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Speaker 2: Joe Davis joints us here, global chief Economists and Global
Speaker 2: head of Investment Strategy, a little shop down here in
Speaker 2: Philadelphia called Vanguard. Joe, what did you make of FED
Speaker 2: Chairman Jpal's comments about rate policy maybe the December meeting.
Speaker 2: What's your takeaway from yesterday?
Speaker 3: Well, I think he's trying to really thread a needle.
Speaker 4: I mean, we've clearly downshifted on the labor market. Not
Speaker 4: all of it is because of weaker demand, but you
Speaker 4: got inflation sticky, and in a third factor that I
Speaker 4: don't think you know they're talking enough about, but probably will,
Speaker 4: and that is the prospect of asset price inflation. You
Speaker 4: look at the equity market. So I think they're trying
Speaker 4: to feel a way here in a data bline spot.
Speaker 5: So what about that duel?
Speaker 6: Mandy, We're talking about inflation and the stabilization and prices,
Speaker 6: but then also maximum and unemployment or maxim unemployment.
Speaker 5: Rather, how are you viewing this right now?
Speaker 3: Well, again, I did you know?
Speaker 4: Our view was that that they would weigh the job
Speaker 4: market over the inflation. This is has been generally a
Speaker 4: modestly dubbish institution, at least in recent years.
Speaker 3: Not a criticism. I think it's just a reality.
Speaker 4: And you also have to you have to at least
Speaker 4: make some assumption that some of this tariff induced inflation,
Speaker 4: you know, will dissipate.
Speaker 3: But the risks are growing.
Speaker 4: I think that's why you're seeing, you know, some of
Speaker 4: the sense at the Federal Reserve. It's actually somewhat commonplace
Speaker 4: once you get too close to where you think you
Speaker 4: should be. And we're definitely in that zone.
Speaker 2: Hey, Joe, we've we're right in the middle of tech
Speaker 2: earnings and the numbers continue to really impress us in
Speaker 2: terms of how much money these companies are spending on
Speaker 2: on AI. Is that how does that impacting the broader economy?
Speaker 2: Do you guys kind of take a stab at that?
Speaker 3: Well?
Speaker 4: Yeah, so, in fact, we've spent over three years really
Speaker 4: looking deep a where the economy how could it be
Speaker 4: affected as AI broadens and it's you know, it's not
Speaker 4: a foregone conclusion. But I think in two or three years,
Speaker 4: in our data driven framework, there is a possibility that
Speaker 4: we're growing at three percent real GDP, which I have
Speaker 4: not seen many firms or economists talk about. And again
Speaker 4: I'm not you have to you have to be cautious, right,
Speaker 4: there's going to be over investment in this cycle, even
Speaker 4: if AIS is transformative as we think, So we have
Speaker 4: to feel your way here. But we are not in
Speaker 4: bubble territory and this could really accelerate over the next
Speaker 4: two years.
Speaker 6: So caution is in the corporate tech space. What about consumers?
Speaker 6: How are we thinking about terror for related inflation? Are
Speaker 6: you seeing any of that right now?
Speaker 4: You definitely see it in households, particularly those at the
Speaker 4: lower at the lower income rackets.
Speaker 3: That that's not new, It's been there.
Speaker 4: It's where you also see you know, some of the
Speaker 4: wage growth that had slowed for a time. Yeah, you
Speaker 4: have hire income households, which again is not new, really
Speaker 4: supported by just the past five years. The increase in
Speaker 4: wealth in housing as well as the equity market.
Speaker 3: Is really a source of cushion.
Speaker 4: But you do see that bifurcation, and I don't think
Speaker 4: that's going to change in the near term. What's going
Speaker 4: to be key is do we see a firm firming
Speaker 4: in the labor market in twenty twenty six. That's our expectation,
Speaker 4: That's what our own indicators of vanguards show right now,
Speaker 4: given our proprietary data. But again there's there's still some
Speaker 4: tarif uncertainty to work through here.
Speaker 2: And Joe on the labor front, you know, I'm one
Speaker 2: of those people these early, early, early stages of AI.
Speaker 2: I just feel like AI is going to be net
Speaker 2: negative for the US labor market in terms of absolute
Speaker 2: bodies needed in it to fuel this economy. I know
Speaker 2: it's early, but do you guys have an opinion on that?
