very strong thesis around
Speaker 1: the end market as to what the customers are willing
Speaker 1: to buy UM in the sense that the product market
Speaker 1: fit is known to us before we make an investment,
Speaker 1: even at that early stage. So callus p P callers.
Speaker 1: We see which our way. So where do you see
Speaker 1: the most opportunity for growth in India? I mean, is
Speaker 1: it UM in manufacturing products for export or is there
Speaker 1: a domestic opportunity there? What? What's front and center? So
Speaker 1: our thesis is fairly unique in the sense we're not
Speaker 1: sectoral and how we think about it, but we have
Speaker 1: customer centric which means we underwrite the wallet of an
Speaker 1: end massive market population which is maybe about half a
Speaker 1: billion people um. These are people who are aspiring for
Speaker 1: quality and growth and have not yet been addressed by
Speaker 1: large scale corporate entities. What is fascinated about this customer
Speaker 1: segment is that the non linear growth potential comes from
Speaker 1: intergenerational growth ambitions in the sense previous generations in these
Speaker 1: markets have probably figured out survival, but the current generation
Speaker 1: is aspirational for a better quality life. They're focused on quality,
Speaker 1: they want better lives for themselves and their children. And
Speaker 1: it triggers a very interesting twin fly wheel effect in
Speaker 1: the sense that businesses start growing because their customers start growing,
Speaker 1: and that's fascinating to watch. So we we see very
Speaker 1: clear and fascinating trends across sectors because of this customer dynamic.
Speaker 1: So give us, Josina, maybe some in examples of some
Speaker 1: types of deals that you've invested in. You know, it
Speaker 1: give us a sense of kind of how you think
Speaker 1: about your market. Yeah, so if you if you think
Speaker 1: about the foundation that was laid by let's say micro
Speaker 1: finance in these markets, you see this customer now getting
Speaker 1: aspirational in terms of the quality of financial services product.
Speaker 1: They're ready for more sophisticated products based on business loans,
Speaker 1: based on underwriting, the robustness of cash flows so working
Speaker 1: capital needs, asset backed lending. All of those are emerging
Speaker 1: trends within financial services for a market that banks did
Speaker 1: not address all these years. Uh. There are two three
Speaker 1: other trends which I find fascinating. For example, the investment
Speaker 1: mindset in this market. They're looking to upgrade the quality
Speaker 1: of life and are often willing to pay interesting sums
Speaker 1: of amount to see that shift. So they're willing to
Speaker 1: invest in small businesses that are launched at their end,
Speaker 1: so you can work with them on a lot of
Speaker 1: these opportunities. And small business services, for example, those that
Speaker 1: take shopify down another segment to and even smaller business
Speaker 1: would be fascinating themes you're looking at um. Similarly, you
Speaker 1: look at the affinity to course solutions as against just
Speaker 1: products are transactions. And just to take an example there,
Speaker 1: if you think about courting classes, that's still a single product.
Speaker 1: But if you look at in the entire case world
Speaker 1: of education that gives the child better chances of employability,
Speaker 1: that's a core solution. Right. Think about farmer information services,
Speaker 1: that's the transactional service where you think about market linkages
Speaker 1: and working capital solutions bundled together. That's a core solution.
Speaker 1: Tele consultation tele medicine is transactional, but a full stack
Speaker 1: primary healthcare solution is a core solution. And the minute
Speaker 1: you see this market gravitating towards core solutions, you know
Speaker 1: that you have them. For the long run, your cost
Speaker 1: of acquisition is lower, the customers tend to grow their
Speaker 1: business with you, and you end up having a loyal, growing,
Speaker 1: massive customer base. Can you tell us about just give
Speaker 1: us a sense of kind of how Indian affair through
Speaker 1: the pandemic, Where are you now? How did that maybe
Speaker 1: impact your business and some of the clients you you
Speaker 1: deal with. Yeah, that's a very interesting question, to be honest.
Speaker 1: The first couple of months of the pandemic, we were like,
Speaker 1: God knows how this segment is going to come out,
Speaker 1: because the external perception at some level is that it's
Speaker 1: a vulnerable segment. However, our thesis, of course, over the
Speaker 1: last fifteen years of investing has been that there's a
Speaker 1: lot of resilience, And in a way, I'm kind of
Speaker 1: happy the last two or three years panned out because
Speaker 1: everybody is now seen that this market is super resilient.
