WEBVTT - Argentina Bonds Become Attractive At 40 Cents: Greer 0:00:02.640 --> 0:00:05.320 Welcome to the Bloomberg Penel Podcast. I'm Paul swing you, 0:00:05.360 --> 0:00:07.680 along with my co host Lisa Brahma wits. Each day 0:00:07.720 --> 0:00:10.240 we bring you the most noteworthy and useful interviews for 0:00:10.280 --> 0:00:12.520 you and your money. Whether at the grocery store or 0:00:12.560 --> 0:00:15.480 the trading floor. Find a Bloomberg Penl podcast on Apple 0:00:15.520 --> 0:00:17.960 podcast or wherever you listen to podcasts, as well as 0:00:17.960 --> 0:00:21.360 at Bloomberg dot com. The big news of the day 0:00:21.440 --> 0:00:24.560 certainly China and the US. The other big news is 0:00:24.760 --> 0:00:28.040 Argentina at the pace so continuing to sell off versus 0:00:28.640 --> 0:00:33.199 the dollar currently at its lowest weakest level on record, 0:00:33.360 --> 0:00:38.880 after the surprise defeat of Mauricio mccli the current president, yesterday, 0:00:39.159 --> 0:00:42.480 and questions about who will take his place, the fact 0:00:42.520 --> 0:00:46.160 that Christina Kirshner could be coming back to power. Joining 0:00:46.200 --> 0:00:48.279 us how to talk about how investors have to view 0:00:48.320 --> 0:00:51.159 all this is Paul Greer. He's a portfolio manager focusing 0:00:51.240 --> 0:00:54.639 on emerging markets, debt and fax at Fidelity International. He's 0:00:54.680 --> 0:00:57.880 joining us from our London studios. Paul, thank you so 0:00:57.960 --> 0:01:01.200 much for being with me today. The main question is 0:01:01.480 --> 0:01:04.959 how much is Argentina a specific story about a country 0:01:05.000 --> 0:01:07.440 that has defaulted many times on its debt and how 0:01:07.480 --> 0:01:10.520 much does this reflect true risk and emerging markets that 0:01:10.640 --> 0:01:15.360 is currently mispriced by debt investors A Lisa and yeah, 0:01:15.400 --> 0:01:18.720 I guess with Argentina, you know, clearly it's been that 0:01:18.920 --> 0:01:22.480 the story of the week. I think the nature of 0:01:22.520 --> 0:01:25.480 the story is quite idiosyncratic in many ways. We had 0:01:25.480 --> 0:01:29.240 a very specific primary vote over the weekend, which you 0:01:29.240 --> 0:01:33.600 know clearly had an adverse result for investors in Argentinean 0:01:33.720 --> 0:01:37.440 debt and currency, and investors have have voted with their feet. 0:01:37.480 --> 0:01:40.000 You know, we've seen a pretty sharp sell off in 0:01:40.360 --> 0:01:43.480 bonds and in currency markets. I think there's been a 0:01:43.480 --> 0:01:46.559 little bit of contusion, certainly yesterday, a little bit today 0:01:46.600 --> 0:01:50.120 into the rest of emerging markets. I think it's you know, 0:01:50.160 --> 0:01:53.600 maybe quite difficult for investors to exit the Argentinian market 0:01:53.680 --> 0:01:55.800 at the moment. It's it's quite a liquid, it's under 0:01:55.800 --> 0:01:58.240 a lot of pressure. But I think from here on, 0:01:58.760 --> 0:02:01.640 with every passing day, I think for the rest of 0:02:01.680 --> 0:02:05.040 emerging markets, in terms of contagion, we'll probably see a 0:02:05.120 --> 0:02:08.840 reduced impact in terms of the spill over into the 0:02:08.880 --> 0:02:12.040 rest of the market. Clearly, it's going to remain topical 0:02:12.440 --> 0:02:15.880 and thematic for Argentina is specifically, but I think we've 0:02:15.880 --> 0:02:18.480 probably seen the peak for the rest of EM in 0:02:18.600 --> 0:02:22.480 terms of contagion. Well, what is the node of contagion 0:02:22.520 --> 0:02:25.160 that we should be looking at? I'm sorry I didn't 0:02:25.400 --> 0:02:28.760 In other words, what how how is the contagion expressing itself. 0:02:28.800 --> 0:02:31.280 Is it just that investors, if they can't get rid 0:02:31.400 --> 0:02:36.000 of Argentinean assets, they're simply selling other high beta emerging 0:02:36.080 --> 0:02:39.720 markets securities. Is that sort of the way it's expressed. 