Speaker 4: Yes, yes, again, we we've we started to work, believe
Speaker 4: it or not on AI in the future work. I
Speaker 4: can't believe it's almost a decade ago. What we continue
Speaker 4: to find and expect it's been a learning process for
Speaker 4: all of us, is that roughly one in five occupations
Speaker 4: over next three to five years. I'm not going to
Speaker 4: sugarcoat it. You're going to see jobs start to decline,
Speaker 4: but for every job that declined, there's going to be
Speaker 4: three that benefit. But this is going to be disruptive
Speaker 4: in our baseline expectation. We see the most disruption in
Speaker 4: terms of how we spend our day at work changing
Speaker 4: in at least twenty five years, and so there's going
Speaker 4: to be anxiety along with some of these efficiency gains.
Speaker 4: More workers will benefit than not, but there is going
Speaker 4: to be some disruption here and that's a clear result
Speaker 4: from our work.
Speaker 6: I mean, how are you thinking about job opportunities coming
Speaker 6: from that or potentially lack thereof. I mean, if you
Speaker 6: think about the tech space right now, you hear people
Speaker 6: who are coder is even concerned about being replaced by AI.
Speaker 6: How are you thinking about that on the long term.
Speaker 4: Well, again, to my you know, I'm not going to
Speaker 4: sugarcoat it. There's going to be some industries where you're
Speaker 4: in occupations, you're going to see some pressure. But again
Speaker 4: it's almost I give to pick like which which issue
Speaker 4: to effectively deal with. The fact is is for the
Speaker 4: past ten or fifteen years in the US economy and
Speaker 4: most developed markets, we've had a lack of automation, which
Speaker 4: is why growth has generally been low and some of
Speaker 4: the wage growth outside of COVID was fairly tepid. And
Speaker 4: so you know, if disruption comes the prospect for productivity,
Speaker 4: higher wages. But but but that comes with that with change.
Speaker 4: I mean we've seen that throughout history, and so like pick,
Speaker 4: we have to we have to think about which world
Speaker 4: we're entering. It's more likely going to be a disruptive
Speaker 4: one higher growth, but it's not all not all boats
Speaker 4: will be lifted at the same time.
Speaker 3: And you know, it's just I'm not going to I mean,
Speaker 3: it just is what it is. That's clearly the diagnosis. Jo.
Speaker 2: How are you guys dealing with the fact that you're
Speaker 2: not getting a lot of government supplied economic data with
Speaker 2: this shutdown? Are you just kind of trying to find
Speaker 2: the best alternative data points out there?
Speaker 7: Yeah?
Speaker 4: Yeah, I mean, like like everyone, you know, we're where
Speaker 4: we have our own indicators. We know, for example, job
Speaker 4: growth because if you're in a four one K plan,
Speaker 4: uh and if we're the administrator through auto enrollment like
Speaker 4: for your for your actual retirement plan, we have some
Speaker 4: sense of new jobs being created, even promotion rates in
Speaker 4: real time and clearly an anonymoused way. It's not perfect
Speaker 4: because we clearly are not the only four one K provider,
Speaker 4: but nevertheless it's another indicator that we can look at it.
Speaker 4: And again there's other data points out there from other
Speaker 4: from other firms, a job hosting websites, So I think
Speaker 4: we always look at it as a distillation. So again
Speaker 4: it's right now, those indicators that we have are holding constant.
Speaker 4: You know, they're not super rosy, but they're not negative.
Speaker 4: And so that that would that would point us to
Speaker 4: that the labor markets should firm here. But that that's
Speaker 4: the key indicator for the next few months.
Speaker 2: Now, if you're wondering why Joe is this such a
Speaker 2: smart guy here any sense, is because he gets got
Speaker 2: his man there's n his PhD at Duke University. See
Speaker 2: what I did there, So you needed an.
Speaker 3: UNDERGRADUA, I knew you're going to work that in. You
Speaker 3: got to say, Duke.
Speaker 2: Absolutely, Joe Davis, thanks so much. We appreciate it. Joe Davis,
Speaker 2: Global chief Economists and Global head of Investment Strategy at Vanguard.
Speaker 3: Now, when you're a.
Speaker 2: Graduate student at Duke, no matter what school you're in,
Speaker 2: you don't have to camp out at night for Duke tickets.