Speaker 1: The companies that were lending did have to provide somewhat
Speaker 1: or initially, but that happened across the board globally. But
Speaker 1: what we saw interestingly was that the end market was
Speaker 1: very nimble in terms of adjusting. In fact, small businesses
Speaker 1: in India did not really necessarily get wait for any
Speaker 1: major subsidies or or support. They tend to innovate and
Speaker 1: and trans asition into business models very very quickly in
Speaker 1: emerging markets. In fact, we saw this both across India
Speaker 1: and Latin America, and they came out beautifully at the
Speaker 1: end of it, so that nimbleness makes them very resilient. Likewise,
Speaker 1: for education, we saw a massive shift towards digital solutions,
Speaker 1: both in healthcare and education, and that adoption definitely did
Speaker 1: speed up through the pandemic. But again, extremely smart purchasing
Speaker 1: decisions made by this market in a way that they
Speaker 1: managed cash flows well through the pandemic and switched back
Speaker 1: into growth and investment more the minute they could come
Speaker 1: out of it. In some sense, I see this market
Speaker 1: is far more resilient than some of the larger or
Speaker 1: or higher income customer segments that do business. I mean
Speaker 1: it's just been phenomenal watching the resilience grow. The one
Speaker 1: pieces that I think the world of capital probably took
Speaker 1: a little longer to recognize this resilience, So some of
Speaker 1: these businesses did take longer to raise funds. But it's
Speaker 1: great to see that that the core dn of these
Speaker 1: companies as such that they weren't really as subject to
Speaker 1: the liquidity ebbs and flows. Uh. They were building core, core,
Speaker 1: profitable businesses. Um. It's it's perfectly fine for some of
Speaker 1: our companies to raise money a year later than what
Speaker 1: was planned and they still managed to generate capitals through
Speaker 1: customer revenues. And that's been great alright, great stuff. Really
Speaker 1: appreciate getting your perspective. Their Drutson A. Krishnan, managing partner
Speaker 1: l of our Equity. They are based in India, investing
Speaker 1: in India. Our Jersey covers all the rate stuff for
Speaker 1: Bloomberg Intelligence. He's in studio here, but as we all know,
Speaker 1: he is a soccer guru here in the US and
Speaker 1: Jonathan Tyson in studio he's usually based in London. He
Speaker 1: covers all the European banks force, but he's here in studio.
Speaker 1: And we were just lamenting the England side and lost
Speaker 1: to France. But let's start it off. And by the way,
Speaker 1: we should say we do have a deep dive into
Speaker 1: soccer slash football later on in the program. Am we do? Yeah,
Speaker 1: because we have Darren fantastic and nature of Van Tassel,
Speaker 1: the owners of the South Georgia torment to FC, and
Speaker 1: maybe maybe maybe I can come back for that. We'll see.
Speaker 1: I mean he's in the office. I mean that's in
Speaker 1: and of itself as a wonderful thing. Yeah, it's only
Speaker 1: a second time I've ever seen him in real life,
Speaker 1: and I've been working for twenty three years. I know
Speaker 1: it's this whole thing. I don't get it, but that's
Speaker 1: what the kids are doing these days. All right, your
Speaker 1: Feller Reserve meeting Wednesday. What are we going to hear?
Speaker 1: What are you looking for? Yeah? So, so it's gonna
Speaker 1: be a fifty basis point hike. I think the reaction
Speaker 1: function and what Powell says during the post meeting press
Speaker 1: conference is going to be hyper important because will they
Speaker 1: if they see reasonably high inflation print and inflation doesn't
Speaker 1: come down as quickly as they want in January? Will
Speaker 1: they then go fifty basis points again in February, and
Speaker 1: I think that that's that's currently the question that is
Speaker 1: in the minds of a lot of market participants. And
Speaker 1: we're priced fifty fifty basically right now for that eventuality.
Speaker 1: So um, we do get new dots, we do get
Speaker 1: a new summary of economic projections. You know, where where
Speaker 1: does where do FED members see inflation going next year?
Speaker 1: That's going to be another big focus right at two
Speaker 1: o'clock when we get the when we get so right
Speaker 1: now we're at four percent is the upper bound? Right?
Speaker 1: They're gonna bring it to four fifty on Wednesday, and
Speaker 1: then the next meeting is February, February one, and it's likely,
Speaker 1: I know that the pricing is split, but isn't the
Speaker 1: the mood kind of an expectation of another fifty basis
Speaker 1: point hike while they can get it in Yeah, I
Speaker 1: think so. And we do think that they're going to
Speaker 1: probably go to five and a quarter in the upper bound,
Speaker 1: So you know, even though they're that's your terminal rate expectations.
