1 00:00:18,040 --> 00:00:20,720 Speaker 1: Hello, and welcome to The Credit Edge, a weekly markets podcast. 2 00:00:20,840 --> 00:00:23,440 Speaker 1: My name is James Crombie. I'm a senior editor at Bloomberg. 3 00:00:23,800 --> 00:00:26,479 Speaker 1: This week, we're very pleased to welcome Gabriella Santos, chief 4 00:00:26,520 --> 00:00:29,840 Speaker 1: market strategist for the America's at JP Morgan Asset Management. 5 00:00:29,880 --> 00:00:30,760 Speaker 1: How are you, Gabriella. 6 00:00:30,960 --> 00:00:32,959 Speaker 2: I'm doing well. Thank you so much for having. 7 00:00:32,760 --> 00:00:34,040 Speaker 1: Me, Thank you so much for joining us. So we 8 00:00:34,080 --> 00:00:35,720 Speaker 1: very excited to have you on the show. We're also 9 00:00:35,840 --> 00:00:39,199 Speaker 1: delighted to welcome back Rob Schiffman from Bloomberg Intelligence as 10 00:00:39,200 --> 00:00:39,720 Speaker 1: our co host. 11 00:00:39,760 --> 00:00:41,840 Speaker 3: Hello, Rob, Oh, so happy to be here. 12 00:00:42,520 --> 00:00:44,800 Speaker 1: So just to set the scene a bit here, US 13 00:00:44,840 --> 00:00:47,440 Speaker 1: markets are rallying as rates come down, the economy keeps 14 00:00:47,520 --> 00:00:50,680 Speaker 1: chugging along, and investors look forward to a new administration, 15 00:00:50,920 --> 00:00:54,320 Speaker 1: which the bulls think will be very pro growth. Credit 16 00:00:54,360 --> 00:00:56,400 Speaker 1: markets are also on fire, and we've seen a huge 17 00:00:56,440 --> 00:00:58,720 Speaker 1: amount of borrowing by companies, with more to come. In 18 00:00:58,760 --> 00:01:02,120 Speaker 1: twenty twenty five. Private debt in particular has experienced a 19 00:01:02,160 --> 00:01:05,399 Speaker 1: meteoric rise. It's now a one point six trillion dollar market, 20 00:01:05,440 --> 00:01:07,720 Speaker 1: but it could well be worth tens of trillions dollars 21 00:01:07,760 --> 00:01:10,720 Speaker 1: more when you include all of the asset based finance, 22 00:01:11,680 --> 00:01:14,720 Speaker 1: but very tight bond spreads, tons of insuance and rising 23 00:01:14,760 --> 00:01:18,120 Speaker 1: fund inflows. That doesn't mean zero risk in credit markets. 24 00:01:18,440 --> 00:01:21,240 Speaker 1: The Feds started to ease, but yields remain elevated, and 25 00:01:21,280 --> 00:01:24,720 Speaker 1: the stated aims of the next government all sound very inflationary, 26 00:01:25,080 --> 00:01:28,640 Speaker 1: signaling a period of higher for longer interest rates. That 27 00:01:28,720 --> 00:01:31,759 Speaker 1: means high debt costs, which will hurt borrowers across the board, 28 00:01:31,880 --> 00:01:34,480 Speaker 1: especially the weak ones. In the background, we have a 29 00:01:34,520 --> 00:01:37,399 Speaker 1: lot of geopolitical risk, which will only be amplified by 30 00:01:37,400 --> 00:01:40,600 Speaker 1: the Trump trade wars. Plus the threat of recession hasn't 31 00:01:40,600 --> 00:01:43,040 Speaker 1: gone away entirely. A downturn would cause a lot of 32 00:01:43,080 --> 00:01:46,200 Speaker 1: distress in credit markets. So what's your view, Garbriella. You 33 00:01:46,280 --> 00:01:48,520 Speaker 1: expect the economy to keep growing and no accession, but 34 00:01:48,520 --> 00:01:50,480 Speaker 1: what about inflation. Surely that's going to be a big 35 00:01:50,520 --> 00:01:52,520 Speaker 1: problem for investors and markets next year. 36 00:01:52,880 --> 00:01:55,760 Speaker 2: So I do think in terms of the base case 37 00:01:55,800 --> 00:01:59,480 Speaker 2: here for next year, it's really looking like it's a 38 00:01:59,520 --> 00:02:03,000 Speaker 2: pretty good but pretty solid economy. We like to call 39 00:02:03,000 --> 00:02:05,680 Speaker 2: it our twenty twenty four economy and then take two 40 00:02:05,760 --> 00:02:12,040 Speaker 2: next year, so two percent rounding down growth, no recession 41 00:02:12,040 --> 00:02:15,000 Speaker 2: in the base case, two percent inflation in the base case, 42 00:02:15,520 --> 00:02:19,440 Speaker 2: and four percent unemployment. I do think if we consider 43 00:02:20,639 --> 00:02:22,799 Speaker 2: how that might change next year, a lot of it 44 00:02:22,840 --> 00:02:26,080 Speaker 2: will depend on some of the policies of the new administration, 45 00:02:27,080 --> 00:02:33,960 Speaker 2: especially around taxes, deregulation, immigration, tariffs, and that can help 46 00:02:34,040 --> 00:02:37,360 Speaker 2: us to really nail down the decimal places there. Of 47 00:02:37,400 --> 00:02:41,640 Speaker 2: that twenty twenty four forecast, I do think some of 48 00:02:41,680 --> 00:02:45,400 Speaker 2: it is pro real economic growth, some of it might 49 00:02:45,480 --> 00:02:49,720 Speaker 2: actually depress real economic growth, and some aspects of it 50 00:02:49,800 --> 00:02:52,680 Speaker 2: might be inflationary. So it's not all good, it's not 51 00:02:52,760 --> 00:02:55,359 Speaker 2: all bad, and it will really depend on the scale 52 00:02:55,360 --> 00:02:58,280 Speaker 2: of the scope the sequencing of all of these policies. 53 00:02:59,440 --> 00:03:01,120 Speaker 2: I think it's in listening to note in the bond 54 00:03:01,200 --> 00:03:04,760 Speaker 2: market that yields have moved up fifty basis points since 55 00:03:04,760 --> 00:03:08,880 Speaker 2: we started pricing in the probability of a Republican sweep. 56 00:03:09,840 --> 00:03:12,760 Speaker 2: The majority of the move higher we have seen from 57 00:03:12,840 --> 00:03:15,560 Speaker 2: real yields, which I think is just a signal of 58 00:03:15,880 --> 00:03:20,560 Speaker 2: the more resilient real economic growth side. But we've also 59 00:03:20,680 --> 00:03:23,799 Speaker 2: had to move higher in inflation break events, so that's 60 00:03:23,840 --> 00:03:27,000 Speaker 2: an early sign that inflation is coming back to be 61 00:03:27,120 --> 00:03:29,639 Speaker 2: top of mind, not because of where we are right now, 62 00:03:30,360 --> 00:03:33,480 Speaker 2: but because we're trying to shape those contours next year, 63 00:03:33,880 --> 00:03:36,080 Speaker 2: and that would be very dependent on the policy. 64 00:03:36,800 --> 00:03:38,600 Speaker 1: Can the FED cut rates in December? 65 00:03:39,560 --> 00:03:43,280 Speaker 2: We think for December, And this has been interesting this 66 00:03:43,320 --> 00:03:45,760 Speaker 2: week to hear some of the last FED speak before 67 00:03:45,760 --> 00:03:50,000 Speaker 2: the blackout period for the meeting mid December, and I 68 00:03:50,000 --> 00:03:52,440 Speaker 2: think it was fascinating to see that Governor Waller had 69 00:03:52,480 --> 00:03:55,920 Speaker 2: a speech called cut or Skip, so clearly he knows 70 00:03:56,000 --> 00:03:59,960 Speaker 2: here how to draw in an audience, and he seemed 71 00:03:59,960 --> 00:04:04,120 Speaker 2: to lean on the side of cutting in December. So 72 00:04:04,160 --> 00:04:07,440 Speaker 2: the market's pricing in let's call it, seventy percent chance 73 00:04:07,480 --> 00:04:10,880 Speaker 2: of a cut in December unless something changes with the 74 00:04:10,960 --> 00:04:14,840 Speaker 2: jobs report Friday or CPI next week, that seems doable. 