WEBVTT - Goldman's David Kostin on Market Outlook, Investment Strategy

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<v Speaker 1>Bloomberg Audio Studios, podcasts, radio news.

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<v Speaker 2>Let's talk to David Costin from Golden Sachs.

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<v Speaker 3>He's the chief of US equity strategy there and or

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<v Speaker 3>the chief US equity strategist, I should say, David, and

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<v Speaker 3>it's great to get you on to talk about your

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<v Speaker 3>expectations with the market, and I'd love to just get

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<v Speaker 3>your take on the FED. You know, how important is

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<v Speaker 3>the FED cutting cycle right now?

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<v Speaker 2>Is? I think everyone has reduced.

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<v Speaker 3>His or her expectations for the terminal rate.

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<v Speaker 2>What are you looking at? Well?

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<v Speaker 4>I have the benefit of working with the Golden Sachs

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<v Speaker 4>economics team, and their forecast right now is a FED

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<v Speaker 4>will cut next week as well as the beginning of

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<v Speaker 4>next year. That's mostly priced into the market. The expectation

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<v Speaker 4>for most portfolio managers with whom I interact on a

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<v Speaker 4>regular basis are expecting an easy cycle to continue, and

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<v Speaker 4>the stock market is pricing as though the underlying economic

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<v Speaker 4>growth is close with a five percent. The economy, of course,

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<v Speaker 4>is not growing.

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<v Speaker 2>As rapidly as that, but the.

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<v Speaker 4>Performance of cyclical stocks relative to defensive stocks is more

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<v Speaker 4>consistent with a pretty robust economic underlying activity. In fact,

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<v Speaker 4>that is what most of the fund managers are anticipating.

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<v Speaker 4>The animal spirits have really been out in force.

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<v Speaker 2>In the last month.

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<v Speaker 4>We've seen the market rally by roughly five percent since

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<v Speaker 4>the election. You saw recently the NFIB Small Business Optimism

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<v Speaker 4>Index jump sharply. That's pretty consistent what we saw in

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<v Speaker 4>the first Trump administration, the expectation of more business friendly environment.

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<v Speaker 4>Whether that's true or not, of course, that remains to

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<v Speaker 4>be seen. CEO confidence is typically highest in a unified

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<v Speaker 4>republican government, so that also is I think one of

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<v Speaker 4>the reasons why you've seen it. We are expecting a

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<v Speaker 4>twenty five percent increase in M and A activity next year.

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<v Speaker 4>The CEO confidence is one of the key variables, along

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<v Speaker 4>with financial conditions and economic activity. So those are some

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<v Speaker 4>of the attributes around why business expectations are pretty strong.

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<v Speaker 4>The economy is the stock market is pricing that, and

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<v Speaker 4>we have expectations of roughly seven percent increase in the

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<v Speaker 4>S and P five hundred during the next twelve months

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<v Speaker 4>to around six thousand, five hundred. So that's sort of

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<v Speaker 4>the play lay of land Matt as we see it now.

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<v Speaker 1>David, what do you tell people who are following the

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<v Speaker 1>animal spirits. Should they keep following the animal spirits or

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<v Speaker 1>is there something more under the hood they should be

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<v Speaker 1>looking at. Given that when we look at your analysis,

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<v Speaker 1>you're taking a look at a very very specific set

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<v Speaker 1>of stocks that should outperform, and not just the entire index.

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<v Speaker 4>So we have a couple of strategies that we think

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<v Speaker 4>about in this environment. One we'd be companies whose customer

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<v Speaker 4>base or customer clients are small and mid sized businesses.

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<v Speaker 4>The intuition behind that is that companies that are small

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<v Speaker 4>businesses are looking to spend more money in the idea

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<v Speaker 4>of a more optimistic outlook. So if you're a supplier

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<v Speaker 4>of those to those businesses, that's usually a good source

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<v Speaker 4>of potential positive earning revisions.

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<v Speaker 2>More greater business.

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<v Speaker 4>A group of stocks that my colleague economic or stock

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<v Speaker 4>analysts at Goldman have identified as a greater than average

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<v Speaker 4>probability of being.

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<v Speaker 2>Acquired in a merger.

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<v Speaker 4>That's a strategy we published the other day last week

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<v Speaker 4>looking at companies with a high risk adjusted return. The

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<v Speaker 4>idea of the expected risk adjuster return being quite high

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<v Speaker 4>in the coming year would be an appropriate strategy in

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<v Speaker 4>our view, because the stock market trades at a very

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<v Speaker 4>high valuation level, and there's a slight value bias or

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<v Speaker 4>value tilts to a group of stocks with the highest

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<v Speaker 4>risk adjusted potential risk adjuster returns. And I think that's

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<v Speaker 4>an important strategy to think about given the uncertainty scenario

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<v Speaker 4>around and the tariffs, exactly what will happen with inflation,

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<v Speaker 4>employment situation, So there's certain undercurrents of concern, and so

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<v Speaker 4>the idea of choosing stocks with high risk adjuster return

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<v Speaker 4>I think it's appropriate to set up a.