Speaker 1: So after February, the next meeting will be only twenty
Speaker 1: five basis points in March and then and then they're
Speaker 1: going to be completely in March see at some point,
Speaker 1: at some point, they were going to always have to
Speaker 1: downshift because they want to kind of tweak where that
Speaker 1: terminal rate is and basically calibrate their their upper bound. Right,
Speaker 1: So could they go to five and a quarter for example, Yes,
Speaker 1: that's where we think they're going. Could they go to
Speaker 1: five and al f in May if inflation still is
Speaker 1: pretty high? Yes, but that gives them more optionality to
Speaker 1: hike more if they're at twenty five bas point increments
Speaker 1: instead of fifty. All right, Johnason Tyson, we've got you
Speaker 1: in studio here, a rare event, almost as rare as
Speaker 1: having Ivy here. Well, but in Jonathan's defense, that's because
Speaker 1: he lives in England. Okay, alright, I got it. Yeah,
Speaker 1: John Tyson is one of the top banks analysts in
Speaker 1: the city of London, been doing it for decades. So
Speaker 1: we got interest rates rising, Jonathan, what does that mean
Speaker 1: for the European banks that you follow? H right, Um, well,
Speaker 1: we've already seen an awful of the upgrades, no income upgrades,
Speaker 1: margin upgrades. Take Lloyds, for example, it's going to make
Speaker 1: an extra two billion top line next year purely because
Speaker 1: the banks grades grades. But I think if you think
Speaker 1: about Europe in the US, it's quite clear that it
Speaker 1: has been aggressive. If you're the ECB, you don't have
Speaker 1: a straightforward decision to make because you've still got to
Speaker 1: think Italy. We all remember two thousand, twelve thirteen sovereign crisis,
Speaker 1: all of that. So while a lot of commentators would
Speaker 1: think in Europe behind the curve, you do have to
Speaker 1: understand that we have a very big Italian bank system
Speaker 1: that is still not that strong. Still well, I mean
Speaker 1: Mounti Passes, they just had another capital raised after twenty
Speaker 1: years of troubles. Um, And yes, the spreads have come
Speaker 1: back between Italy and Germany. But the e CP is
Speaker 1: very very aware that, yes, we could inflation, but we
Speaker 1: do not want to kick start some form of a
Speaker 1: sovereign fragmentation, which is what kicked off into Well. Well,
Speaker 1: you know, if the healthy banks are making more and
Speaker 1: more money with higher rates, are they going to be
Speaker 1: able to do a little m and a and maybe
Speaker 1: take out Amani Pasky. I mean they probably nobody wants
Speaker 1: that bank. But um, are we going to see cross
Speaker 1: finally see cross border m and a that the CEO
Speaker 1: is back. You know, over the past few years, I
Speaker 1: have said no, we can't do because of zero intrograte
Speaker 1: policy and because um the um EU rules aren't yet finished.
Speaker 1: In that regard that the rules are very big part
Speaker 1: of it. Um. If you look at b MP, they're
Speaker 1: selling the US business. They've got seven billions to reinvest
Speaker 1: next year. But even they have said we're not going
Speaker 1: to do a big we don't need to do a
Speaker 1: big deal. So we're two or three years away from
Speaker 1: a big cross border deal still because you've got liquidity concerns,
Speaker 1: it's not straightforward, and captors capital is strong. But we're
Speaker 1: now you're heading into a recession and we know that
Speaker 1: bad debts are going back up. So again you normally
Speaker 1: buy a smaller bank. How can you price a smaller
Speaker 1: bank when you're not quite sure what the environment looks like?
Speaker 1: How can What are the banks saying the European banks, Charnathan,
Speaker 1: what are they saying about a recession in Europe? I mean,
Speaker 1: plus you've got the added issue of the war in Ukraine.
Speaker 1: So what are the big European banks saying about the
Speaker 1: next twelve months? Actually very sanguine. I mean, we we
Speaker 1: saw them all over provision for COVID, so most of
Speaker 1: the banks have still got a pretty decent cushion that
Speaker 1: they're running down a couple, haven't um And because of
Speaker 1: all of this sort of it's four and a half
Speaker 1: trillion access liquidity, you've got retail deposits, you've got corporate deposits.
Speaker 1: The starting position for the man on the street is
Speaker 1: a lot better than it was. So they're still pretty
Speaker 1: sanguine and they've got a lot of room to play with.
Speaker 1: I I think your Federal Reserve should pause. I think
Speaker 1: they've been raising rates like crazy. Okay, Jonathan's European banks
Speaker 1: of benefiting, the US banks are benefiting. But you know
Speaker 1: we're going to get a CPI print tomorrow that's showing that, Yeah,
Speaker 1: not only is inflation peak, but it's coming down consistently.
Speaker 1: Why don't they pause? I might not considerably. I'm consistently
Speaker 1: right that the problem is we're just not seeing inflation
Speaker 1: reduced at the speed we thought it would be. Yeah,
Speaker 1: so let's say it comes to where the markets pricing
Speaker 1: it around seven point two percent. I think the consensus
Speaker 1: on the Bloomberg terminals telling me seven point three percent
Speaker 1: year on year CPI UM, So it's that's still relatively high,
Speaker 1: but but your point, Paul, you know, the month on
Speaker 1: month prints are much much lower than they were, right.