75 00:04:15,400 --> 00:04:17,760 Speaker 2: But I do think the market was right to take 76 00:04:17,800 --> 00:04:19,920 Speaker 2: out a lot of the rate cuts next year. Right. 77 00:04:19,920 --> 00:04:24,320 Speaker 2: We've taken out one hundred basis points of cuts. Really 78 00:04:24,360 --> 00:04:26,920 Speaker 2: we think next year maybe we see another couple of 79 00:04:26,920 --> 00:04:31,080 Speaker 2: twenty five basis points, but it does seem like we're 80 00:04:31,160 --> 00:04:33,120 Speaker 2: likely to see a terminal rate closer to three and 81 00:04:33,160 --> 00:04:36,159 Speaker 2: a half four percent. And I think for credit as 82 00:04:36,279 --> 00:04:41,599 Speaker 2: long as that's coming from primarily more resilient economic growth 83 00:04:41,640 --> 00:04:46,679 Speaker 2: and hence resilient earnings and credit metrics. That's okay, that's good. 84 00:04:46,760 --> 00:04:49,200 Speaker 2: You can still have very tight spreads. You can also 85 00:04:49,200 --> 00:04:51,840 Speaker 2: have equities at all time highs. But I think to 86 00:04:51,880 --> 00:04:55,720 Speaker 2: the extent that maybe you continue seeing interest rate volatility 87 00:04:55,760 --> 00:04:58,760 Speaker 2: and a move higher yields on the curve coming more 88 00:04:58,800 --> 00:05:03,960 Speaker 2: from the inflation side or fiscal concerns. That's one. Maybe 89 00:05:04,080 --> 00:05:07,040 Speaker 2: you can see a bit more of a choppy outlook 90 00:05:07,080 --> 00:05:08,200 Speaker 2: for spreads. 91 00:05:08,880 --> 00:05:11,440 Speaker 3: I do want to drill down deeper on credit, but 92 00:05:11,520 --> 00:05:14,160 Speaker 3: before we get there, I want to get a little 93 00:05:14,160 --> 00:05:17,839 Speaker 3: more insight into your secret sauce because whatever you've been 94 00:05:17,960 --> 00:05:20,840 Speaker 3: dishing out has just been spot on the last few years. 95 00:05:22,120 --> 00:05:25,719 Speaker 3: And I just think you know you've been able to 96 00:05:25,800 --> 00:05:28,800 Speaker 3: pick the right times, the right sub segments of each 97 00:05:28,839 --> 00:05:32,680 Speaker 3: of these markets. But the biggest difference right now is 98 00:05:33,040 --> 00:05:37,520 Speaker 3: this election. And I'm just wondering, with this giant umbrella 99 00:05:37,800 --> 00:05:42,600 Speaker 3: of new changes, in particular people in the cabinet, what 100 00:05:42,640 --> 00:05:47,440 Speaker 3: your thoughts are from a tariff perspective, from a policy perspective, 101 00:05:47,640 --> 00:05:52,159 Speaker 3: that's really going to shape that bigger, broader, generally bullish 102 00:05:52,240 --> 00:05:55,080 Speaker 3: view that you had going into this election. 