Speaker 2: You just do it once the beginning of your graduate
Speaker 2: school career, one night, and then you get to keep
Speaker 2: those season tickets for your entire graduate school career. You
Speaker 2: don't have to do it every year. So if you're
Speaker 2: one of these PhD people will like philosophy. It takes
Speaker 2: stretch out over eight years. You got your season tickets care.
Speaker 5: It's all the undergrads have to sleep every.
Speaker 2: Sleepout for every game. Oh, we just have to do
Speaker 2: it once. That's because we're professional graduate space. So that's
Speaker 2: kind of earns it. Do they hate us for that?
Speaker 2: The undergrad so that we get a lot of agree
Speaker 2: for that. Stay with us. More from Bloomberg Surveillance coming
Speaker 2: up after this.
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Speaker 2: Heidi Crebo Rehticker. She's Adjunct Senior Fellow at the Council
Speaker 2: on Foreign Relations. She joins us here. Heidi, thanks so
Speaker 2: much for journey us here. A lot of headlines, a
Speaker 2: lot of tweeting coming out of Asia here. It was
Speaker 2: a long it was a long trip. A week in Asia,
Speaker 2: many countries, concluding maybe highlighting with a meeting yesterday with
Speaker 2: Shijing Ping and President Trump here, what's your takeaway from
Speaker 2: President Trump's Asia trip?
Speaker 8: So first, I think that there that it was a
Speaker 8: very positive trip all the way around. So this is
Speaker 8: a big feel good moment for Trump, and it takes
Speaker 8: the temperature down on trade, particularly you know, with with
Speaker 8: the meeting with Shijinping. You know, no big surprises in
Speaker 8: the in that that agreement. The contours of the framework
Speaker 8: agreement were pretty well telegraphed. But I think, you know,
Speaker 8: short term, good trip. Longer term, I always pay attention
Speaker 8: to this strategic direction of travel in the US China relationship,
Speaker 8: and I don't think that has changed. So as long as,
Speaker 8: for example, China keeps supporting Putin's war machine and threatens
Speaker 8: not only Taiwan but other Into Pacific partners, and we're
Speaker 8: going to have a bumpy ride ahead for the rest
Speaker 8: of the presidency and beyond. So we always have that
Speaker 8: issue of dual use technology. And even though the China
Speaker 8: Hawks in this administration have been pushed back, I think,
Speaker 8: particularly around around export controls, as long as as long
Speaker 8: as China continues a trajectory with swamping global markets with
Speaker 8: manufacturing and dialing up or dialing down, but dialing up
Speaker 8: the export their own export controls on rare earths and
Speaker 8: related technology. It's it's going to be a complicated relationship.
Speaker 8: And so I think in the longer run, uh, we
Speaker 8: have a clear direction of travel. It's it's not going
Speaker 8: in the right direction.
Speaker 6: So a short term fix here or band aid, if
Speaker 6: you will, But what are some of those other deeper
Speaker 6: structural issues between the US and China that you believe
Speaker 6: need to be resolved here over the long term.
Speaker 8: So I think we have I mean, they're they're the
Speaker 8: deep structural tensions in the commercial and economic relationship that
Speaker 8: we have with China. And you know, they're they're flying
Speaker 8: ahead in terms of their their innovation and capacity to
Speaker 8: uh to actually really implement a lot of the strategies
Speaker 8: and advanced manufacturing that you know, they they've just doubled
Speaker 8: down on the on you know, with this with this
Speaker 8: latest five year plan, on their desire to just be
Speaker 8: an even greater giant on the world stage. And the
Speaker 8: export controls on rare earth. You know, I was in
Speaker 8: Shanghai last week for the Blend Summit, Global Summit. They're global,
Speaker 8: those export controls they're here to stay. And the Chinese
Speaker 8: are very, very confident they're enjoying this checkmate moment, and
Speaker 8: so I think we'll see again these export controls on
Speaker 8: rare Earth's dial up, dial down, its asymmetric leverage. They
Speaker 8: have the ability to shut down industries of basically every
Speaker 8: country in the world with manufacturing. So I think that
Speaker 8: is that is the big picture moving forward on this.
Speaker 8: On the strategic side.
Speaker 2: Heidi, it seems, I don't know, maybe over the last
Speaker 2: ten years, maybe even longer, kind of a development of
Speaker 2: a technology cold war between China and the West. And
Speaker 2: at one point it seemed like the US's policy was
Speaker 2: let's a lot ally ourselves with everybody else out there
Speaker 2: against China and transpecific deal. Then it seemed to be
Speaker 2: a little bit of America first and we'll take it
Speaker 2: on solo. How do you think America and the West
Speaker 2: should deal with China going forward?