Speaker 1: So a lot of this is base effects and the
Speaker 1: fact that we had very high inflation early in the
Speaker 1: year UM, because at this point the FED promised that
Speaker 1: they were going higher right going to five. Powell even said,
Speaker 1: you know, even when he was dovish a couple of
Speaker 1: weeks ago at the Brookins Institution, he said, you know,
Speaker 1: we're going to be higher than last UM summary of
Speaker 1: economic projections was so, which was four and you know
Speaker 1: four sixty five. Basically, so if they're gonna be higher
Speaker 1: than that, they want to deliver on that promise. And
Speaker 1: and you know that the FED doesn't want to under deliver,
Speaker 1: particularly when inflation is such a problem in such a
Speaker 1: high priority globally. And if US inflation comes down, that
Speaker 1: probably will feed into other markets, that will feed into Europe,
Speaker 1: that will feed into the UK, that will feed into Japan. UM.
Speaker 1: So you know, we do want to get UM kind
Speaker 1: of demand and UM supply balance back into back into
Speaker 1: some semblance of normalcy. And the only way to do
Speaker 1: that really is too slow US demand. That the problem
Speaker 1: I think with US inflation in particular is that it's
Speaker 1: a lot of it's in the service sector, which isn't
Speaker 1: directly impacted as much by UM by interest rates because
Speaker 1: you don't you know, you don't buy you don't go
Speaker 1: into McDonald's and buy a big mac on credit usually. Well,
Speaker 1: and even if it is UM, isn't the lag like
Speaker 1: three to five quarters that policy lag. I mean, it
Speaker 1: was funny to hear you say they want to cow
Speaker 1: celebrate something. I mean they're working with a sledge hammer. Um.
Speaker 1: So this is not the kind of delicate scalpel work
Speaker 1: that um you would hope that monetary policy is. Yeah.
Speaker 1: So so generally speaking, monetary policy takes between six and
Speaker 1: eighteen months to flow through, so we're only starting to
Speaker 1: see the effects right now. Alright, great stuff, Iver Jersey,
Speaker 1: Bloomberg Intelligence rate analysts here in our Bloomberg and Actors
Speaker 1: broker studio and a rare treat. Jonathan Tyson, he covers
Speaker 1: European banks for Bloomberg Intelligence. He's based in London, So
Speaker 1: if you're ever in London, go to look up Jonathan Tyson.
Speaker 1: Bia pint. Megan Horneman, chief investment officer at Verden's Capital,
Speaker 1: joins us here. Megan, I'm gonna just you know, I've
Speaker 1: been telling Matt two, I'm done with It's it's so over.
Speaker 1: I'm looking at three. What's your outlook? What are you
Speaker 1: telling your clients? What are you penning in your year
Speaker 1: head kind of letter. But I think that we've seen
Speaker 1: a lot of the equity damage and and even the
Speaker 1: fixed income damage, but we're just starting to see the
Speaker 1: economic damage from whether it's the um you know, slow
Speaker 1: down in the economic growth or the tightening of the
Speaker 1: said policy. We're just starting to see that. So unfortunately,
Speaker 1: going into next year, uh, there's gonna be a lot
Speaker 1: of the same. When it comes to the economic situation.
Speaker 1: The economy is going to be weaker, Um, it's going
Speaker 1: to be quite volatile. We think the consumer is going
Speaker 1: to be um, the one thing that's going to give in.
Speaker 1: They've been very resilient this year as far as spending,
Speaker 1: and we'll get retail sales tomorrow as well. But I
Speaker 1: don't think it's sustainable when you look at the level
Speaker 1: of spending and then you look at how they're spending
Speaker 1: and that is basically turning to credit cards, which are
Speaker 1: growing at a double digit pace over an annual basis. Um,
Speaker 1: are you worried about the or are you watching the
Speaker 1: credit card legislation. I can't remember the name of the bill, um,
Speaker 1: but it's like the credit card competition bill or something
Speaker 1: that's apparently going to open up another pay rail and
Speaker 1: give retailers more of a choice. Um. No, I'm not
Speaker 1: following that so much as far as the what people
Speaker 1: are doing and taking out debt in any respect in
Speaker 1: the slowing economic economy is not something that consumers want
Speaker 1: to do. While balance shees are relatively healthy, we're still
Speaker 1: seeing savings and savings rates pretty much dwindled down. So um,
Speaker 1: I think turning to credit is not the right thing
Speaker 1: at Okay, I sorry, sorry, I misunderstood. I thought you
Speaker 1: were saying that you like the credit card companies here.
