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Speaker 1: Welcome to the Bloomberg P and L Podcast. I'm Pim Fox.

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Speaker 1: Along with my co host Lisa Abramowitz. Each day we

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Speaker 1: bring you the most important, noteworthy, and useful interviews for

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Speaker 1: you and your money, whether you're at the grocery store

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Speaker 1: or the trading floor. Find the Bloomberg P L Podcast

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Speaker 1: on iTunes, SoundCloud and at Bloomberg dot com. All right,

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Speaker 1: let's solve the question of whether people should invest in

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Speaker 1: Japan and in companies in Asia. Joining us now is

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Speaker 1: John Vail. John joins us. He is the global chief

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Speaker 1: Global Strategist of Nico Asset Management, helping to manage I

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Speaker 1: believe over like a hundred and sixty five billion dollars. John,

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Speaker 1: thanks for being in the studio with us. All right,

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Speaker 1: so give us your assessment, because I was noting that

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Speaker 1: in part of your reports you're saying that you're not

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Speaker 1: really your underweighting equities generally speaking, but you do like

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Speaker 1: stocks in Japan and in several developed Asia markets. Tell

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Speaker 1: us about it. Well, it's really quite a story about

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Speaker 1: Japan's unique corporate governance improvement. Most countries are in the

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Speaker 1: world have fairly good corporate governance, especially in the US,

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Speaker 1: and to a lesser extent in Europe, but Japan is

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Speaker 1: coming from a low level upward. So it's a structural

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Speaker 1: increase in the improvement in their corporate governance, and that's

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Speaker 1: in increasing profit margins quite dramatically. It's also improving stock

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Speaker 1: buy backs. They're also doing a great deal stock buy backs,

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Speaker 1: and that's along with b O j buying Bank of

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Speaker 1: Japan buying, that's pushing the stock market index upward. Well,

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Speaker 1: hold on a second, back up. I'm looking at the

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Speaker 1: knee k right now, UM down eight percent on the year.

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Speaker 1: And you know this isn't because people are looking at

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Speaker 1: companies and saying, well, we don't know about your corporate governance.

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Speaker 1: This has been driven in part in part by people

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Speaker 1: getting their money out of the country and trying to

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Speaker 1: uh figure out, you know, what's going on with the economy.

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Speaker 1: I mean, what's at what point we'll technicals give way

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Speaker 1: to fundamental analysis like the one you're giving right now. Yeah.

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Speaker 1: I'm not big on technicals, to be honest, But all

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Speaker 1: I can say about the stock market declining this year,

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Speaker 1: that's because the end has been very strong and it

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Speaker 1: has impacted corporate profits profits in Japan. But if you

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Speaker 1: look at it in US dollar terms like a U

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Speaker 1: S investor would. It's actually up on the year about

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Speaker 1: two three percent, which is not far away from where

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Speaker 1: the U S stock market is up five So for

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Speaker 1: U S investors has not been a bad return at

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Speaker 1: all for Japan this year. Well, I was I just

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Speaker 1: break injured. Because you know, you talk about changing corporate governments,

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Speaker 1: this isn't being done apparently because they like to make

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Speaker 1: this change in corporate governance. A lot of this has

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Speaker 1: to do with activist shareholders that have been pushing managements

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Speaker 1: and boards to change the way they do business. Is correct, correct?

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Speaker 1: And also the government um Abbe, Prime Minister Abbe has

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Speaker 1: been a huge effort in terms of pushing for improved

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Speaker 1: corporate governance. So are there some companies that are more

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Speaker 1: ripe for let's say, outside pressure to have them change

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Speaker 1: their government's program am so that they can then reward

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Speaker 1: shareholders Because I know in South Korea, for example, you've

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Speaker 1: got the situation right now where Elliott Management is going

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Speaker 1: after Samsung. Yes, um in Japan has always been a

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Speaker 1: few very good corporate governance companies. Even years ago, there

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Speaker 1: were some that were very good, but there were always

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Speaker 1: a lot of bad eggs as well. And it's these

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Speaker 1: bad eggs when they're shifting from uh bad to good,

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Speaker 1: that's when you can really make a great deal of money. So,

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Speaker 1: moving away from Japan, what other markets in age are

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Speaker 1: you looking at? Well, we like Hong Kong a great deal. Wait,

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Speaker 1: hold on a second. There was a story on the

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Speaker 1: Bloomberg terminal that was saying that Chinese money is flowing

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Speaker 1: out of Hong Kong stocks. You know, yes, um, Chinese

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Speaker 1: money comes and goes um, But we still like the

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Speaker 1: fact that China is growing quite firmly. It doesn't need

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Speaker 1: all the speculative money coming in or out of China.