0:02:39.919 --> 0:02:42.200 Or is it just that you have negative news and 0:02:42.200 --> 0:02:44.799 in a big emerging market or one that a lot 0:02:44.840 --> 0:02:48.720 of people own, and then certain retail investors say, you 0:02:48.760 --> 0:02:50.640 know what, I'm not going to go any into EM 0:02:50.720 --> 0:02:52.440 or I'm going to yank some funds from my E 0:02:52.560 --> 0:02:55.440 M E TF. I think it's exactly that, I mean, 0:02:55.480 --> 0:02:58.799 I mean, the two biggest risks with Argentina right throughout 0:02:58.880 --> 0:03:02.840 this year have always been politics and positioning, and on 0:03:02.919 --> 0:03:06.720 the latter issue, you know, Argentinean dead and currency. You know, 0:03:06.760 --> 0:03:10.120 it has been a popular, crowded market in many ways 0:03:10.120 --> 0:03:13.120 with investors. Clearly there's been a big draw down in 0:03:13.200 --> 0:03:17.520 terms of the performance that's hit you know, investors, funds, 0:03:17.840 --> 0:03:19.960 and we've seen a little bit of de risking in 0:03:19.960 --> 0:03:24.440 other markets. It's been most acute in Latin America, particularly 0:03:24.440 --> 0:03:26.160 on the f X side. I would say, you know, 0:03:26.200 --> 0:03:29.320 it's very difficult to sell the Argentinian pesto at the minute. 0:03:29.360 --> 0:03:32.560 Liquidity is quite poor. So you know, certainly yesterday we 0:03:32.600 --> 0:03:37.160 saw currencies like the Mexican pesso, Brazilian royale, Chile, Columbia, 0:03:37.200 --> 0:03:40.720 et cetera come under pressure as investors really look for 0:03:41.200 --> 0:03:45.000 an option somehow to hedge the risk in Argentina. I 0:03:45.000 --> 0:03:47.760 think it worked yesterday, you know, maybe a little bit today. 0:03:47.800 --> 0:03:51.200 But with each passing day, I think the Argentinian story 0:03:51.560 --> 0:03:55.360 will become increasingly idiosyncratic and it will be harder to 0:03:55.480 --> 0:03:59.080 hedge it using, you know, other countries and other markets. 0:03:59.400 --> 0:04:01.560 Earlier this year, you wrote a column for the Financial 0:04:01.560 --> 0:04:04.560 Times where you said that emerging markets are in a 0:04:04.760 --> 0:04:08.560 sweet spot, and certainly that came to fruition and returns 0:04:08.600 --> 0:04:12.160 with emerging markets debt outperforming us risk of your securities. 0:04:12.160 --> 0:04:15.960 I'm wondering, from your perspective, is that sweet spot over? 0:04:16.279 --> 0:04:19.599 Have we sort of closed that out? Yeah? I don't 0:04:19.600 --> 0:04:21.840 think it's quite over. I mean, if you look at 0:04:21.880 --> 0:04:25.560 the returns year to did you know sovereign external debt, 0:04:25.640 --> 0:04:28.000 you know, we're up twelve and a half percent. Local 0:04:28.040 --> 0:04:32.040 currency markets were up percent. I think probably the lion's 0:04:32.040 --> 0:04:35.279 share of the returns have already come and gone so 0:04:35.400 --> 0:04:39.280 far in emerging markets this year, but between nine year end, 0:04:39.360 --> 0:04:42.400 we still think there'll be incremental positive returns for for 0:04:42.480 --> 0:04:45.279 e M debt investors. I mean, it's it's not a 0:04:45.360 --> 0:04:49.200 perfect asset class. We've seen this horrible story in Argentina 0:04:49.279 --> 0:04:52.360 over the weekend. You know, em is still suffering from 0:04:52.520 --> 0:04:55.839 softening global growth. We've still got the threat of you know, 0:04:56.000 --> 0:04:59.520 US trying to cheer trade tarts, etcetera. But you know, 0:04:59.560 --> 0:05:02.120 there's there's in lots of parallels with with last year, 0:05:02.160 --> 0:05:03.880 you know, the big sell off and e M in 0:05:04.000 --> 0:05:08.080 summer eighteen, but there are also some notable differences. You know, 0:05:08.120 --> 0:05:11.600 the industrate environment globally is a lot more favorable this year, 0:05:11.960 --> 0:05:14.640 and we'll be seeing that the Fed and other central 0:05:14.640 --> 0:05:17.560 banks cut interest rates. So you know, yields have been 0:05:17.600 --> 0:05:21.160 falling generally in the G ten world. Investors have been 0:05:21.160 --> 0:05:25.400 looking towards emerging markets as summer that has an attractive 0:05:25.480 --> 0:05:28.719 yield and a spread that that will offer them them 0:05:28.760 --> 0:05:32.400 some returns. So I don't think the sweet story is 0:05:32.440 --> 0:05:34.640 that the sweet spot is is quite