Speaker 1: Oh no, no, no, for sure, if if, if the
Speaker 1: consumer is taking is putting more and more money, more
Speaker 1: and more purchases on plastic, that's a problem, um. And
Speaker 1: that's the kind of the kind of sign that we've
Speaker 1: been looking for. What's your expectation for a recession in
Speaker 1: twenty three or some people have been saying maybe won't
Speaker 1: come till early now. I think I think it's highly likely.
Speaker 1: In ine, and I actually would lean more towards this
Speaker 1: the first half of three because we've had such a
Speaker 1: like I said, a resilient year from the consumer spending
Speaker 1: standpoint in I think after the holidays, after this spending
Speaker 1: has been done for this year, that people will sit
Speaker 1: back reassess. UM they're going to see the credit cards,
Speaker 1: not only their credit card bills, the actual number on
Speaker 1: the credit card build. But don't forget that credit card
Speaker 1: rates are rising just along with the rest of interest rates.
Speaker 1: So credit card interest rates right now are very high,
Speaker 1: and I think this is just going to be challenging
Speaker 1: for consumers. So I think from a UM spending standpoint,
Speaker 1: that's going to pull back. You have that at the
Speaker 1: same time where you have manufacturing that's now in contraction territory, UM,
Speaker 1: you have housing that continues to be challenged by higher
Speaker 1: interest rates and high costs. These three things could be
Speaker 1: UM could weigh on the economic scenario in the first
Speaker 1: half of next year. So Megan, you know, we we
Speaker 1: It seems like a lot of economists say we might
Speaker 1: have a you know, a tough or first half of
Speaker 1: but then maybe better second half. As you think about
Speaker 1: kind of where you want to position your portfolio, are
Speaker 1: you guys kind of constructive on the markets here or
Speaker 1: are you kind of wait and see a little bit
Speaker 1: as we get into next year. So we're long term investors,
Speaker 1: so we're always constructive on the market. But you know,
Speaker 1: right now, for for the near term, what we're trying
Speaker 1: to do is raise a little bit of cash going
Speaker 1: into the year at the end of the year, especially
Speaker 1: since we've had such a tremendous rebound um since that
Speaker 1: October twelfth low, so and take last week out of
Speaker 1: the equation, we still have had a pretty decent upside there.
Speaker 1: So there's some areas that we may want to just
Speaker 1: overall reduce some risk, increase that dry powder, get a
Speaker 1: little bit more cash because I do believe that in
Speaker 1: the first half of next year there's going to be
Speaker 1: a lot more opportunities to put more money into the
Speaker 1: equity markets for the long run. Tax loss harvesting is
Speaker 1: a phrase we've been hearing a lot. Is that what
Speaker 1: you're talking about? Yeah, So it's not just only tax
Speaker 1: loss harvesting, because remember, tax loss harvesting is um you know,
Speaker 1: you're you're taking the tax off and maybe implementing something
Speaker 1: as ah like an e t F or something that
Speaker 1: so you're staying participated. But this is an overall tactical
Speaker 1: move in the market where you want to reduce your
Speaker 1: overall risk in the portfolio. So take losses where you can,
Speaker 1: but also then look at maybe just reducing some of
Speaker 1: those areas of the market that have rallied so much
Speaker 1: here in the past six weeks. Megan, you know, as
Speaker 1: a long term investor, where does technology fit into your
Speaker 1: perfect just going to ask about the Fang stocks see
Speaker 1: a great minds think alike off front running a little bit.
Speaker 1: But again, the fang stocks have been so good to
Speaker 1: Matt and me and everybody else over the last dozen
Speaker 1: years or so, So we think about those types of names.
Speaker 1: Will they continue to be leaders in this market or
Speaker 1: is there time as a as a market leader passed?
Speaker 1: So there was like a three part questionnaire. The first
Speaker 1: one is, um, what do we think of technology in
Speaker 1: the long run? And then and then you had mentioned
Speaker 1: bangs and then um have they lost their leadership? And
Speaker 1: technology over the long run is a great investment? Um,
Speaker 1: good quality technology? The fangs. Um. The reason why they
Speaker 1: got that that you know, the Fang name to them
Speaker 1: is because um, they had their valuations had run up
Speaker 1: so far, so fast. Nobody had anticipated that any other
Speaker 1: company in the s and P five hundred, including technology,
Speaker 1: could actually produce the same types of earnings growth that
Speaker 1: those companies could. I think that those days are over. UM.