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Speaker 1: You can actually enjoy foreign capital foes from many countries.

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Speaker 1: And it's yes, things are improving in China. And Hong

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Speaker 1: Kong is a derivative basically on China, but almost all

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Speaker 1: of its profits come from China or related to China,

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Speaker 1: so it's doing quite well. Actually, how concerned are you

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Speaker 1: by the weakening Gwen? Well, Um, it's basically tied to

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Speaker 1: a basket of currencies now, and so when the dollar

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Speaker 1: is strong versus the euro or the yen or the

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Speaker 1: Brazilian real, then the Chinese animal also depreciate versus the

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Speaker 1: US dollar. But it certainly is coming to a point

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Speaker 1: now where maybe some politicians are going to notice. So

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Speaker 1: the U. S. Treasury is going to notice because it's

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Speaker 1: it's hit new lows recently. And yes, well uh, and

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Speaker 1: it's making you know, hundreds of billions of dollars of

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Speaker 1: trade surpluses every year, right, So why is a country

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Speaker 1: that's making so much a trade surplus losing value of

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Speaker 1: its currency. It just doesn't seem right. But it is

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Speaker 1: based on a basket, and I think it's following the

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Speaker 1: basket reasonably closely. John, you said you were not a

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Speaker 1: fan of technical analysis, so maybe you're a fan of

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Speaker 1: fundamental analysis, which I guess you are right because I

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Speaker 1: was just sort of I confess trying to make header

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Speaker 1: tails of the Chinese. A lot of Chinese company balance

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Speaker 1: sheets and income statements is beyond my pay grade. But um,

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Speaker 1: I do look at the Japanese companies because just to

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Speaker 1: go back there for a second, well, at least I've

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Speaker 1: been there, at least I you know that. But Phonic,

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Speaker 1: for example, I always think of as the robot making company.

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Speaker 1: Um Daniel loebe very successful with Phonic, and also Sony

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Speaker 1: to get them to do share buy backs. What what

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Speaker 1: analysis do you do and give us some names or

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Speaker 1: some direction for how we should deploy money specifically in

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Speaker 1: in Japan, because they don't just work in Japan, they

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Speaker 1: just based there. Well, we have a fund that actually

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Speaker 1: looks for these opportunities that have a lot of cash

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Speaker 1: on their books. I don't actually know the names and

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Speaker 1: probably should have mentioned them either at this point is

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Speaker 1: run by very sex assful for fully manager we have

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Speaker 1: in Japan. He has been doing it for I think

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Speaker 1: two decades. And yes, there's still our companies in Japan

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Speaker 1: that can do what Daniel Loebe wants to do in

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Speaker 1: terms of returning a lot of a lot of their

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Speaker 1: cash to shareholders, to reducing their unprofitable subsidiaries, concentrating on

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Speaker 1: profit as opposed to market share, all the good things

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Speaker 1: that we expect from companies here but are still to

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Speaker 1: some companies in uh in the learning stage in Japan.

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Speaker 1: In Japan, can you remove the variable in your fundamental

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Speaker 1: analysis of quantitative easing and what the Japanese Central Bank

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Speaker 1: is doing and how they might extricate themselves from current

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Speaker 1: policies that have proved incredibly challenging, particularly to the financial sector. Well, uh, no,

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Speaker 1: I don't think we can, other than to say that

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Speaker 1: the stock market probably would be lower, um if the

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Speaker 1: Bank in Japan was not buying a lot of stocks

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Speaker 1: or doing a lot of QUI. I think that's pretty clear.

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Speaker 1: But um, I would say that the Bank of Japan

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Speaker 1: is doing basically the right thing right now. It's in

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Speaker 1: terms of lessening the importance of the que policy and

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Speaker 1: moving towards basically a price fixing of the long bond.