Speaker 8: So there were there were a lot of European experts, economists,
Speaker 8: financial leaders at this at this summit in Shanghai last week,
Speaker 8: and they were distancing themselves from the US and saying
Speaker 8: that they want no part of these export controls on them,
Speaker 8: on the on them. In the in terms of how
Speaker 8: the US moves forward, we have obviously taken at the
Speaker 8: You know, the Trump administration is not multilateral and its
Speaker 8: approach to really anything except for critical minerals and rare earths.
Speaker 8: So there is no way to do to develop any
Speaker 8: kind of capacity without friends and allies. We've seen big
Speaker 8: deals with Australia, We've seen the you know, the initiation
Speaker 8: of deals with Ukraine, d r c H. The one
Speaker 8: big missing pieces in Japan. The one big missing piece
Speaker 8: is Canada, which of course could be our you know,
Speaker 8: one of our greatest, our greatest friends when it comes
Speaker 8: to the critical minerals puzzle. So you know, I do
Speaker 8: think you'll see this on the G seven agenda. You'll
Speaker 8: see investment in technology to sort of leap frog some
Speaker 8: of the China choke holds.
Speaker 2: But we can't do that by ourselves. So what's your.
Speaker 6: Takeaway on the soybean purchase A situation I see here
Speaker 6: you say that it was symbolic but made good mewed music.
Speaker 5: It talk to me about that.
Speaker 8: So I do think that. I mean, so far, the
Speaker 8: volume that we know about has been been minimal. You know,
Speaker 8: we don't know what the details of what Trump's massive
Speaker 8: amounts agreed actually mean. So we have to wait and
Speaker 8: see where, you know, where that goes in terms of
Speaker 8: how much and whether or not the Chinese actually followed through.
Speaker 8: Really important to US farmers to actually to really get
Speaker 8: this fixed, and the shipping fees that we had the
Speaker 8: tariffs on on Chinese ships. If we're moving agricultural products
Speaker 8: to China, we don't actually we use Chinese ships to
Speaker 8: actually ship a good deal of our products because they dominate.
Speaker 2: So I think it was it was symbolic.
Speaker 8: They wanted to, you know, Bijing wanted to create a
Speaker 8: constructive atmosphere for negotiations, and you know, I think, you know,
Speaker 8: they did get tariff relief and some renewed agricultural trade.
Speaker 8: But we have to see what exactly what's in that deal.
Speaker 8: China already is well stocked for agricultural goods in South
Speaker 8: America is really set with a strong harvest. So we'll
Speaker 8: have to see where we have whether it's near term
Speaker 8: upside for US soybean producers or whether it's just you know,
Speaker 8: whether it'll be durable.
Speaker 2: I'm not even sure I know soy being if I
Speaker 2: tripped over one but not a very important twelve million
Speaker 2: metric tons twenty five million metric tons I don't know what's.
Speaker 5: Got a thousand times all all right, morning.
Speaker 2: All right, Heidi Creboat Hticker, thank you so much. We
Speaker 2: really appreciate getting your thoughts there. Heidi Krebo Reticker. She's
Speaker 2: the adjunct Senior Fellow on the council at Barn Relations.
Speaker 2: Stay with us. More from Bloomberg Surveillance coming up after this.
Speaker 1: You're listening to the Bloomberg Surveillance podcast. Catch us Live
Speaker 1: weekday afternoons from seven to ten am Eastern. Listen on
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Speaker 2: We've got earnings coming in pretty darn strong. That's a
Speaker 2: good thing for risk assets, I would think, So what
Speaker 2: are we doing here? Let's talk to somebody who has
Speaker 2: he gets paid to think about that stuff, Adam Farstrup.
Speaker 2: He's had a multi asset for the America's wor else
Speaker 2: for Schroeders. Adam, it seems like we've got a pretty
Speaker 2: constructive backdrop for risk assets here again with earnings. Yeah,
Speaker 2: with presumably an accommodative federal reserve. How are you guys
Speaker 2: thinking about allocating assets? Yeah, I mean I think it's
Speaker 2: in some ways.
Speaker 9: I talk about being a broken record, because really since
Speaker 9: Liberation Day it has been right to be long risk assets,
Speaker 9: particularly equities. Yep, we had at the beginning of this year,
Speaker 9: you had a bit of the Cell America trade, right,
Speaker 9: we saw Europe really doing well.