Speaker 1: People are not going to pay outside valuations for companies
Speaker 1: just in the hopes for that future growth, and the
Speaker 1: main reason behind that is that the interest rate environment
Speaker 1: is completely changing going forward. UM. I think that there
Speaker 1: is room for good quality UM technology, even good quality growth,
Speaker 1: but I think that that's going to be a second
Speaker 1: half of the year next door UM second half of
Speaker 1: the year story UM for next year, because I think
Speaker 1: there's still is room from the valuation correction that we
Speaker 1: need to see. You're still looking at earnings that probably
Speaker 1: are slightly unrealistic at this point for some of these names,
Speaker 1: so we want to see that come down. Then you'll
Speaker 1: get a bit more of a better entry point into
Speaker 1: these areas. What are you looking for in terms of
Speaker 1: earnings across the SMP, I mean broader earnings and valuations
Speaker 1: next year. So next year, the multiple is the big unknown. UM.
Speaker 1: I do think that you're going to see some further
Speaker 1: pe multiple contract compression in the SMP five but it's
Speaker 1: primarily going to be led by technology. UM. Those fang names,
Speaker 1: as we've mentioned, those are the ones where we're going
Speaker 1: to see pe contraction and they make up the majority
Speaker 1: SMP five hundreds. UM. I think earnings growth has um
Speaker 1: it does need to be revised lower. I still think
Speaker 1: we can get somewhere around, you know, in the mid
Speaker 1: single digits of an earnings growth situation, but we do
Speaker 1: need to see earnings come down. And remember this market
Speaker 1: is almost very segmented right now. You have pockets of
Speaker 1: the market that have really good earnings potential next year,
Speaker 1: but and you have some areas of the market that
Speaker 1: I think you're gonna going to struggle next year as well.
Speaker 1: So you have to be very selective active management from
Speaker 1: not only your asset allocation exposure, but also I'm even
Speaker 1: looking from the your investment proposed, your investment exposure as
Speaker 1: far as managers, make sure that you selectivity is very
Speaker 1: important going into next year. All right, Megan, thank you
Speaker 1: so much for joining us. Good stuff there. We really
Speaker 1: appreciate Megan Horneman. She's a chief investment officer at Verden's
Speaker 1: Capital Management. Giving us your thoughts on these markets. I
Speaker 1: want to talk technology I want to talk technology. M
Speaker 1: n A Toma. Bravo's got a deal out there, buying
Speaker 1: some software company, and we'll get to that. But Microsoft
Speaker 1: buying four percent of the London Stock Exchange. I don't
Speaker 1: know what's going on with that one. So fortunately we
Speaker 1: got a software expert with us, Steve Kannying. He's managing
Speaker 1: director at SMBC Nico Securities America. Uh. He joins us
Speaker 1: over the phone. A Steve, can you tell me what
Speaker 1: Microsoft is doing buying you know, a small piece of
Speaker 1: the the stock exchange. I don't get it. Yeah, yeah, thanks,
Speaker 1: thanks to him. Great to be on with you, Thanks
Speaker 1: for having me. Uh yeah, you know it is um,
Speaker 1: it's it's just, you know, it's an indicator. It's a
Speaker 1: symptom of the fact that there is a lot of
Speaker 1: runway left for businesses in many industries, in this case
Speaker 1: financial services, to transform the way they the way they
Speaker 1: make decisions, the way they use data, and the way
Speaker 1: they operate in the cloud. And Microsoft being the number
Speaker 1: two cloud player with a zur Is is a real
Speaker 1: driver and and benefits from that migration to the cloud.
Speaker 1: And um, you know, there are a lot of there
Speaker 1: are a lot of ways to do it. In this case,
Speaker 1: this is this is really a vertical specific it's an
Speaker 1: industry specific initiative UM that Microsoft is undertaking UH which
Speaker 1: which which basically it's going to allow them to exploit
Speaker 1: the opportunity to provide financial data to you know, many
Speaker 1: of Thompson Ruyter's customer and UH and in doing so,
Speaker 1: they in signing to steal. They can help to transform
Speaker 1: Thompson Reuter's on offerings, to better integrate them with Excel,
Speaker 1: to better integrate with them, team with teams, Microsoft teams,
Speaker 1: it's collaboration software, and to really make the Thompson Reuters
Speaker 1: products work better. You know, honestly, I've used Thompson Reuters
Speaker 1: and I've used Bloomberg, and some of the Thompson's Reuter
Speaker 1: software could use a company like Microsoft to help them out,
Speaker 1: you know, speaking very frankly. Okay, got it all right, Matt.
Speaker 1: We got another extremely over educated guest here. Our friend here,
Speaker 1: Steve has got his BS with distinction and mathematics from Stanford,
Speaker 1: boring Masters and engineering from Stanford, and then an NBA
Speaker 1: from Harvard. I'm not sure I'm talking to this guy
Speaker 1: at a cocktail party, but I think he knows what
Speaker 1: he's talking about when it comes to software. Paul is
Speaker 1: a little bit intimidated Steve when it comes to mass statistics,
Speaker 1: and he said that he's not a STEM guy's um hey,
Speaker 1: my job is to make it simple. So happy to
Speaker 1: happy to do that because so well, And that's that's
Speaker 1: an interesting explanation of the Microsoft deal. And I get that.