103 00:05:55,680 --> 00:05:58,200 Speaker 2: So I think the secret sauce for US has been 104 00:05:58,279 --> 00:06:02,520 Speaker 2: really looking much more at the track ends so cyclically 105 00:06:02,640 --> 00:06:05,640 Speaker 2: with the economy, I think the trend here is really 106 00:06:05,680 --> 00:06:08,279 Speaker 2: that we're past the cyclical storm. This is the first 107 00:06:08,640 --> 00:06:10,479 Speaker 2: year that we can really say that, and by that 108 00:06:10,560 --> 00:06:12,760 Speaker 2: we mean all the effects of COVID and the inflation 109 00:06:12,880 --> 00:06:16,160 Speaker 2: shock and the rate shock, and finally the economy is 110 00:06:16,240 --> 00:06:18,920 Speaker 2: just normal and that's a good place to go into 111 00:06:19,000 --> 00:06:21,320 Speaker 2: next year. And then if you look at the trend 112 00:06:21,400 --> 00:06:25,840 Speaker 2: of structural forces, all of this AI and AI adjacent 113 00:06:26,000 --> 00:06:32,480 Speaker 2: adjacent capital investment, that's a powerful force behind business private investment, 114 00:06:32,920 --> 00:06:36,200 Speaker 2: something that we think can help productivity over time. So 115 00:06:36,320 --> 00:06:40,800 Speaker 2: overall it's a pretty resilient foundation, both cyclically and structurally. 116 00:06:41,680 --> 00:06:44,440 Speaker 2: And on top of that, then we overlay policy, and 117 00:06:44,520 --> 00:06:49,279 Speaker 2: I think if we listen to some of the members 118 00:06:49,320 --> 00:06:54,000 Speaker 2: of that have been nominated from the administration, I think 119 00:06:54,080 --> 00:06:59,520 Speaker 2: you can gather, for example, from US Trade Representative Designate 120 00:06:59,640 --> 00:07:04,600 Speaker 2: Jamis and Greer that he and other members of the 121 00:07:04,640 --> 00:07:08,080 Speaker 2: administration really do see tariffs not just as a thread 122 00:07:08,279 --> 00:07:13,200 Speaker 2: or a negotiating tool, but also a policy tool for 123 00:07:13,320 --> 00:07:17,240 Speaker 2: domestic aims and an end in and of itself. And 124 00:07:17,320 --> 00:07:19,920 Speaker 2: so that's what lead us to believe that next year 125 00:07:19,960 --> 00:07:24,680 Speaker 2: we are likely to see early on some tariffs actually implemented. 126 00:07:25,640 --> 00:07:32,080 Speaker 2: If you also listen to other cabinet members within the 127 00:07:32,160 --> 00:07:35,360 Speaker 2: economic sphere, what you also see in terms of target 128 00:07:36,080 --> 00:07:40,960 Speaker 2: it's very much focused on national and economic security and 129 00:07:41,120 --> 00:07:45,600 Speaker 2: especially with relation to China. So for next year, we 130 00:07:45,960 --> 00:07:50,320 Speaker 2: think some of these tariffs are much more just on 131 00:07:50,360 --> 00:07:53,520 Speaker 2: the negotiating camp and those specifically with Mexico, with Canada, 132 00:07:53,520 --> 00:07:57,920 Speaker 2: it's about immigration and getting other getting those countries to 133 00:07:57,960 --> 00:08:01,240 Speaker 2: close the back door to China. Some of those tariff 134 00:08:01,280 --> 00:08:04,560 Speaker 2: proposals are actually also likely to be implemented, and that's 135 00:08:04,640 --> 00:08:08,160 Speaker 2: with regards to China, and here is kind of a 136 00:08:08,200 --> 00:08:12,680 Speaker 2: working base case, subject to revision. We do think it 137 00:08:12,920 --> 00:08:16,080 Speaker 2: can be likely to see about half of the tariffs 138 00:08:16,120 --> 00:08:21,680 Speaker 2: that are being discussed on Chinese goods and here. I 139 00:08:21,720 --> 