Speaker 2: That shifted to emerging markets.
Speaker 9: Emerging markets continue to do well, but the key shift
Speaker 9: was over the summer coming back into the US equity market.
Speaker 9: And from here we still see strength coming through the
Speaker 9: US and actually emerging markets where earnings are supporting things.
Speaker 9: So the valuations clearly not something that makes you really
Speaker 9: comfortable at night, but as long as we continue to
Speaker 9: have these earnings come through, we think investors should stay
Speaker 9: risk on.
Speaker 6: So what about the fact that data has been sparse?
Speaker 6: How have you all been navigating that given the fact
Speaker 6: that we're experiencing a government shutdown.
Speaker 9: Yeah, you know, I think our economists are wondering what
Speaker 9: they do with their day because that data to come in.
Speaker 2: They keep canceling meetings with us.
Speaker 9: Now we're really focused on the same kinds of alternative
Speaker 9: data sources that you see the FED talking about. You
Speaker 9: look at we still have high quality pieces of information
Speaker 9: coming out from say Atlanta FED, the GDP now which
Speaker 9: is showing you that the economy continues to grow. And
Speaker 9: even if GDP now is not always the most accurate assessment,
Speaker 9: you look at that sort of bracketing almost four percent
Speaker 9: growth for the quarter with consensus estimates around two percent.
Speaker 9: Let's say that GDP growth is falling.
Speaker 2: Somewhere in between.
Speaker 7: There.
Speaker 9: That tells you you're still in a supportive growth environment.
Speaker 9: And we're not seeing the unemployment data really tick up
Speaker 9: at this point yet, but it's a real knife edge
Speaker 9: for the employment market. I think that's one of the
Speaker 9: challenges we have right.
Speaker 2: Now in the market's in the equity markets. One of
Speaker 2: the concerns is equity market concentration. I'm looking at your
Speaker 2: notes that says it's higher than we saw in the
Speaker 2: tech bubble. But I like this. We think investors should
Speaker 2: be wary and not fearful. What do you mean by that?
Speaker 9: So we think in these period is of technological change.
Speaker 9: It's not unusual when you look through history to see
Speaker 9: concentration in markets. So the concentration within the US equity
Speaker 9: market means you need to be active. You need to
Speaker 9: understand the companies that you're investing in. Would be leery
Speaker 9: of just buying beta right now as opposed to having
Speaker 9: a view on the stocks that you're buying in the market.
Speaker 9: So that's point number one. But point number two that
Speaker 9: I think the concentration we're more worried about is the
Speaker 9: degree to which capital markets are oriented towards the US
Speaker 9: right now, and that has been kind of the big
Speaker 9: challenges a multi asset investors, an asset allocator is how
Speaker 9: do you diversify without being dramatically underweight what has been
Speaker 9: a high roe, high returning market in the US. And
Speaker 9: so we think looking towards global approaches capturing some of
Speaker 9: the real dynamics in emerging markets where if you say
Speaker 9: you want to play AI and you think that that trend,
Speaker 9: that technological change is going to continue, the place to
Speaker 9: play it Europe.
Speaker 2: It's emerging markets. That's the other strength outside the US.
Speaker 5: So where in.
Speaker 6: Emerging markets are you looking? Where do you see the
Speaker 6: most opportunity?
Speaker 9: I think it depends whether you're talking about debt markets
Speaker 9: or equity markets. So in equity markets there is you know,
Speaker 9: China is a real complex situation right now. The domestic
Speaker 9: consumption in China is still weak. The economy is being
Speaker 9: managed I think to some different inns than we would
Speaker 9: traditionally see in the US. But if you look at
Speaker 9: exports are picking up out of China. We just had
Speaker 9: the deal overnight announced between the latest deal announced between
Speaker 9: the US and China. We think that that starts to
Speaker 9: push out into countries like Taiwan and Korea where they're
Speaker 9: sort of involved in that supply chain. The tech names
Speaker 9: within China are very interesting to US as bottom up investors.
Speaker 9: You know, talking to the bottom up teams with in Schroeders,
Speaker 9: they get very excited about that. When you talk about
Speaker 9: the debt markets here, what's interesting is you've seen very
Speaker 9: high yields in a co enemies where the monetary policy
Speaker 9: has been managed in a very traditional way. They've been
Speaker 9: on top of the inflation pressures, and so we have
Speaker 9: this this monetary supportive cycle that is backing investors in
Speaker 9: Latin America in particular, where we see a lot of
Speaker 9: opportunities for real yields.