Speaker 1: And if you look at it a little more deeply, UM,
Speaker 1: there I can't tell if they're paying uh the Elmy
Speaker 1: or the Emmy's paying them, Like where's the balance? Because um,
Speaker 1: they're getting a lot of business in return, right, yeah, Yeah.
Speaker 1: My read of the terms and the deal is that
Speaker 1: they're they're buying a billion dollar equity stake and UM
Speaker 1: and there will be proceeds out of that UM that
Speaker 1: Thompson Reuters and and LC will use to expand the business,
Speaker 1: you know, the data analysis business and Thompson's Reuter's tools. UM.
Speaker 1: In return, Microsoft gets a UM minimum commitment. It's a
Speaker 1: ten year deal, so they get a minimum commitment of
Speaker 1: two point eight billion and guaranteed revenue from l C
Speaker 1: a UM for using a Zoor Microsoft thought service. Now,
Speaker 1: now a lot of that revenue was going to happen anyway,
Speaker 1: if not all of it, it's just a guarantee. But
Speaker 1: in addition, Microsoft expects to generate another you know, I
Speaker 1: would calculate two point two billion, because they calculate five
Speaker 1: billion in total that they're going to get in revenue
Speaker 1: from this deal over ten years. And in that additional
Speaker 1: revenue they're going to get, I think a lot of
Speaker 1: that is probably going to come from Thompson's Reuters customers.
Speaker 1: Is what Microsoft is hoping that they'll help build better
Speaker 1: tools for Thompson Reuters and that those tools can be
Speaker 1: sold to the you know, ten thousand customers that Thompson
Speaker 1: Reuters have. If they call that business for affinity, does
Speaker 1: that data analysis and tools business? All right? And we
Speaker 1: should note that Bloomberg LP competes with Thompson Reuters. Yeah,
Speaker 1: let's let's not worried. We invented the internet, invented it? Hey,
Speaker 1: all right? So right, yeah, exactly. So, Steve, we've got
Speaker 1: another M and a trade in your space here stock
Speaker 1: that you cover, Kopa going to be acquired by Toma Bravo.
Speaker 1: Is that Toma Bravo? Okay? What since when is private
Speaker 1: equity buy software companies? What's going on there. Yeah, well, um,
Speaker 1: private equity buys a lot of software companies. Uh, that's
Speaker 1: that's a trend that's been going on for a very
Speaker 1: long time. And um, you know the the I think
Speaker 1: in really in the last twelve months there there have
Speaker 1: been at least ten pretty large transactions of PE firms
Speaker 1: buying software. Um. The reason PE firms like software is
Speaker 1: that the revenues don't trip very easily. They don't go away.
Speaker 1: You know, once the company buys either package software, infrastructure
Speaker 1: software and integrates it into their business, you know, they
Speaker 1: become pretty dependent on that software. And maybe over time
Speaker 1: they might rip and replace it, but more generally they
Speaker 1: just add around it. And so you know, when you
Speaker 1: buy a software company, you're buying a revenue stream with
Speaker 1: a very long tail. Uh. And the other driver here
Speaker 1: is that, you know, some of these software businesses have
Speaker 1: not they have not learned how to be profitable yet,
Speaker 1: but they're very capable of being profitable because the revenue
Speaker 1: doesn't go away because there's low turn And so the
Speaker 1: private equity firms are are experts in being able to
Speaker 1: m create more disciplined cost control of these companies and
Speaker 1: generate a lot more cash when these companies go private
Speaker 1: and and that's what's happening here. You know, Cooper has
Speaker 1: pretty good cash flow, but um, you know, they've got
Speaker 1: tough competition in the markets with s A p uh
Speaker 1: they you know, we see them as the best to
Speaker 1: breed leader in this business spend management. Um. But I
Speaker 1: think the private equity firms, he's you know, they see
Speaker 1: an opportunity to create shareholder value here, especially with the
Speaker 1: stock having really been hit in the tech down turn
Speaker 1: this year. You know, I think they see an opportunity
Speaker 1: for you know, to add value and that you know,
Speaker 1: to ultimately take take Kopa either public again or have
Speaker 1: them acquired by a strates software strategic vendor at a
Speaker 1: higher price. All right, good stuff, Steve, good having you on.
Speaker 1: Steve Kanni, really smart dude on this whole software tech space.