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Speaker 1: And it's a risky move which could require unlimited amounts

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Speaker 1: of intervention at some point, but in a way it

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Speaker 1: softens the blow of tapering because they don't need to

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Speaker 1: really buy any more bonds because they already own most

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Speaker 1: of the ten year bonds. They own like sev of

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Speaker 1: five to ten year bonds and probably more of the

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Speaker 1: longer durrated so they can effectively fix that price I

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Speaker 1: think without much effort. We shall see John Bail, chief

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Speaker 1: global strategist at NICO Asset Management, which overseas one hundred

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Speaker 1: and sixty five billion dollars, Thank you so much. So

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Speaker 1: let's take a deeper look at the A T and

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Speaker 1: T time Warner deal as far as whether it really

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Speaker 1: is all that likely that it will get done? And

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Speaker 1: what the regulatory hurdles are that the banker's face at

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Speaker 1: this point. Uh. We want to bring in Alex Sherman,

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Speaker 1: Bloomberg m and a reporter and Jerry Smith, Bloomberg media

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Speaker 1: reporter to talk about this deal. Alex, I want to

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Speaker 1: start with you. I mean, what do you put the

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Speaker 1: chances at that this deal is actually going to meet?

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Speaker 1: You're asking me this. At least I didn't drink lemon water,

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Speaker 1: I didn't exercise this morning, and yet I'm still being

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Speaker 1: grilled with questions here. All Right, I'm gonna do my best.

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Speaker 1: You can just say no. Look, take a look at

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Speaker 1: where the stock is trading right now. You could say no. Uh.

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Speaker 1: Time the market believes this deal is in serious jeopardy.

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Speaker 1: I mean the time Warner is trading well below the

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Speaker 1: offer price of a hundred and seven dollars and fifty

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Speaker 1: cents a share right now. That is an indication that

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Speaker 1: there is a lot of concern regulators will mix this deal. Uh.

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Speaker 1: And and with some reason. Donald Trump has already come

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Speaker 1: out and said he'll block the deal. Hillary Clinton has

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Speaker 1: said we need to look at deals like this with

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Speaker 1: an increased level of scrutiny, maybe meaning that she plans

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Speaker 1: on being even tougher than the Obama administration has been,

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Speaker 1: and they've been pretty tough. I mean, the Comcast Time

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Speaker 1: Warner cable deal did not go through, even though those

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Speaker 1: two companies don't directly compete against each other. The Comcast

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Speaker 1: NBC deal of two thousand nine, which is what A T.

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Speaker 1: T is pointing to, that deal did go through, and

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Speaker 1: that probably is the closest proxy for this deal of

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Speaker 1: a distribution company buying a large content company. But the

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Speaker 1: world has changed since two thousand nine, Jerry Smith, changed

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Speaker 1: since two thousand nine. You think this is what what

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Speaker 1: Alex says makes sense. I mean, you can disagree a

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Speaker 1: little bit, a little bit, a little bit, not a lot.

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Speaker 1: He's here with you. I think it's changed since last year.

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Speaker 1: I was gonna say it's not. It's it's like the

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Speaker 1: landscape every six months. It's something that's big, indifferent, right.

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Speaker 1: I mean, you can see what A T and T

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Speaker 1: and Time Warner are. You know. The argument that they're

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Speaker 1: laying out now is as Alex said, and also they're

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Speaker 1: talking about how there's so many new competitors that they

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Speaker 1: face now. Um, you know, companies like Netflix and Amazon

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Speaker 1: that weren't in the television business just a couple of

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Speaker 1: years ago. Um. So yeah, I mean this it's very similar.

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Speaker 1: This deal is very similar to the Comcast NBC deal. Um,

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Speaker 1: that went through, but it was it went through with

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Speaker 1: some pretty tough conditions attached to it that in some

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Speaker 1: ways has hampered, um, you know, Comcast and NBC's ability

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Speaker 1: to do business. So um. You know, analysts right now

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Speaker 1: are kind of putting this out about a fifty fifty chance. Um.

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Speaker 1: Certainly the climate has changed. I mean, if you look

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Speaker 1: at what happened with Comcast, Time Warner Cable, A lot

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Speaker 1: of people thought that deal was a sure thing when

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Speaker 1: it was first announced and it was blocked. So you know,

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Speaker 1: I think it's it's really um, you know, it remains

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Speaker 1: to be seen. So with a big deal like this,

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Speaker 1: how much does even regardless of whether it even gets through,

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Speaker 1: how much does a big agreement like this pressure smaller

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Speaker 1: companies to join forces and to you know, sort of

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Speaker 1: generate some new wave of consolidation just by virtue of

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Speaker 1: the threat of such a behemoth. Yeah. I think that's right.

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Speaker 1: I mean I think there is a herd mentality when

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Speaker 1: you see deals like this happening. Um, you know, I

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Speaker 1: think a lot of media companies, especially smaller ones, are

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Speaker 1: looking at a T and T and Time Warner and

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Speaker 1: they're not really sure what they're up to, but thinking

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Speaker 1: to themselves, you know this, I need to get bigger.