00:08:24,800 Speaker 2: think it'll all depend on the exclusions. It'll all depend 140 00:08:24,880 --> 00:08:27,720 Speaker 2: on the timing. But that's something that we saw last 141 00:08:27,760 --> 00:08:31,920 Speaker 2: time around. Is something that impacts the type of goods, 142 00:08:31,920 --> 00:08:34,720 Speaker 2: of course that we import from China and here specifically 143 00:08:34,720 --> 00:08:38,960 Speaker 2: intermediate goods, and then this next phase it might even 144 00:08:39,000 --> 00:08:44,040 Speaker 2: involve end consumer goods. This all brings me, it brings 145 00:08:44,120 --> 00:08:47,480 Speaker 2: us to the conclusion that maybe if we think about retail, 146 00:08:47,559 --> 00:08:50,319 Speaker 2: which has been under a lot of pressure the past 147 00:08:50,320 --> 00:08:53,920 Speaker 2: couple of years, is kind of coming out of that storm. Unfortunately, 148 00:08:54,000 --> 00:08:57,680 Speaker 2: it's not clear skies ahead we might see, for example, 149 00:08:57,800 --> 00:09:01,960 Speaker 2: that sector is being particularly impact did by some of 150 00:09:01,960 --> 00:09:05,840 Speaker 2: these potential likely tariffs on Chinese imports. 151 00:09:06,520 --> 00:09:08,439 Speaker 1: What kind of retail that I mean, we're talking about 152 00:09:08,480 --> 00:09:11,760 Speaker 1: all retailing. This seems like the high end consumer is 153 00:09:11,800 --> 00:09:14,160 Speaker 1: still doing fine. Is it the more sort of budget 154 00:09:14,320 --> 00:09:15,360 Speaker 1: stores that are in trouble? 155 00:09:16,240 --> 00:09:19,360 Speaker 2: Yeah, So if we think about what we still import 156 00:09:19,440 --> 00:09:25,640 Speaker 2: from China around consumer goods, it's electronics, for example, it's 157 00:09:25,720 --> 00:09:30,960 Speaker 2: some aspects of clothing, and so here we're we're thinking 158 00:09:31,000 --> 00:09:35,800 Speaker 2: more on the consumer discretionary and consumer durable and non 159 00:09:35,880 --> 00:09:40,560 Speaker 2: durable goods kind of sphere. And I do think, of course, 160 00:09:40,600 --> 00:09:43,440 Speaker 2: this is not the first movie. We've already seen the 161 00:09:43,440 --> 00:09:46,640 Speaker 2: first one in twenty eighteen. We have had a trade 162 00:09:46,640 --> 00:09:48,920 Speaker 2: war one point zero, and we have had an adjustment 163 00:09:48,960 --> 00:09:52,360 Speaker 2: of supply chains since then. And it's very real when 164 00:09:52,360 --> 00:09:54,720 Speaker 2: you look at US imports from China that used to 165 00:09:54,720 --> 00:09:57,760 Speaker 2: be twenty one percent of all of our imports, it's 166 00:09:57,800 --> 00:10:00,760 Speaker 2: now thirteen percent. So to an extent, there has been 167 00:10:00,880 --> 00:10:05,640 Speaker 2: some diversification of these supply chains to Southeast Asia, to 168 00:10:05,720 --> 00:10:09,240 Speaker 2: Mexico to India, but there is still, to an extent 169 00:10:09,400 --> 00:10:12,960 Speaker 2: a certain amount of these types of consumer goods that 170 00:10:13,000 --> 00:10:16,200 Speaker 2: are coming from China. I think at the end of 171 00:10:16,200 --> 00:10:20,199 Speaker 2: the day, it's just accelerates that movement of a China 172 00:10:20,240 --> 00:10:25,640 Speaker 2: plus one strategy for companies and really a manufacturing base 173 00:10:25,720 --> 00:10:29,040 Speaker 