Speaker 1: Boo, Bloomberg Audio Studios, Podcasts, radio news.
Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along
Speaker 2: with Lisa Bromwitz and Amrie Hordern. Join us each day
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Speaker 2: Terminal and the Bloomberg Business app. Black Rock releasing their
Speaker 2: twenty twenty five global outlook, writing we stay in risk
Speaker 2: on as we look for transformation beneficiaries and go further
Speaker 2: over weight US stocks as the AI theme broadens out.
Speaker 2: Waeley of Black Rock is with us here in New
Speaker 2: York Way. It's good to see you.
Speaker 3: As always, Thanks for having me.
Speaker 2: AI beneficiaries. At the moment, it's been the big AI enabler,
Speaker 2: the likes of video, which has been the big winner.
Speaker 2: How does that story change? What's the next phase of
Speaker 2: this trend?
Speaker 4: We continue to like the big tech part of the
Speaker 4: AI beneficiary. So far this year they've been carrying the
Speaker 4: way in terms of earnings growth. Looking at twelve months trailing,
Speaker 4: Magnificent seven grew their earnings on a forty grew their
Speaker 4: earnings by forty five percent a year on year basis
Speaker 4: versus the rest of the market actually growing only four percent.
Speaker 4: So there's a significant difference. Continues to be very, very concentrated,
Speaker 4: but over time we do expect the beneficiaries through broaden out.
Speaker 4: We're looking at energy, We're looking at utility, We're looking
Speaker 4: at industrials as we build and finance the transformation right sources,
Speaker 4: and we will have to look at the combination of
Speaker 4: public and private market as the theme plays out. We
Speaker 4: continue to think that this is an environment of transformation
Speaker 4: rather than environment of your typical cycle. So, given all
Speaker 4: these magaphorics, not just AI but also low carbon transition,
Speaker 4: geopolitical fragmentation, we're learning real time what the longer term
Speaker 4: trend is heading towards instead of the fluctuations around a typical, stable,
Speaker 4: longer term trend, and that has significant implications on investing
Speaker 4: over the long term. What is neutral in this environment?
Speaker 1: Right way, You can't talk specifically about this deal that
Speaker 1: Black Croc announced yesterday about buying this credit fud manager.
Speaker 1: But you talked about the convergence of public and private markets,
Speaker 1: how much you're increasing your allocation to private markets as
Speaker 1: part of the sort of extra over overweight of this
Speaker 1: broader theme.
Speaker 4: While private market has been growing significantly in recent years,
Speaker 4: and looking ahead, a private market is expected to double
Speaker 4: in AM by the end of the decade from the
Speaker 4: twenty twenty three level. And with in that, actually infrastructure
Speaker 4: and private credits are likely going to play a big
Speaker 4: role both as we think about building the transformation and
Speaker 4: also as we think about financing the transformation. And so far,
Speaker 4: if you look at allocation to markets for a lot
Speaker 4: of investors, they are quite heavily in real estate in
Speaker 4: private equities. So private credit and infrastructure are really exposures
Speaker 4: that we do think will grow both in terms of
Speaker 4: the asset base but also in terms of their allocation
Speaker 4: in investor portfolios.
Speaker 1: That's where I wanted to go this question of what
Speaker 1: it means to be even more bullish on US equitism in.
Speaker 3: The story of AI.
Speaker 1: Where are you focusing and getting more bullish and have
Speaker 1: you ever been more bullish on some.
Speaker 3: Of these names?
Speaker 4: Well, right now, as you know, we have been bullish
Speaker 4: on US equities for all of this year, so we're
Speaker 4: dialing up risk taking even more because we do believe
Speaker 4: that earnings can broaden out. Right, we talked about this
Speaker 4: year being still quite concentrated in terms of Big Tech
Speaker 4: doing the heavy lifting. Next year, Big Tech Magnificent seven
Speaker 4: expected to grow their earnings like eighteen percent versus the
Speaker 4: rest of the market a high single digit. You do
Speaker 4: see the gap closing and that broadening out is one
Speaker 4: reason that we believe there is more momentum for US
Speaker 4: acodes to run higher. Another reason is that people look
Speaker 4: at how expensive US athletes are, how concentrated US equities are.