over. You know, 0:05:34.640 --> 0:05:37.719 we're also seeing stimulus from the Chinese authorities as well, 0:05:38.080 --> 0:05:41.720 but I think probably most of the returns for nineteen 0:05:41.760 --> 0:05:45.000 have already been witnessed. Yeah, talking about picking up some 0:05:45.120 --> 0:05:48.719 yield and emerging markets. Argentinian A hundred year bonds currently 0:05:48.800 --> 0:05:53.040 almost yield fourteen percent. Are you buying? We're not buying now. 0:05:53.600 --> 0:05:55.840 We think it pays to be cautious and in the 0:05:55.880 --> 0:05:59.200 ear term. As I mentioned earlier, the two biggest risks 0:05:59.240 --> 0:06:01.680 this year in argent You for us, we're really politics 0:06:01.680 --> 0:06:05.360 and positioning. And politics has clearly played out with the 0:06:05.360 --> 0:06:09.720 primary result in Sunday. But the positioning overhang that technical 0:06:10.240 --> 0:06:13.400 is it's still quite awkward for investors. It's been crowded, 0:06:13.800 --> 0:06:16.679 it's been a popular trade. I think the market still 0:06:16.720 --> 0:06:20.800 needs to find a balancing clearing level for for both 0:06:20.839 --> 0:06:24.240 bonds and for currencies. So we think that positioning and 0:06:24.320 --> 0:06:28.120 technical angle will continue to to weigh in Argentina in 0:06:28.160 --> 0:06:32.159 the short term and more medium term. It does offer, 0:06:32.240 --> 0:06:35.360 you know, an interesting opportunity. The bonds, I guess are done, 0:06:35.360 --> 0:06:38.400 you know, points in the last kind of one and 0:06:38.440 --> 0:06:43.120 a half days were very quickly moving towards the scenario 0:06:43.200 --> 0:06:47.120 where default is you know, getting towards priced in by 0:06:47.160 --> 0:06:50.200 the market, with you know, bonds trading below fifty cents 0:06:50.200 --> 0:06:53.000 in the dollar today, so you know, a lot of 0:06:53.040 --> 0:06:55.200 bad news has been priced in. We think in the 0:06:55.279 --> 0:06:58.320 near term bonds are probably at risk of drifting further 0:06:58.400 --> 0:07:01.000 lower and by you know, as we get down to 0:07:01.080 --> 0:07:04.000 the forties and some of these Argentinean dollar bonds, and 0:07:04.040 --> 0:07:06.760 you start to think about recovery values and kind of 0:07:06.800 --> 0:07:09.320 the assets that the country has, I think, you know, 0:07:09.320 --> 0:07:11.880 over the media in term it could be an interesting opportunity, 0:07:11.920 --> 0:07:14.240 but but certainly not in the short term. Where else 0:07:14.280 --> 0:07:17.000 are you buying just quickly thirty seconds? Yeah, I mean 0:07:17.200 --> 0:07:19.520 our highest conviction and e m that at the minute 0:07:19.560 --> 0:07:22.320 is on the local currency side. You know, inflation and 0:07:22.360 --> 0:07:25.400 growth has been falling in a number of countries and 0:07:25.440 --> 0:07:27.800 many markets have got you know, steep yield curves and 0:07:28.080 --> 0:07:31.840 pretty attractive real yields. So we really like local currency bonds, 0:07:31.880 --> 0:07:37.520 and you know, countries like China, Russia, Indonesia, Serbia, Peru, etcetera. 0:07:37.600 --> 0:07:40.120 Love these countries were expecting to see more interest rate 0:07:40.160 --> 0:07:42.960 cuts from central banks, and we think the risk premium 0:07:43.040 --> 0:07:45.800 is is pretty attractive even at these levels. Paul Greer, 0:07:45.880 --> 0:07:48.480 thank you so much for spending the time, wonderful speaking 0:07:48.480 --> 0:07:51.840 with you. Paul Greers, portfolio manager focusing on emerging markets, 0:07:51.880 --> 0:07:55.480 debt and f X for Fidelity International, joining us from 0:07:55.480 --> 0:08:08.640 our London studios. How do you trade this market? The 0:08:08.720 --> 0:08:12.360 key question facing so many portfolio managers today. We're going 0:08:12.440 --> 0:08:14.960 to post that question to Grady Briquette. He's a portfolio 0:08:14.960 --> 0:08:17.680 manager at diamond Hill Capital Management, joining us here in 0:08:17.720 --> 0:08:21.000 our interactive broker studio. So, Grady, one key question here 0:08:21.000 --> 0:08:24.480 as markets get whipside, who's trading? Are you out there 0:08:24.520 --> 0:08:28.240 actively trading these headlines? Thanks for having me. We're not. 0:08:28.480 --> 0:08:32.840 So we take a strategic approach to the portfolio construction. 