2: that's much more localized around where the end consumer is. 174 00:10:29,720 --> 00:10:32,840 Speaker 3: You talk a lot about the growing breadth of the market, 175 00:10:33,760 --> 00:10:35,840 Speaker 3: and it sounds like, you know, there's been a few 176 00:10:35,840 --> 00:10:39,640 Speaker 3: players that's really benefited, but there's a lot more and 177 00:10:39,679 --> 00:10:43,000 Speaker 3: a lot of other sub sectors to benefit. The counter 178 00:10:43,080 --> 00:10:45,920 Speaker 3: though I wonder about China is that when you think 179 00:10:45,920 --> 00:10:51,600 Speaker 3: about AI and just dramatic growth, everything has to go 180 00:10:51,840 --> 00:10:55,440 Speaker 3: through China. Like when you start thinking, like how much 181 00:10:55,880 --> 00:11:00,559 Speaker 3: you think about black Swan type risks that China effectively 182 00:11:00,600 --> 00:11:03,720 Speaker 3: controls everything when it comes to AI, right, you can't 183 00:11:03,720 --> 00:11:08,040 Speaker 3: basically get a semiconductor made unless it's going through something 184 00:11:08,040 --> 00:11:11,640 Speaker 3: that China controls. So how do you take out like, oh, 185 00:11:11,679 --> 00:11:14,360 Speaker 3: there's going to be tariffs on China, but the rest 186 00:11:14,360 --> 00:11:16,240 Speaker 3: of the world doesn't have to worry about it just 187 00:11:16,280 --> 00:11:17,440 Speaker 3: some small sub sectors. 188 00:11:17,960 --> 00:11:21,120 Speaker 2: Yeah, And I think it's that mix of tariffs and 189 00:11:21,280 --> 00:11:26,920 Speaker 2: industrial policy. And I think in the previous Trump administration 190 00:11:27,000 --> 00:11:29,240 Speaker 2: there was more of a focus on the tariff side. 191 00:11:29,559 --> 00:11:34,320 Speaker 2: Under the Biden administration, there's also been some focus on 192 00:11:34,400 --> 00:11:36,920 Speaker 2: tariff and on tariff exclusions, but also on a broader 193 00:11:36,960 --> 00:11:39,240 Speaker 2: industrial policy, and I think it's going to be a 194 00:11:39,240 --> 00:11:43,520 Speaker 2: combination of both from here on out, and especially when 195 00:11:43,559 --> 00:11:46,720 Speaker 2: it comes to semiconductors, which is kind of the perfect 196 00:11:46,800 --> 00:11:51,680 Speaker 2: epicenter of this national security and economic security epicenter since 197 00:11:51,720 --> 00:11:54,840 Speaker 2: it's dual use technology in the military as well as 198 00:11:55,920 --> 00:12:01,600 Speaker 2: consumer and corporate production. And I think really it's it's 199 00:12:01,760 --> 00:12:08,880 Speaker 2: less about our dependence on China directly for semiconductors. I 200 00:12:08,920 --> 00:12:12,760 Speaker 2: think indirectly, the epicenter of this with China really is 201 00:12:12,800 --> 00:12:16,480 Speaker 2: around critical minerals, and China knows it has that lever 202 00:12:17,559 --> 00:12:23,880 Speaker 2: where so many raw materials nickel magnesium come from China, 203 00:12:24,040 --> 00:12:26,760 Speaker 2: and China this morning was using that as a way 204 00:12:26,800 --> 00:12:34,000 Speaker 2: to retaliate against some limits on exports to China. But 205 00:12:34,040 --> 00:12:36,480 Speaker 2: I think it's it's more indirectly through the critical minerals 206 00:12:36,520 --> 00:12:39,800 Speaker 2: where I think industrial policy fits in is more our 207 