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Speaker 1: I mean, the immediate game right now is very much

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Speaker 1: about size. How many subscribers you have, how many viewers

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Speaker 1: you have. Um So yeah, I mean there's a possibility

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Speaker 1: that this just is sort of a domino effect and

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Speaker 1: that there there's other media companies that want to get

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Speaker 1: larger to compete. And we already know there's one deal

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Speaker 1: in the works CBS and Viacom, which the boards are

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Speaker 1: looking at merging right now. So Time Warner would have

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Speaker 1: been an out perhaps if CBS didn't want to go

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Speaker 1: through with the deal. How that Time Warner has taken

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Speaker 1: in essence, I think it probably increases the likelihood that

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Speaker 1: CBS and vi comes boards decide okay, a merger is

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Speaker 1: beneficial for both companies. Alex Sherman tell us a little

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Speaker 1: bit about the price, and how do you believe they

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Speaker 1: arrived at this price? And and as you noted, the

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Speaker 1: shares of Time Warner. They trading about eighty seven dollars

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Speaker 1: a year. That's below the offer price. Well, so Fox

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Speaker 1: came after Time Warner two years ago with an eighty

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Speaker 1: five dollar per share offer, a hostile offer, you may remember,

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Speaker 1: and Time Warner next that one said it was too low,

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Speaker 1: that was a floor. So that was a floor exactly.

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Speaker 1: And Time Warner before we broke this story last week,

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Speaker 1: Tom Warner was trading around let's say seventy eight seventy

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Speaker 1: a share. Um, so you move about ten percent since

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Speaker 1: the since the deal was made, correct, So you knew

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Speaker 1: the offer was gonna have to be above eighty five

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Speaker 1: dollars a share, and probably well above because Fox indicated

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Speaker 1: they were willing to go even higher than eighty five.

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Speaker 1: That was just sort of their beginning offering price. Uh.

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Speaker 1: And Time Warner was very resistant that that that deal

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Speaker 1: was not going to happen. So an offer probably of

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Speaker 1: above a hundred dollars was almost a sure thing. Uh.

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Speaker 1: Then I think it just became a process of doing

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Speaker 1: their due diligence and coming up with one of seven

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Speaker 1: fifty um through the earlier wasn't what kind of multiple times,

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Speaker 1: which is a little high if you look at the

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Speaker 1: other comps. But again that's fairly typical when these deals

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Speaker 1: are announced, that the comp is a little bit higher

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Speaker 1: than the competition because you need to get the shareholders

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Speaker 1: on board and you want to put out a sort

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Speaker 1: of a suite premium. Jerry I wanted to ask with

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Speaker 1: Time Warner, let's say this deal does fall apart, how

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Speaker 1: how bad of a situation as Time Warner in. I

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Speaker 1: don't think they're in a bad situation at all. I

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Speaker 1: mean they were before this deal was announced. They were

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Speaker 1: pretty widely considered one of the best position companies in

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Speaker 1: the media industry. I mean, they have so many assets

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Speaker 1: that the UM you know, HBO, the Warner Brothers Studio, CNN,

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Speaker 1: we're all having great years. So I mean, they had

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Speaker 1: the right collection of assets they felt like and certainly,

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Speaker 1: you know, we know that UM Apple had at least

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Speaker 1: sort of vaguely entertained the idea of talking to them

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Speaker 1: at one point. Jeff Bucas this morning said that Apple

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Speaker 1: wasn't really that serious. But um, you know, if this

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Speaker 1: deal were to fall apart, UM, it's not hard to

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Speaker 1: imagine that they Time Warner could find another suitor at

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Speaker 1: some point. I think part of that logic also is

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Speaker 1: why this deal. Let's be honest here, despite what the

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Speaker 1: companies really say, there are no real synergies in this deal.

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Speaker 1: There were no real synergies one Comcast bought NBCU vertical integration.

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Speaker 1: It's just they don't really exist. An M and A

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Speaker 1: professor textbook would say, you don't do this deal. In fact,

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Speaker 1: this deal actually is exactly what you're not supposed to do,

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Speaker 1: which is it. It's diversifying your company and providing a

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Speaker 1: hedge against your core competency, which is really what what

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Speaker 1: if you took an M and A class in business school,

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Speaker 1: they tell you those deals typically don't work. But that said,

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Speaker 1: this is not a new concept. And actually Comcast buying

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Speaker 1: NBC did work for Comcast because they bought it at

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Speaker 1: such a low point in the market in two thousand

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Speaker 1: nine that they were purely buying a good asset on

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Speaker 1: the cheap. So that deal is gonna work. Now. Is

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Speaker 1: a T and T buying Time Warner on the cheap?