0:08:33.600 --> 0:08:36.840 We my team and I meet on a on a 0:08:36.840 --> 0:08:39.040 scheduled basis to decide what we want to buy and 0:08:39.040 --> 0:08:40.440 what we want to sell, and it's really based on 0:08:40.520 --> 0:08:45.200 valuation and our expectations for future fundamental fundamentals of each business. 0:08:45.720 --> 0:08:48.959 So a day like today, you it's unlikely that you'd 0:08:48.960 --> 0:08:51.439 see us make any any big changes, if if any 0:08:51.520 --> 0:08:54.560 changes at all. So Diamond Hill Capital Management, overseeing twenty 0:08:54.559 --> 0:08:58.000 three billion dollars normally in Columbus, Ohio. Grady, I'm wondering 0:08:58.040 --> 0:09:00.480 if you're saying, and so many people are saying, we're 0:09:00.480 --> 0:09:03.160 not trading this, In fact, we're trading less. Are you 0:09:03.240 --> 0:09:07.120 trading less due to some of the geopolitical uncertainty and 0:09:07.280 --> 0:09:12.520 the backdrop of the trade tensions. Well, if we we 0:09:12.559 --> 0:09:16.280 would trade less if we don't see relative valuation opportunities. 0:09:16.320 --> 0:09:19.880 If we saw relative evaluation opportunities emerge as a result 0:09:19.920 --> 0:09:23.080 of these issues, then we might allocate more. So, for instance, 0:09:23.080 --> 0:09:26.920 if we saw China become relatively attractive compared to Europe 0:09:27.040 --> 0:09:29.160 or some of the other markets, we might start to 0:09:29.200 --> 0:09:31.920 allocate more to China. Right now, we have a larger 0:09:31.960 --> 0:09:34.920 allocation to the UK because first a couple of years now, 0:09:34.960 --> 0:09:37.439 we've we've felt that the valuations in the UK attractive. 0:09:37.679 --> 0:09:39.760 But on a day to day basis, we're gonna we're 0:09:39.760 --> 0:09:42.040 gonna step back and breathe and uh and look and 0:09:42.080 --> 0:09:44.360 make sure that we're comfortable buying more of the businesses 0:09:44.360 --> 0:09:46.520 that we own as they get cheaper. So when did 0:09:46.600 --> 0:09:49.520 you start buying UK? Oh? We started? We we we've 0:09:49.559 --> 0:09:52.839 We've always allocated the UK since the funds inception. Um, 0:09:53.000 --> 0:09:56.439 but we we we I'd say we increase the weight 0:09:56.600 --> 0:10:00.600 over time right after the initial vote to to leave 0:10:00.640 --> 0:10:03.320 the European Union, and how how are you accessing it 0:10:03.440 --> 0:10:06.240 with bonds? Stocks? So we're so in the international fund, 0:10:06.280 --> 0:10:08.680 we're all equity, all equity. And one thing that you 0:10:08.720 --> 0:10:11.400 mentioned in a note recently was it's reasonable to expect 0:10:11.440 --> 0:10:16.080 seven to nine percent annualized returns for global equities over 0:10:16.160 --> 0:10:19.920 the next ten years. I'm wondering how that can be 0:10:20.080 --> 0:10:23.360 given the fact that so much of the growth has 0:10:23.400 --> 0:10:26.760 already been front loaded, priced in, and sort of juiced 0:10:26.880 --> 0:10:28.960 by the central banks. Do you ever get pushed back 0:10:29.360 --> 0:10:32.640 on that that that yield target? I just did from 0:10:32.640 --> 0:10:34.400 one of my colleagues when I presented it to you. 0:10:34.920 --> 0:10:37.280 All right, so what did you say? Well, so my 0:10:37.360 --> 0:10:39.199 answer is, right now, when I look at our portfolio, 0:10:39.200 --> 0:10:41.160 and I'm using our portfolio as a proxy for for 0:10:41.200 --> 0:10:45.000 global equities because we are global portfolio, the dividend yield 0:10:45.080 --> 0:10:47.800 right now is about two point six percent. I think 0:10:47.800 --> 0:10:50.920 the valuations are reasonable now, some some markets are more 0:10:51.559 --> 0:10:53.599 valuations are more stretched than others. I would argue the 0:10:53.679 --> 0:10:55.679 US is one of the more stretched markets in terms 0:10:55.720 --> 0:10:58.640 of just statistical valuation. UM. But I think that you 0:10:58.720 --> 0:11:02.560 get three percent uh real GDP growth, and you get 0:11:02.600 --> 0:11:04.720 a couple of percentage points of earnings growth on top 0:11:04.720 --> 0:11:07.439 of that through share by backs, that operating efficiencies. So 0:11:07.480 --> 0:11:11.520 you've got five percent on the on the earnings growth potential, 0:11:11.800 --> 0:11:13.480 and then you've got another two at two point six 0:11:13.480 --> 0:11:16.000 percent DIVEN yields. That's that's right at eight percent. The 0:11:16.040 --> 0:11:19.040 idea of predicting out ten years at a time of 0:11:19.240 --> 0:11:23.040 you know, tweets and things moving uh really quickly depending 0:11:23.120 --> 0:11:26.160 on the headline of the day is mind boggling. And 0:11:26.200 --> 0:11:30.640 I wonder how sensitive your returns prediction is to a 0:11:30.800 --> 0:11:34.680 trade deal or some sort of kind of global order 0:11:34.840 --> 0:11:36.679 staying the same way that it is right now. So 0:11:36.720 --> 0:11:38.680 again this is this is my base case, and so 0:11:38.720 --> 0:11:40.680 there's certain enter tails around that and you can see 0:11:40.679 --> 0:11:43.400 return and we have seen historical returns be much higher 0:11:43.440 --> 0:11:45.880 and much lower. UM. I think that if you get 0:11:46.080 --> 0:11:48.840 a negative sentiment in the market that compresses valuations, than 0:11:48.880 --> 0:11:51.199 our forward tenure return would be higher. And if you 0:11:51.200 --> 0:11:54.640 get positive sentiment that causes valuations to stretch further than 0:11:54.640 --> 0:11:57.640 there are today that I would expect my return expectations 0:11:57.679 --> 0:12:00.000 to go down, but on a tenure basis, it's more 0:12:00.000 --> 0:12:03.400 about the current dividend yield and earnings growth expectations. Do 0:12:03.440 --> 0:12:06.960 you expect a recession anytime soon? I think within the 0:12:06.960 --> 0:12:09.720 tenure time frame that I mentioned, But in the next 0:12:09.760 --> 0:12:13.679 and the next day, in the next year, uh, potentially 0:12:13.679 --> 0:12:17.160 earnings some earnings pressure, but but a true recession, global recession, 0:12:17.200 --> 0:12:19.920 I don't personally see it. What about emerging markets? I 0:12:19.960 --> 0:12:22.000 think emerging markets can be attractive. The way that we 0:12:22.080 --> 0:12:25.640 typically access that is through developed market companies that have 0:12:25.760 --> 0:12:29.680 strong exposure to emerging markets. So like a b NBEV Ashmore, 0:12:29.760 --> 0:12:32.320 which is a UK asset manager that's emerging market debt 0:12:32.360 --> 0:12:35.959 manager UM Diagio and so we understand that we're out 0:12:35.960 --> 0:12:38.360 on the ground and emerging markets as a team, so 0:12:38.440 --> 0:12:40.560 we want to access companies with good management teams who 0:12:40.640 --> 0:12:43.280 have people on the ground to understand those markets well. 0:12:43.400 --> 0:12:47.240 Any areas you're absolutely avoiding well UM. Fortunately we haven't 0:12:47.240 --> 0:12:49.559 been allocated to Argentina on a direct basis, although we 0:12:49.600 --> 0:12:52.240 do have exposure through COPA Airlines. They have seven percent 0:12:52.240 --> 0:12:55.000 of the revenue from Argentina. UM any market where we 0:12:55.040 --> 0:12:58.319 see very high inflation and unstable political environments, we tend 0:12:58.400 --> 0:13:00.920 to tend to avoid. Great cat Thank you so much 0:13:00.920 --> 0:13:03.640 for being here. Grady brick Hats, portfolio manager at Diamond 0:13:03.720 --> 0:13:08.160 Hil Capital Management, overseeing twenty three billion dollars, joining us 0:13:08.240 --> 0:13:22.560 here in New York. Try to check in with Bloomberg Opinion. 