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<v Speaker 2>Portfolio at this time.

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<v Speaker 4>We think of it as terms of various delices of strategies.

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<v Speaker 5>I want to go back to the strategy you mentioned

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<v Speaker 5>about stocks with a higher M and a potential. Obviously

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<v Speaker 5>we've been talking about the antitrust, the regulatory environment that's

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<v Speaker 5>expected in twenty twenty five, especially with a.

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<v Speaker 2>New FTC chair named.

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<v Speaker 5>Clearly there's a lot of interest among Wall Street firms

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<v Speaker 5>in that. What are your conversations with clients around that sound?

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<v Speaker 5>Have you also seen an increase in interest from investors

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<v Speaker 5>to pursue that type of strategy we have?

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<v Speaker 4>In fact, the Goldman Sachs Financial Services Conference was held

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<v Speaker 4>on Tuesday and Wednesday of this week, and there was

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<v Speaker 4>quite a lot of the CEOs who were presenting, we're

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<v Speaker 4>talking about the expectation they had for increased M and

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<v Speaker 4>a activity incounter twenty twenty five. Investors as a consequence,

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<v Speaker 4>are also quite focused in this area. And we have

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<v Speaker 4>a group of stocks where typically if you look at

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<v Speaker 4>the S and P one thousand, five hundred, fifteen hundred,

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<v Speaker 4>there's about a two percent of those companies get acquired

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<v Speaker 4>each year, and a group of stocks to which I

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<v Speaker 4>referred earlier, which my colleague analysts have identified as a

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<v Speaker 4>greater than average probability. We about a nine percent hit

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<v Speaker 4>rate of acquisitions. Those stocks tend to outperform as you

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<v Speaker 4>would anticipate receiving a usually a merger comes at a premium.

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<v Speaker 4>That's been a driving force behind why we get lots

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<v Speaker 4>of inquiries looking at this list of sixty two companies.

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<v Speaker 2>How do you look out, David for black swans.

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<v Speaker 3>I mean, we're in a situation where we really haven't

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<v Speaker 3>had any for so long. The market's up almost thirty

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<v Speaker 3>percent this year, the S and P at least, it

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<v Speaker 3>was up twenty five percent last year, and it's had

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<v Speaker 3>an incredible run since the bottom in two thousand and

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<v Speaker 3>nine from six six six to over six thousand. What

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<v Speaker 3>do you do to try and factor that into your models,

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<v Speaker 3>the potential of an unknown unknown.

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<v Speaker 4>Well, since you referenced Donald Rumsfeld's famous dictum no knowns

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<v Speaker 4>and no non knowns and non unknowns, that's ax question

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<v Speaker 4>kind of hard to forecast.

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<v Speaker 2>A black swan will.

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<v Speaker 4>One way Matt to combat that or to tackle that

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<v Speaker 4>problem would be to look at companies with a high

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<v Speaker 4>risk adjusted return because that's factored into a certain grade,

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<v Speaker 4>not a specific black swan event, but rather the idea.

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<v Speaker 2>Of overall risk.

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<v Speaker 4>The idea of a potentially high return adjusted for that risk.

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<v Speaker 4>And that's a goal. That's the holy grail of all

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<v Speaker 4>portfolio managers to get the best risk adjusted return that

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<v Speaker 4>he or she can.

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<v Speaker 2>So what do we think about it? Well, we look

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<v Speaker 2>at some of the big macro issues that are that

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<v Speaker 2>are there and try.

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<v Speaker 4>To understand valuation. To set up with the stock market

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<v Speaker 4>of trading at such high pe multiple does create you know,

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<v Speaker 4>asymmetries in terms of downside risk if there's real disappointments

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<v Speaker 4>on the underlying fundamental, So there's value has a potential

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<v Speaker 4>component in a portfolio. I think the way to think

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<v Speaker 4>about is a a as a portfolio in a true

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<v Speaker 4>portfolio sense, with multiple strategies in place, some that are

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<v Speaker 4>maybe companies that are likely to have an M and activity,

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<v Speaker 4>some that are forecast to have more customer based in

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<v Speaker 4>small area that we talked about our risk adjusted returns.

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<v Speaker 4>Those combinations, I think is the right way to approach

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<v Speaker 4>a market that trades at a very high valuation historically speaking,

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<v Speaker 4>and that's I think that's how we would advocate and

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<v Speaker 4>recommend to our clients.

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<v Speaker 1>David, we thank you so very much for joining us,

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<v Speaker 1>of course, that is David Coston of Goldman Sachs. We

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<v Speaker 1>thank you for your time