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Speaker 1: Much harder? Sell? I think? Uh so? I think, you know,

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Speaker 1: the obstacles for a T and T to really turn

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Speaker 1: this into a good deal are a lot higher. But

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Speaker 1: a T and T has a separate motivation for these deals.

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Speaker 1: It's also why By bought Direct TV at a very

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Speaker 1: high price. It needs free cash flow to pump through

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Speaker 1: its dividend. That's why a lot of people invest in

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Speaker 1: a T and T. So these are free cash flowing monsters,

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Speaker 1: these two companies, and that should work well for a

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Speaker 1: T and T S overall strategy. They're gonna need that

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Speaker 1: cash club because they're gonna be taken on a lot

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Speaker 1: of that if they actually get the deal done. I

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Speaker 1: want to thank you very much, Alex Sherman from Bloomberg News.

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Speaker 1: Our thanks also to Jerry Smith of Bloomberg News. Now

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Speaker 1: let's turn our attention to imagine what's going on in Britain.

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Speaker 1: We've got Mark Gilbert, Bloomberg View columnists joining us from

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Speaker 1: London Market. Gilbert the pound. The British pound has fallen

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Speaker 1: by nearly a fifth against the U. S Dollar since

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Speaker 1: that June vote to leave the European Union. It also

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Speaker 1: triggered a rise in prices paid by businesses for the

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Speaker 1: raw materials. I think that was like an eight percent

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Speaker 1: rise in August, and the rise in costs that came

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Speaker 1: down just a little bit to about seven percent. But

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Speaker 1: it does Britain have an inflation problem. What's going on

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Speaker 1: with with the cost of of having voted to exit

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Speaker 1: the European Union. Oh boy, oh boy, we have an

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Speaker 1: inflation problem coming down the hell, that's for sure. Microsoft

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Speaker 1: has just announced that if you use its business software

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Speaker 1: on a license in the UK, you're going to see

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Speaker 1: a price rise of about a fifth as a result

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Speaker 1: of the pounds drop against the dollar. If you look

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Speaker 1: at any of the market interpretations of future inflation, like

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Speaker 1: the swaps market, it's looking like it goes on on

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Speaker 1: a hockey stick. It goes up and up and up

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Speaker 1: and up, so that in turn is gonna I mean

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Speaker 1: the Bank of England is going to struggle to cause

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Speaker 1: interest rates. It means that one of the side effects

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Speaker 1: of a weak currency, which is arise in inflation expectations,

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Speaker 1: is being seen rather more quickly than what might be

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Speaker 1: seen as the good side, which would be a potential

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Speaker 1: rise in exports mark. You know, at a certain point

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Speaker 1: you have to wonder how much people's view of Brexit

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Speaker 1: in the rear view mirror is being colored by uh,

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Speaker 1: some of the lobbying that's going on. Um. I know

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Speaker 1: that the British Banking Association for example, is saying that

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Speaker 1: by the end of this year banks in the UK

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Speaker 1: will start pulling people out of uh London and relocating

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Speaker 1: them elsewhere as a result of the Brexit vote. H

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Speaker 1: this is a huge concern. I mean, this is sixty

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Speaker 1: six billion pounds of potential taxes from the financial services

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Speaker 1: that are at stake here. I mean, how much is

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Speaker 1: this just gimmickery, how much is this just trying to

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Speaker 1: color people's views, and how much is actually economic risk? Well,

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Speaker 1: I know Anthony Brown at the British Banks fotiations, he's

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Speaker 1: a serious chap, but it is his job to lobby

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Speaker 1: on behalf of his industry. And the key quotes he says,

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Speaker 1: they've got their hands poise quivering over the relocate button.