0:13:22.600 --> 0:13:25.560 We're joined by the Bloomberg Opinion Commnst. Max Neeson. Uh. 0:13:25.720 --> 0:13:29.240 There have been recent proposals out of the Trump administration's 0:13:29.320 --> 0:13:33.040 headquarters that perhaps the way to lower prices on prescription 0:13:33.120 --> 0:13:36.280 drugs in the United States is simply to import drugs 0:13:36.480 --> 0:13:38.520 from Canada. Can you just give us a little bit 0:13:38.600 --> 0:13:42.480 more about the proposal. Yeah, absolutely so. It's basically a 0:13:42.559 --> 0:13:45.719 two part proposal, One that that states and wholesalers and 0:13:45.760 --> 0:13:50.679 pharmacies can apply to HHS to basically give them a 0:13:50.800 --> 0:13:55.240 proposal for importing certain subsets of drugs from Canada, which 0:13:55.240 --> 0:13:57.520 has lower prices than we do, if they can prove 0:13:57.600 --> 0:13:59.400 that it's going to be safe for consumers for them 0:13:59.440 --> 0:14:01.360 to do so. The other one, which is a little 0:14:01.360 --> 0:14:03.800 bit more puzzling, is that drug makers would be able 0:14:03.880 --> 0:14:07.319 to import their own medicines from another country. That part 0:14:07.400 --> 0:14:09.559 I basically ignore because it doesn't make any sense to me. 0:14:10.280 --> 0:14:14.199 But um, the issue, as always with drug pricing is 0:14:14.280 --> 0:14:17.199 that although this sounds good, you know you have lower 0:14:17.280 --> 0:14:19.720 price in an other country. If you bring those drugs in, 0:14:19.840 --> 0:14:22.960 it's good for consumers, it brings in competition, it brings 0:14:23.040 --> 0:14:26.320 the price down. But it's it's more complicated because in 0:14:26.480 --> 0:14:29.760 order to actually do this, you need Canadian wholesalers and 0:14:29.840 --> 0:14:33.040 the government of Canada to cooperate, and they have no 0:14:33.200 --> 0:14:36.120 incentive whatsoever to do So why not more business, more 0:14:36.160 --> 0:14:39.720 profits because they depend on on drug makers to actually 0:14:39.800 --> 0:14:44.760 provide those medicines, and the price differential in the US 0:14:45.240 --> 0:14:48.240 is basically the most valuable thing in the world for 0:14:48.360 --> 0:14:51.200 the pharmaceutical industry, the fact that they can charge higher 0:14:51.240 --> 0:14:54.160 prices here. They will do whatever they can to preserve it. 0:14:54.480 --> 0:14:58.120 And if that means basically cutting off drug supply for 0:14:58.240 --> 0:15:02.120 Canadian wholesalers that that start importing drugs in the United States, 0:15:02.360 --> 0:15:05.600 they may very well do so. Um. So you know, 0:15:05.680 --> 0:15:08.800 they really relies on drug makers to cooperate in a 0:15:08.920 --> 0:15:12.200 scheme that would cost them money in the long run, 0:15:12.320 --> 0:15:15.760 and I don't I don't expect them to do that. Yeah, Max, 0:15:15.920 --> 0:15:17.880 here's what I'm struggling with. We have been talking about 0:15:17.920 --> 0:15:20.800 prescription drug prices for decades, right, I mean, this has 0:15:20.840 --> 0:15:23.880 been an issue for a really long time. Why has 0:15:23.960 --> 0:15:26.760 there been no material progress and coming up with some 0:15:26.960 --> 0:15:31.480 way to lower drug prices while continuing to encourage uh 0:15:32.000 --> 0:15:37.480 innovation within the pharmaceutical industry. I think it's because there's 0:15:37.520 --> 0:15:40.160 such a lobby on the second part of that thing 0:15:40.400 --> 0:15:43.360 where or it's become sort of this perceived wisdom for 0:15:43.560 --> 0:15:46.640 for a lot of politicians that anything you do to 0:15:47.040 --> 0:15:50.480 to bring down drug prices is going to irrevocably and 0:15:50.640 --> 0:15:55.120 harmfully impact innovation. The reality is is probably something a 0:15:55.200 --> 0:15:57.640 little bit different, and and the problem is, in order 0:15:57.680 --> 0:15:59.760 to actually bring prices down, you really do have to 0:15:59.800 --> 0:16:03.120 make big structural change. You need to do what every 0:16:03.200 --> 0:16:06.000 other developed country in the world does, which is make 0:16:06.240 --> 0:16:10.600 drug approval conditional on and pricing conditional on the value 0:16:10.680 --> 0:16:13.120 it brings to patients, as opposed to the system we 0:16:13.200 --> 0:16:16.440 have right now where negotiating power is so fragmented that 0:16:16.680 --> 0:16:20.440 that that sort of fundamental market action that the real 0:16:20.560 --> 0:16:25.640 competition only happens in limited ways and is specifically prohibited 0:16:25.720 --> 0:16:28.840 from happening in certain government programs. So it's just a mess, 0:16:28.880 --> 0:16:30.400 and there has to be a kind of a fundamental 0:16:30.520 --> 