Speaker 4: Our study shows that if there are good reasons mega
Speaker 4: forces structural forces that could potentially change the longer term trend,
Speaker 4: the mean revert doesn't quite apply. Mean reverts to what
Speaker 4: if the destination and the makeup of the destination is changing,
Speaker 4: Which is why we're not over indexing on the current
Speaker 4: valuation level, especially as we look at investing over the
Speaker 4: tactical horizon of twenty twenty five and the near term.
Speaker 4: Text cuts and deregulation talks can drive sentiment further, which
Speaker 4: is why we're leaning into it.
Speaker 5: When you look at your global outlook, you talk about
Speaker 5: the focus on the United States and what you're seeing
Speaker 5: in terms of security priorities, national economic priorities at the
Speaker 5: expense of others. Who is the US winning at the
Speaker 5: expensive when you look at it the biggest.
Speaker 4: Well, when we look at twenty twenty five, US exceptionalism
Speaker 4: is a theme that we expect to to play out
Speaker 4: for the entirety of this year. Within equities. That means
Speaker 4: that we prefer US accolades versus the rest of the world.
Speaker 3: We use a.
Speaker 4: UK aqualitly downgrade to fund our US aquity upgrade, so
Speaker 4: there is a bit of a kind of leaning back
Speaker 4: into US aquilas. But within duration within government bonds. Because
Speaker 4: the US exceptionalism also is associated with greater fiscal spent,
Speaker 4: we actually prefer international duration like UK guilts market over
Speaker 4: government bond the US duration, where we expect term premier
Speaker 4: to come back even more reflecting the higher fiscal trajectory.
Speaker 4: We also continue to like quality income within a credit.
Speaker 4: Even though spread is very very tight from a total
Speaker 4: yield perspective, it is reasonable and the tighter spread really
Speaker 4: reflect the fact that the government have become more indebted
Speaker 4: and private sector has been actually managing their leverage somewhat
Speaker 4: more reasonably.
Speaker 2: Well, it's good to say thanks joining us here in
Speaker 2: New York City. Thank you, Thank you very much, Willy
Speaker 2: there of black Clok, the team over at Stay Street
Speaker 2: right in the following. We expect the narrative of rake
Speaker 2: cuts and resilience to hold in twenty twenty five and
Speaker 2: for our projective soft landing to materialize. This landscape extends
Speaker 2: our favorable outlook for equity markets. Lori Handel's Stay Street
Speaker 2: joined us now for more. Laurie, welcome to the program.
Speaker 2: Do you not think that the policy changes that we
Speaker 2: could see in the next twelve months would be potent
Speaker 2: enough to disrupt the kind of resilience that you're looking for.
Speaker 3: Well, it's too early to tell.
Speaker 6: I mean, obviously there are a number of cross currents
Speaker 6: and what the Trump administration is proposing that could be
Speaker 6: a threat to what we've seen as a soft landing
Speaker 6: so far.
Speaker 3: But until we.
Speaker 6: Actually have the ink dried on some of those policies,
Speaker 6: it's hard to know how those cross winds will actually
Speaker 6: impact real economy.
Speaker 2: The political changes elsewhere have been a threat to markets elsewhere,
Speaker 2: and that's for sure. Check out the Euro holding onto
Speaker 2: one of five. Briefly looking at one of four again
Speaker 2: this morning over in South Korea. We've seen the disruption
Speaker 2: there as well. Laurie is their scope for some performance
Speaker 2: x US at a time when a lot of people
Speaker 2: are on this program saying buy one thing by America.
Speaker 6: Yeah, well, right now, we still are on the momentum Bandwig.
Speaker 6: And also, I mean what worked well in twenty twenty
Speaker 6: four is likely to persist in twenty twenty five, and
Speaker 6: that suggests that US large cap in particular has room
Speaker 6: to run here. But what we've also been talking about
Speaker 6: is broadening out. So it's not just about the high
Speaker 6: flying mag seven tech names. It's about financials, it's about
Speaker 6: potentially energy, it's about other places like consumer discretionary that
Speaker 6: may benefit from an upgrading of the US economic prospect.