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Speaker 1: And now that might be true, but hey, we all

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Speaker 1: recognize moving staff overseas is kind of difficult, and we've

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Speaker 1: got story after story showing how office space in places

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Speaker 1: like Paris and Luxembourg and Frankfurt is very hard to

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Speaker 1: come by. What what Anthony's really looking for, I think

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Speaker 1: is to push the government into giving some tax concessions

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Speaker 1: to the UK banking industry to make it more attractive,

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Speaker 1: particularly for foreign max to keep their business here. And

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Speaker 1: he's also putting the pressure on the government that this

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Speaker 1: issue of passporting, the right of firms based in the

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Speaker 1: City of London to sell services into the EU region

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Speaker 1: once we've left the European Union. He wants to make

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Speaker 1: the pressure a bit harder on Prime Minister Theresa Maye

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Speaker 1: to try and ensure that there's some continuity of those

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Speaker 1: passporting rights, which frankly, at the moment the government seems

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Speaker 1: to de prioritize over its ability to cabin a great

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Speaker 1: That said, if you're a big foreign bank and you're

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Speaker 1: based in London and you're doing your five year plans

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Speaker 1: or your ten year plans, being outside of the EU

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Speaker 1: does make the does make London just a less attractive

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Speaker 1: place than it was previously. So this isn't all smoke,

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Speaker 1: but there might not be a full foot raging fire either,

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Speaker 1: Mark Gilbert, what about the cost of fuel and energy, Well,

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Speaker 1: we're entirely dependent upon what happens to the oil price there.

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Speaker 1: But we have a much high attacks on fuel in

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Speaker 1: the UK than than, for instance, you guys have in

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Speaker 1: the United So what is what is a leader of

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Speaker 1: a leader of petrol? As you would say, what is

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Speaker 1: a leader of petrol cost because I guess for about

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Speaker 1: four leaders to the gallant uh no idea because I

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Speaker 1: don't drive because I live in London. Very few people

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Speaker 1: in London actually drive because there's nowhere to park and

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Speaker 1: nowhere to drive it to directly. You know your column

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Speaker 1: today where you're talking about the fact that Britats are

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Speaker 1: starting to count the cost of Brexit, you said that

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Speaker 1: a pull conducted earlier this month by IPSIS shows almost

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Speaker 1: half a voters record they'll be personally worse off after

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Speaker 1: Brexit mets up from less than a third before the vote.

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Speaker 1: What is it so far that's changed their view, do

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Speaker 1: you think, Well, the inflation expectations is a big part

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Speaker 1: of it. You know, the day after the vote, Mark Carney,

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Speaker 1: the Bank of England governor, basically came out on television

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Speaker 1: and said, whatever it takes, we will do. We've cut

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Speaker 1: interest rates, You're gonna have cheaper mortgages with those sunlit

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Speaker 1: uplands that that that that those in favor of leaving

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Speaker 1: the EU were talking about. Were skeptical that's going to happen,

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Speaker 1: but hey, your central bank is here to help. Well,

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Speaker 1: if inflation does what the market prices suggest, inflation is

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Speaker 1: going to do. Then Carne's hands are tired. He's not

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Speaker 1: gonna be able to cut interest rates. You're not going

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Speaker 1: to have that cheaper mortgage. And we you know, big

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Speaker 1: international companies. We have a car factory up in a

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Speaker 1: place called Sunderland, run by Nissan, and they make their

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Speaker 1: cash Kite suv there that they're most popular, four by

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Speaker 1: four by a long way, six thousand, seven hundred jobs

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Speaker 1: of that factory, and the head of Nissan says, you

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Speaker 1: know what, when we do the next version of the

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Speaker 1: cash car, we might just not be doing that in Sunderland.

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Speaker 1: So those six thousand, seven undred direct jobs in the

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Speaker 1: factory might well be at risk. And you have not

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Speaker 1: a lot of companies so far saying listen, we're canceling this,

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Speaker 1: We're pulling out of that. But there's definitely a feeling

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Speaker 1: that investments is on hold, and that is increasing people's

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Speaker 1: nervousness about what their own jobs futures are and also

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Speaker 1: about their personal prosperity going forward. Bloomberview columnist Mark Gilbert

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Speaker 1: on Brexit and the pessimism that it's ensued. Thank you

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Speaker 1: so much for being with us, Thanks for listening to

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Speaker 1: the Bloomberg P and L podcast. You can subscribe and

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00:21:42,240 --> 00:21:47,240
Speaker 1: listen to interviews at iTunes, SoundCloud, or whatever podcast platform

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00:21:47,400 --> 00:21:50,119
Speaker 1: you prefer. I'm pim Fox. I'm out there on Twitter

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Speaker 1: at pim Fox. I'm out there on Twitter at Lisa Abramo.

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Speaker 1: It's one before the podcast. You can always catch us

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Speaker 1: worldwide on Bloomberg Radio to kill O Lord