0:16:34.480 shift in in mindset and ambition that's just not happening 0:16:34.600 --> 0:16:36.240 right now. Max. When I talked to a lot of 0:16:36.320 --> 0:16:39.760 investment managers right now, they say that because of the 0:16:39.880 --> 0:16:43.200 trade wars, because of what's going on with geopolitical uncertainty, 0:16:43.560 --> 0:16:47.320 they are piling into healthcare shares in the United States 0:16:47.560 --> 0:16:50.520 because they see that as immune to some of these 0:16:50.600 --> 0:16:53.840 tensions and immune to a potential downturn. People still have 0:16:54.040 --> 0:16:57.600 to spend on their healthcare. Do you think that the 0:16:57.720 --> 0:17:01.240 outlook for healthcare companies right now it's pretty positive or 0:17:01.280 --> 0:17:04.320 do you think that perhaps people are overlooking other issues 0:17:04.400 --> 0:17:07.520 that are facing some of these companies. I think in 0:17:07.640 --> 0:17:10.119 the near to midterm, and and kind of in a 0:17:10.240 --> 0:17:13.720 general macro sense, they're They're probably right in the sense 0:17:13.840 --> 0:17:16.840 that we're not going to see a significant health reform, 0:17:16.920 --> 0:17:18.960 which is kind of the health or drug press reform, 0:17:19.040 --> 0:17:21.680 which is the real only real threat to that sort 0:17:21.720 --> 0:17:25.399 of thesis, at least until you know, the after the 0:17:25.480 --> 0:17:28.000 next election, and who knows that how that's going to 0:17:28.080 --> 0:17:30.720 go in the first place. Um, you know, the things 0:17:30.760 --> 0:17:32.639 that we're seeing out of the sentence out of Congress 0:17:32.800 --> 0:17:36.000 right now, would definitely have an impact on on drugmakers 0:17:36.040 --> 0:17:39.320 and potentially on providers as well. Speaking about UM, basically 0:17:39.359 --> 0:17:42.600 an effort to reform how Medicare pays for drugs and 0:17:43.080 --> 0:17:47.000 to crimp surprise bills from from hospitals. But those are 0:17:47.080 --> 0:17:51.359 all sort of incremental changes, especially when compared to the 0:17:51.520 --> 0:17:54.359 more ambitious reform efforts you're you're just seeing proposed by 0:17:54.440 --> 0:17:58.280 by Democrats that are running for president UM. In order 0:17:58.359 --> 0:18:01.000 to kind of pass those those larger efforts at reform, 0:18:01.240 --> 0:18:04.640 they basically have to throw put aside any other political 0:18:04.720 --> 0:18:10.240 priority and also have a very specific outcome in Congress 0:18:10.240 --> 0:18:12.239 as well in the next year's elections. So they may 0:18:12.320 --> 0:18:14.879 not be too far off. It's cynical, but but they 0:18:14.960 --> 0:18:17.280 may be right. And just real quick here in general, 0:18:17.520 --> 0:18:21.760 is the idea that healthcare companies are somewhat recession immune. 0:18:22.240 --> 0:18:26.800 Is that accurate? It historically has been the case. You know, 0:18:27.359 --> 0:18:29.400 as you said, you know, people are going to get 0:18:29.440 --> 0:18:31.800 sick no matter what. People are going to have to 0:18:31.840 --> 0:18:34.520 pay for healthcare no matter what. And at the end 0:18:34.560 --> 0:18:36.119 of the day, there are there are these sort of 0:18:36.240 --> 0:18:39.360 safety net programs that even if people do lose their 0:18:39.440 --> 0:18:43.520 jobs or lose some part of discretionary income, they're they're 0:18:43.520 --> 0:18:46.080 going to fall back on those There there is at 0:18:46.119 --> 0:18:49.240 the margin an impact. You know, there's more uncompensated care. 0:18:49.680 --> 0:18:53.000 People choose to you know, not fill prescriptions that they 0:18:53.080 --> 0:18:55.399 might otherwise feel if they they were seeing you know, 0:18:55.480 --> 0:18:57.480 they had jobs that they were seeing wage growth. But 0:18:57.880 --> 0:19:01.120 you know, relative to other parts of the economy, when 0:19:01.280 --> 0:19:04.800 when things go badly, healthcare does does generally turn out 0:19:04.800 --> 0:19:06.720 to be a lot safer. Max Neeson, thank you so 0:19:06.840 --> 0:19:09.800 much for being with us today. Max Neeson is biotech, pharma, 0:19:09.840 --> 0:19:13.040 and healthcare columnist for Bloomberg