Speaker 3: So it's a little bit of a nuanced story.
Speaker 6: But yes, sadly or not so sadly, we're still by
Speaker 6: American large cap is our primary call.
Speaker 1: I can't find one person who's not Laurie, And this,
Speaker 1: to me is really a key question. How do you
Speaker 1: hedge against the idea that at some point the moment
Speaker 1: does run out?
Speaker 3: Yeah, well, I think there are a couple of things
Speaker 3: that we're doing.
Speaker 6: I mean, first and foremost is we are trying to
Speaker 6: avoid those higher, high flying names and looking at quality
Speaker 6: or companies that can be a bit more durable through
Speaker 6: this kind of cycle. The other thing is broadening out
Speaker 6: a little bit, looking at small cap us for example,
Speaker 6: which might have a little bit less vulnerability to some
Speaker 6: of these global cross winds, and to look for a diversifiers.
Speaker 6: So we have had a position in gold in our
Speaker 6: portfolio because, as you've seen over the last couple of years,
Speaker 6: stocks and bonds are often moving in locksteps. So getting
Speaker 6: some diversification into the portfolio so that you have something
Speaker 6: that's going to zig when the rest of the world's
Speaker 6: eggs is very important for us as well.
Speaker 3: This is important.
Speaker 1: Are you basically saying that sixty forty and the concept
Speaker 1: behind it has been upended that essentially we are looking
Speaker 1: at bonds that no longer are the diversifier you're looking
Speaker 1: at moving out into other types of companies and goals.
Speaker 1: You didn't mention bonds once within that So at a
Speaker 1: certain point does this have to fundamentally upend the way
Speaker 1: people construct their portfolios?
Speaker 3: Necessarily?
Speaker 6: And in fact, I think in some ways we're in
Speaker 6: a better position than we were a few years ago
Speaker 6: when interest rates were zero. So at that point in time,
Speaker 6: we were very much in the camp that bonds just
Speaker 6: weren't providing into kinds of benefits that investors typically needed
Speaker 6: to enjoy from them.
Speaker 3: But we do now have some income in bonds.
Speaker 6: So despite the fact that equities have powered forward, you
Speaker 6: know s and p up twenty five percent or so
Speaker 6: on a year to day basis with fixed incomes, kind
Speaker 6: of earning a coupon, it's still earning a coupon. So
Speaker 6: it's really more about.
Speaker 3: A nuanced positioning.
Speaker 6: So definitely still retain that allocation of bonds we think
Speaker 6: that they're going to return at least coupon perhaps plus.
Speaker 3: But looking for other things, especially if we have some
Speaker 3: you know, draw down risk in the equity markets.
Speaker 5: Well, when you look at potential draw down risks in
Speaker 5: the equity market next year, is it policy coming from Washington.
Speaker 5: I know you're bullish in the fact that potentially we're
Speaker 5: going to have these tax cuts looking at your research,
Speaker 5: but how do you look at tax cuts potentially next
Speaker 5: to the walls going up and higher tariffs.
Speaker 3: I mean, this is the thing.
Speaker 6: There are crosswins even within the stated policy objectives, right,
Speaker 6: So if you think about immigration, potentially it takes labor
Speaker 6: away from sectors that are already a little bit vulnerable.
Speaker 6: Think housing, if you look at tariffs, obviously, that creates
Speaker 6: vulnerability around the inflation front. We do think that the
Speaker 6: Fed is going to cut here in December, but we
Speaker 6: think that next year's cuts are a bit in jeopardy
Speaker 6: as we wait for this agenda to kind.
Speaker 3: Of play through.
Speaker 6: So that's what's really tricky for investors right now is
Speaker 6: it's hard to know precisely where the dost settles.
Speaker 5: If investors wanted a base case for next year and
Speaker 5: how potential Trump policies might impact the FED, would you say,
Speaker 5: there's this idea of pauses for twenty twenty five or
Speaker 5: even potentially a hike.
Speaker 4: Yeah.