Speaker 1: We need those kinds of voices here, SMBC Nico Securities
Speaker 1: to cover software there. We appreciate getting a few minutes
Speaker 1: of his time. It's pretty go to West Kasova. Now
Speaker 1: he's a host of Bloomberg's Big Take podcast. A Big
Speaker 1: Take some of the best reported stories coming out of
Speaker 1: Bloomberg News. And so therefore you give a podcast because
Speaker 1: that's what the kids are doing today, mouth doing the podcastings.
Speaker 1: It's actually big business advertisers like it. West. Thanks much
Speaker 1: for joining us here. What do you guys have on
Speaker 1: your Big Take podcast today? Today we're telling the story
Speaker 1: actually our second installment on TikTok, you know, the who
Speaker 1: was placed on the internet. UH investigative reporter Olivia carverl
Speaker 1: did a story for UH Bloomberg a couple of weeks
Speaker 1: ago about kids who were accidentally killing themselves trying to
Speaker 1: copy these dangerous challenges that appear in some of the
Speaker 1: videos on TikTok, like the blackout challenge, where people try
Speaker 1: to you know, black themselves out and get that rush
Speaker 1: when they wake back up. Well, kids, unfortunately who are
Speaker 1: really younger doing it, and several of them have died.
Speaker 1: In her second story, which we feature on the podcast today,
Speaker 1: she's talking about something a little bit different but in
Speaker 1: a little bit harder to track, which is what she
Speaker 1: calls key TikTok, and that's kids who have these accounts
Speaker 1: are teenagers, um, and sometimes they're a little bit provocative
Speaker 1: on their accounts. A lot of them are teenage girls.
Speaker 1: They're wearing kind of skimpy outfits, they're dancing provocatively. The
Speaker 1: lyrics of the songs are very suggestive. And there's this
Speaker 1: big tension between kids doing things on the platform whether
Speaker 1: that platform should allow it on and a lot of
Speaker 1: parents and other people are saying that it's inappropriate, it's
Speaker 1: influencing their kids, and they wind it off the platform.
Speaker 1: I mean, it sounds more like a parents problem than
Speaker 1: a platform problem. To me, Why would welcome to the
Speaker 1: Why would parents allow their kids to go on this?
Speaker 1: Chinese who have and raised teenagers, it is it is
Speaker 1: the number one issue. It's funny we have police officers
Speaker 1: would come into school about drugs and alcohol. That's not
Speaker 1: the issue anymore. I mean that is something that parents
Speaker 1: they kind of have a hold on. The problem with
Speaker 1: the internet is parents buy and large don't know what
Speaker 1: they don't know. It is brutally difficult to do with
Speaker 1: their software out there. But having raised four teenagers, I
Speaker 1: can take you, well, let me let me ask you
Speaker 1: this West how I mean, even if we decide as
Speaker 1: as Americans that something that TikTok should be regulated differently,
Speaker 1: how much control over that we have since it's a
Speaker 1: Chinese company. But you know, it's not so much that's
Speaker 1: a Chinese company. When it comes to the control as
Speaker 1: it is um this idea of how do you police
Speaker 1: a platform that has tens of billions of videos every year,
Speaker 1: Olivia writes, in the first half of the year, TikTok removed.
Speaker 1: I believe it was something like, uh, two hundred million
Speaker 1: videos from the site that we deemed to be inappropriate.
Speaker 1: But in that time there were twenty billion videos that
Speaker 1: were downloaded. And you make a good point about the parents.
Speaker 1: You know, it used to be you'd have a computer
Speaker 1: on the desktop and you could have a white list
Speaker 1: on the computer of sites where your kids could go
Speaker 1: or not. And now it's on phones and they create
Speaker 1: a counting different names. Their parents don't know about the accounts.
Speaker 1: In the podcast, Olivia talks about this one girl whose
Speaker 1: name her her name on the platform is Jenny Papaci.
Speaker 1: She's sixteen years old, and she's become one of the
Speaker 1: most popular and one of the most controversial people on
Speaker 1: the platform because of the way she dances, and she
Speaker 1: has seven million followers. She has brand deals because she's
Speaker 1: so popular that people want to, you know, have her future.
Speaker 1: Their quote, Yeah, it's it's uh, it is the wild
Speaker 1: West in so many ways West Kasova. He's a host
Speaker 1: of Bloomberg Is the Big Take podcast all those well
Speaker 1: reported stories. Thanks for listening to the Bloomberg Markets podcast.
Speaker 1: You can subscribe and listen to interviews with Apple Podcasts
Speaker 1: or whatever podcast platform you prefer. I'm Matt Miller. I'm
Speaker 1: on Twitter at Matt Miller N seventy three p On
Speaker 1: Fall Sweeney, I'm on Twitter at pt Sweeney. Before the podcast.
Speaker 1: You can always catch us worldwide at Bloomberg Radio