Opinion. Read all his columns, 0:19:13.040 --> 0:19:15.639 They're fantastic. You can read them at O. P I 0:19:15.880 --> 0:19:18.000 N Go on the Bloomberg or you can read them 0:19:18.040 --> 0:19:32.000 at Bloomberg dot com Slash Opinion. Right now, we are 0:19:32.119 --> 0:19:36.400 talking so much about the shift from active fund management 0:19:36.480 --> 0:19:41.040 to passive fund management at a time of index outperformance, 0:19:41.119 --> 0:19:43.399 but there really is a more important question, which is 0:19:43.880 --> 0:19:46.840 what's behind this shift? And joining us now Michelle Sites 0:19:47.000 --> 0:19:50.040 She's chairman and chief executive officer of Russell Investments, which 0:19:50.160 --> 0:19:54.679 oversees two hundred and ninety billion dollars of assets. Michelle 0:19:54.760 --> 0:19:57.600 joins us here in our eleven three oh studios or 0:19:57.600 --> 0:20:00.320 interactive broker studios. Michelle, I want to pull this to 0:20:00.440 --> 0:20:02.760 you because I think it's more important to view this 0:20:03.119 --> 0:20:06.280 shift in light of the drivers than it is the 0:20:06.359 --> 0:20:09.160 shift itself. So what do you think is behind the move? 0:20:09.560 --> 0:20:13.359 Right well throughout my career, but also at Russell Investments, 0:20:13.560 --> 0:20:17.199 you know, the touchstone always is the clients and whatever 0:20:17.320 --> 0:20:20.360 the client's problems are or where the industry is going 0:20:20.440 --> 0:20:23.280 to go. And so at the moment, the problem is 0:20:23.520 --> 0:20:26.920 more people are concerned about going broke than they are dying. 0:20:27.359 --> 0:20:30.720 We're living longer, and we have a massive underfunding of 0:20:30.920 --> 0:20:34.760 pension plans. dB plans are being frozen or shut down 0:20:34.880 --> 0:20:37.800 going to d C. So you have this massive shift 0:20:38.359 --> 0:20:43.080 from institutions providing for retirements to individuals having to provide 0:20:43.359 --> 0:20:46.800 for their own retirements. That is driving down in a 0:20:46.920 --> 0:20:51.440 low return environment, driving down the costs of what we've 0:20:51.480 --> 0:20:54.600 all we all used to do. And so that is 0:20:54.640 --> 0:20:59.159 a byproduct passive to active. Active from passive, etcetera. Is 0:20:59.240 --> 0:21:02.320 a byproduct of really trying to solve a root problem, 0:21:02.400 --> 0:21:05.400 which is the retirement crisis. So some people would turn 0:21:05.440 --> 0:21:07.400 that on its head and say, as people get more 0:21:07.600 --> 0:21:10.600 aware of the income that they get, they become more 0:21:10.640 --> 0:21:13.160 aware of the fees they're paying out, and because they're 0:21:13.200 --> 0:21:17.040 not able to necessarily prove outperformance, some of these active 0:21:17.080 --> 0:21:20.920 funds investors are fleeing. Do you think that that narrative 0:21:21.200 --> 0:21:24.480 is accurate? That simply put, Yes, as people get more 0:21:24.560 --> 0:21:26.200 focused on the fact that they've got to make money 0:21:26.240 --> 0:21:30.040 on their money, they realize that the human managers aren't 0:21:30.040 --> 0:21:32.440 aren't doing the job. Yeah, no, that's that's a very 0:21:32.560 --> 0:21:36.399 accurate depiction as well. Uh, the focus is increasingly on 0:21:36.520 --> 0:21:39.760 the returns that are needed in order for people to 0:21:39.840 --> 0:21:42.719 be able to retire well. And so as the focus 0:21:42.840 --> 0:21:46.320 goes on that, as returns are lower, and the percent 0:21:46.680 --> 0:21:50.439 of the return that we're taking and fees collectively as 0:21:50.520 --> 0:21:53.880 an as an industry needs to go down. Right, When 0:21:53.920 --> 0:21:56.440 you have double digit returns and the average fee is 0:21:56.640 --> 0:21:59.320 one percent or whatever it might be, that's one thing. 0:21:59.400 --> 0:22:01.840 When you have a goal digit returns and it's still 0:22:01.880 --> 0:22:04.240 one percent, that's a very different thing. So what do 0:22:04.320 --> 0:22:08.520 you advise clients as the sort of risk reward factor 0:22:08.720 --> 0:22:12.520 becomes so tenuous where people are less worried about dying 0:22:12.600 --> 0:22:15.240