Speaker 6: So we had originally penciled in four rate cuts in
Speaker 6: twenty twenty five, and we're now really lowering that, looking
Speaker 6: at maybe two, probably a pause around the beginning of
Speaker 6: the year, in part to see how these policies do
Speaker 6: shape up. And by the way, the Fed, if they
Speaker 6: do cut this month and especial they cut for twenty
Speaker 6: five business points still have kind one hundred basis points.
Speaker 3: So while we think that's that there's more to.
Speaker 6: Be done and we'd like to see them do more,
Speaker 6: we think that it's likely that a pause in early
Speaker 6: twenty twenty five is warranted.
Speaker 2: Luriy all the FED speak over the last few days,
Speaker 2: just giving us the impression that they believe, these Fed
Speaker 2: officials believe there's a long way to neutral. I was
Speaker 2: going through some of what Fed Mary Mary Daily had
Speaker 2: to say, Well, the Fed, Chicago Fed president goals, We
Speaker 2: had to say Governor Waller more recently as well, where
Speaker 2: are you on that? Just how far away are we
Speaker 2: from what they consider neutral to be?
Speaker 6: Oh, we agree there is a long way to go
Speaker 6: for neutral, But the problem is that we could have
Speaker 6: some inflationary pressures budding in the early part of twenty
Speaker 6: twenty five, and so one of the things that they
Speaker 6: also have to be very mindful of is that they
Speaker 6: don't cut so aggressively that they're in a position of
Speaker 6: having to hike more rapidly than they would have liked.
Speaker 6: So we've always said that this inflation trajectory was not
Speaker 6: going to be a sort of smooth one way direction.
Speaker 6: There was likely to be able to bumps along the way.
Speaker 3: So it's more a question.
Speaker 6: Of timing, but we do think that neutral is quite
Speaker 6: a bit lower from here.
Speaker 2: Jim and Pound speaking at one forty later on this
Speaker 2: south afternoon, Lurie, appreciate your time, enjoyed the outlook. Thank you.
Speaker 2: Lori Heineld of State Street. Most Ian Lincoln with this
Speaker 2: to say, the incoming federatric has been consistent in the
Speaker 2: messaging that wild Rake Cup decisions are being made on
Speaker 2: a meeting by meeting basis. There is appetite among committee
Speaker 2: members for another move this month. Ian joins us now
Speaker 2: for more Ian, good morning, good to see you. You've
Speaker 2: identified this and I want to go straight to it.
Speaker 2: Let's not bury the lead. What's the two year at
Speaker 2: four twenty? Fed's coming out and saying we're all confident,
Speaker 2: we're above neutral. We've got a long way to go.
Speaker 2: They want to reduce interest rates. Yeah, we've got this
Speaker 2: two year yield that has just stubbornly above four percent,
Speaker 2: just sort of stuck there at four twenty. What's that about.
Speaker 7: I think that the market at the moment is trading
Speaker 7: is still treading the result of the election. They're more
Speaker 7: worried about inflution or a surge of reflation. They're more
Speaker 7: worried about what happens when there's a renewed trade war.
Speaker 7: They're not listening to the Fed. They're not worried about
Speaker 7: the FED cutting in December then going again in Q
Speaker 7: one and Q two. In a typical environment, one would
Speaker 7: expect effective FED funds, which on December eighteenth will be
Speaker 7: four thirty three, to function as a ceiling phenomenal rates.
Speaker 7: When the FED is cutting right now, we could very
Speaker 7: easily find that uninverted sooner rather than later, which I
Speaker 7: think would create an interesting dynamic for the market for sure.
Speaker 3: So who's right? Is a FED right or is the
Speaker 3: market right?
Speaker 7: At this moment, I think that the FED is correct
Speaker 7: in continuing to normalize rates because they're normalizing rates, not
Speaker 7: because the economy is slowing, not because the jobs market
Speaker 7: has turned over, but because they believe they have won
Speaker 7: the war on inflation. And I think that's a nuance
Speaker 7: that we as at market often overlook. Normalization is not easying,
Speaker 7: it's just cutting back to neutral time.
Speaker 1: And this really does go to the point that I
Speaker 1: think the sort of battle of the e ens I'm
Speaker 1: going to call that all morning really goes to where
Speaker 1: you can take a look at something like the Jolts
Speaker 1: report and say it's either really solid and shows ongoing strength,
Speaker 1: or you could see that the overall trend is downward.