Speaker 2: I like Evany's multi asset pros because he can ask
Speaker 2: about anything. Whatever it sticks on the wall here, growth
Speaker 2: call on gold here. It just had this incredible rip
Speaker 2: up the forty three hundred. We've had a little bit
Speaker 2: of a pullback here we're saying just below what some
Speaker 2: folks will tell me as a kind of support level
Speaker 2: around four thy thirty nine to ninety. What do you
Speaker 2: guys make of what's happening gold this year?
Speaker 9: Yeah, I think gold is highly related to the fears
Speaker 9: about what might happen and change in policy in the
Speaker 9: US right. And so when we talk about diversification away
Speaker 9: from the dollar, it's not that the dollar suddenly loses
Speaker 9: its reserve status. It's really that we see a need
Speaker 9: to for central banks to diversify their holdings. We're seeing
Speaker 9: demand for physical gold in places like China and India.
Speaker 9: So we just think this is a consolidation into the
Speaker 9: next leg of a rally as investors see gold being
Speaker 9: very valuable in portfolios for resilience, not a hedge.
Speaker 2: Lis Matteo buying gold at Costco's. Adam, thank you so
Speaker 2: much for joining us, Adam Farstrom. He's had a multi
Speaker 2: asset allocation there at America's for Schroeders. Stay with us.
Speaker 2: More from Bloomberg Surveillance coming up after this.
Speaker 1: You're listening to the Bloomberg Surveillance podcast. Catch us live
Speaker 1: weekday afternoons from seven to ten am Eastern listen on
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Speaker 2: See what we're doing in the credit markets these days.
Speaker 2: Megan Robson, Head of US Credit Strategy for BNP, Harry Bob.
Speaker 2: One of the great greatest offices in Paris is the
Speaker 2: BNP Parry bo office. Is just awesome. Megan, thanks for
Speaker 2: joining us here in our Bloomberg and a rich studio here.
Speaker 2: What did you take away from the FEDS actions yesterday?
Speaker 7: Yeah, so I think that the commentary from Chair Paul,
Speaker 7: as you said, it was a bit more hawkish. So
Speaker 7: you came in and the market was pricing a very
Speaker 7: high probability of getting a second rate cut in December,
Speaker 7: and you know, he said, it's not a foregone conclusion
Speaker 7: that we're going to do that. There's still you know,
Speaker 7: haven't had much data with the government shutdown, and so
Speaker 7: he did leave things a little bit up in the
Speaker 7: air and indicated the committee is a bit divided for
Speaker 7: credit though. I think, you know, investors are still just
Speaker 7: focused on the broader easing bias. So they did announce
Speaker 7: an end to quantitative tightening, which would start December first,
Speaker 7: so that you know.
Speaker 2: That's a positive.
Speaker 7: That's that's easier conditions, And whether we get a cut
Speaker 7: in December or January, I think still still positive for
Speaker 7: credit market. So not a huge driver of price action
Speaker 7: for US I expect, so not as.
Speaker 6: Much data that we've received this month as we been
Speaker 6: in the government shutdown. But how is your team thinking
Speaker 6: about the balance between inflation risks and growth concerns as
Speaker 6: we really think about assessing, you know, credit spreads for instance.
Speaker 2: It's it's a great question.
Speaker 7: So I think with the last CPI print, we did
Speaker 7: get a little bit of relief, and there's some indications
Speaker 7: that inflation is not yet accelerating, and the FED has
Speaker 7: told us that they want to prioritize the growth pillar.
Speaker 7: And so in our view, we think that the FED,
Speaker 7: even if inflation does look a little bit sticky, is
Speaker 7: going to prioritize that and let things run hot. And
Speaker 7: for credit that's actually a very bullish, a very bullish outcome.
Speaker 7: You potentially have front end rates coming down and then
Speaker 7: letting the economy run a little bit hotter. So it
Speaker 7: would be positive for the credit markets.
Speaker 2: All right, where are we taking credit risk at there? Megan,
Speaker 2: I look at them, looking at the end go function,
Speaker 2: which they've reconfigured, so now have to relearn this one.