Speaker 1: What's the right signal at a time when you hear
Speaker 1: companies that are talking about reinvesting in their businesses hiring
Speaker 1: after the election uncertainty has been resolved, really leaning into
Speaker 1: the whole idea of American exceptionalism.
Speaker 7: Well, I'm very sympathetic to Ian's argument that we are
Speaker 7: overdue for a spike in the unemployment rate. The trend
Speaker 7: has been lower, but the reality is the data continues
Speaker 7: to show a resilient labor market as a theme. We
Speaker 7: have an unemployment rate at four point one percent that's
Speaker 7: very low by historic standards. The concern, and I think
Speaker 7: is shared among a lot of the EANs that I know,
Speaker 7: is that there's going to be an eventual spike in
Speaker 7: the unemployment rate that then gets the consumer on their on.
Speaker 5: Foot when it comes to the a port on Friday.
Speaker 5: What number would give the Fed a reason to say
Speaker 5: we're going to.
Speaker 3: Stay on pause.
Speaker 7: We need to see a very significant headline print or
Speaker 7: a three handle on the unemployment rate. You give me
Speaker 7: three fifty headline payrolls and I drop the unemployment rate,
Speaker 7: then the question becomes in this legitimate question is neutral
Speaker 7: in fact higher? Have we not been as restrictive as
Speaker 7: five point fifty might have been in prior cycles. I
Speaker 7: really think it ultimately comes down to whether or not
Speaker 7: we see a unexpectedly higher CPI number, not payrolls, because
Speaker 7: again to the point, they're cutting because they believe they've
Speaker 7: won the war on inflation, not because they're worried about jobs.
Speaker 4: Right.
Speaker 5: So when you look at twenty twenty five and you
Speaker 5: alluded to this, this idea that the market is taking
Speaker 5: the cues from the political economy, the policies that might
Speaker 5: come out of Washington, what does that mean for the
Speaker 5: Fed come January?
Speaker 7: Well, there are only so many things that Trump can
Speaker 7: do when he immediately takes office without Congress. So I
Speaker 7: think that the Fed pauses in January to see what
Speaker 7: those things are. So they take that median off, They
Speaker 7: reassess the situation, They see the trajectory of growth, They
Speaker 7: see if the type of tariffs that are announced are
Speaker 7: the type that they would characterize as a tax on
Speaker 7: the consumer or would really trigger reflation. I suspect it
Speaker 7: will be more of a tax on the consumer, a
Speaker 7: one off increase in CPI, and then we just move forward.
Speaker 1: And do you think that people are under estimating the
Speaker 1: chance of a slowdown, a material slow down in the
Speaker 1: US economy as everyone talks about incredible profitability and this
Speaker 1: incredible boom in the stock market and beyond.
Speaker 7: I would say that at this moment people are underestimating
Speaker 7: the chance that we have a slowdown. What I'm the
Speaker 7: most concerned about is historically the FED has been very
Speaker 7: successful at taking the edges off of the cycle on
Speaker 7: the upside and the cycle on the downside. This is
Speaker 7: what central banks are designed to do, and that has
Speaker 7: resulted in all the major corrections occurring as in the
Speaker 7: form of a crisis. So where are the imbalances? Rucker
Speaker 7: high stock prices speaks to this idea that there's a
Speaker 7: lot of optimism out there, and a lot of optimism
Speaker 7: that's overlooking the potential downside. So a little bit nervous
Speaker 7: in terms of valuations in the equity space as well
Speaker 7: as generally in risk assets.
Speaker 2: Try and set policy for that. The two way risk
Speaker 2: into twenty twenty five, both to the upside and to
Speaker 2: the downside.
Speaker 1: Yeah, well, I have to say I'm not a little
Speaker 1: happy that I don't have to do it. So good
Speaker 1: luck to all the people on the committee.
Speaker 2: Good luck to Chairman exactly, who speaks later on this afternoon. Ian,
Speaker 2: thank you, it's going to see it. Thank you, sir
Speaker 2: Inlingan there of BEMO. This is the Bloomberg Sevenance podcast,
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