Speaker 2: But we do some really positive returns there in the
Speaker 2: corporate ac set point eight seven percent for the Bloomberg
Speaker 2: US corporate aggregate in next we own it great returns and.
Speaker 7: FIXT we so we have a preference right now for
Speaker 7: high yield over investment grade. And you know, as you've
Speaker 7: also probably seen, there were some headlines related to recent
Speaker 7: credit bankruptcies that that came across, and I think we
Speaker 7: think those are idiosynocratic, but they really harmed high yield
Speaker 7: credit spreads a bit more than investment grade. So you're
Speaker 7: seeing those spreads UH trading a little bit wider. Single
Speaker 7: bees in particular, we think look wide and if we
Speaker 7: do see earnings as a good indicator of growth ahead,
Speaker 7: I think that that segment could could really outperform.
Speaker 6: Our corporate balance sheets still resilient or are we starting
Speaker 6: to see cracks there?
Speaker 2: So far?
Speaker 7: Leverage has been very stable for a few quarters, and
Speaker 7: that's that's that's been supported by two things. One, debt
Speaker 7: growth has been relatively low, so you have these high
Speaker 7: rates and and issuers all else EQL are less likely
Speaker 7: to borrow more debt and then the second pillar is earnings.
Speaker 7: Earnings has been very strong and we thought by now
Speaker 7: that potentially you would see some of this tear, that
Speaker 7: the tariffs start to pass through to margin, start to
Speaker 7: harm the bottom line, but so far we're not seeing it.
Speaker 7: Earning earnings broadly has been quite strong, so leverage, corporate
Speaker 7: leverage that we focus on, cash to debt all very
Speaker 7: strong metrics. I think the question for twenty twenty six
Speaker 7: will be do we see a pickup an M and A.
Speaker 7: Do we see some of this AI capex funded through
Speaker 7: the debt market and have that story change? But for now,
Speaker 7: balance sheet's still very resilient.
Speaker 2: How do you guys allocate to private credit?
Speaker 7: So private credit exposure, you can get exposure through the
Speaker 7: business development companies, so there are some publicly traded BDCs
Speaker 7: that investors can gain exposure to credit. Our view is
Speaker 7: that we like the debt of BDC, so they sell bonds,
Speaker 7: you can buy the credit. And then there's also the
Speaker 7: equity component. The equity has struggled recently because of rate
Speaker 7: cuts and also some of these headlines around single name credit,
Speaker 7: but in our view, we think that the credit spreads
Speaker 7: of BDC's look attractive here and are worth considering to
Speaker 7: add risk?
Speaker 6: What sectors are looking most vulnerable to you in terms
Speaker 6: of you know, maybe potential refinancing risks, especially given the
Speaker 6: high rate environment.
Speaker 7: So I think we're we are watching the K shape recovery.
Speaker 7: I think sectors that are more exposed to lower income consumers,
Speaker 7: so think about auto lenders, subprime consumer lenders. Some of
Speaker 7: the retail sectors are a bit more exposed, and we
Speaker 7: are seeing, you know, the few defaults that we have
Speaker 7: seen recently in the headlines have been in those areas,
Speaker 7: So we like avoiding those areas. In areas that we
Speaker 7: like more, we do like exposure to cyclicals. So one
Speaker 7: of our top trades is in overweight to US autos.
Speaker 7: That's that's done very well. We think if we do
Speaker 7: have this kind of hotter economy scenario that we're talking
Speaker 7: about cyclicals, that cyclical premium should tighten.
Speaker 2: Where's the risk out there in the credit markets here
Speaker 2: from your perspectives, I haven't really seen it. I mean,
Speaker 2: if credit quality seems pretty solid, liquidity seems okay, what's
Speaker 2: the concern for you.
Speaker 7: At the Yeah, I think you know, we would watch
Speaker 7: for a growth slowdown. I think you know, Ernie says,
Speaker 7: really been booing everything up, and so that would be
Speaker 7: one scenario we're worried about. Or you know, to the
Speaker 7: discussion on inflation, if we saw a reversal and really
Speaker 7: an acceleration of inflation, if it changed the Fed's posture
Speaker 7: on easying and we ended up getting great hikes, I
Speaker 7: think that that would be something that would also concern
Speaker 7: credit markets.
Speaker 2: Megan, thank you so much for joining us. Really appreciate it.
Speaker 2: Megan Robson, Head of US Credit Strategy at BNP.
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