00:12:39,840 --> 00:12:44,960 Speaker 2: dependence on broader Asia for the manufacturing of semiconductors ninety 208 00:12:44,960 --> 00:12:49,640 Speaker 2: percent in Taiwan for those advanced GPUs, but then an 209 00:12:49,679 --> 00:12:54,440 Speaker 2: additional forty five percent from Korea and Japan when it 210 00:12:54,480 --> 00:12:59,320 Speaker 2: comes to memory semiconductor production. So I think we'll continue 211 00:12:59,320 --> 00:13:03,280 Speaker 2: seeing a lot of industrial policy measures like the Tips Act. 212 00:13:04,120 --> 00:13:06,360 Speaker 2: There'll be a Chips Act two point oh three point 213 00:13:06,360 --> 00:13:09,640 Speaker 2: oh four point oh five point zero to try to 214 00:13:09,720 --> 00:13:16,000 Speaker 2: reshore some of the semiconductor manufacturing capacity. I see the 215 00:13:16,080 --> 00:13:21,120 Speaker 2: relationship with China around semiconductors more from the US side 216 00:13:21,280 --> 00:13:24,719 Speaker 2: in putting up barriers and the transfer of that intelligence 217 00:13:24,800 --> 00:13:29,959 Speaker 2: to China to keep it to slow down its progress. 218 00:13:30,920 --> 00:13:33,840 Speaker 2: And we have seen China about three four years behind 219 00:13:34,360 --> 00:13:38,520 Speaker 2: the US and semiconductor technology, and we have seen the 220 00:13:38,559 --> 00:13:42,280 Speaker 2: Biden administration and likely the Trump administration continue to focus 221 00:13:42,400 --> 00:13:47,760 Speaker 2: on putting some limits around that transfer of technology. 222 00:13:47,559 --> 00:13:49,679 Speaker 3: So from the big picture, you see a lot of 223 00:13:49,720 --> 00:13:54,040 Speaker 3: the tariff conversation is more saber rattling than something that 224 00:13:54,080 --> 00:13:59,720 Speaker 3: could meaningfully disrupt global economies and returns over the next year. 225 00:14:00,080 --> 00:14:04,240 Speaker 2: I think it's part saber rattling but part policy, and 226 00:14:04,320 --> 00:14:08,080 Speaker 2: I think that's the key for investors to identify which ones, 227 00:14:08,120 --> 00:14:10,640 Speaker 2: which I do think if we think about some of 228 00:14:10,640 --> 00:14:13,800 Speaker 2: the proposals, for example, of twenty five percent tariffs on 229 00:14:13,880 --> 00:14:16,720 Speaker 2: Mexico and Canada, that we very much think is a 230 00:14:16,720 --> 00:14:20,600 Speaker 2: negotiating tactic. If we think about it, a company like 231 00:14:20,760 --> 00:14:23,960 Speaker 2: General Motors, fifty five percent of the truck sold in 232 00:14:24,000 --> 00:14:26,800 Speaker 2: the US are imported in sixty percent of those from 233 00:14:26,840 --> 00:14:30,320 Speaker 2: Mexico and Canada. So that's just an example something that's 234 00:14:30,320 --> 00:14:36,200 Speaker 2: truly disruptive economically speaking, unlikely to happen. We also saw 235 00:14:36,240 --> 00:14:40,320 Speaker 2: this the first time around, and Mexico was able to 236 00:14:40,360 --> 00:14:43,160 Speaker 2: give a little bit on the immigration front, and hence 237 00:14:43,600 --> 00:14:47,320 Speaker 2: we got the new USMCA deal and NOE tariffs I posed, 238 00:14:48,120 --> 00:14:50,320 Speaker 2: So that one, I think is much more about negotiation. 239 00:14:50,720 --> 00:14:53,800 Speaker 2: I think the ones with regards to China, that's where 240 00:14:53,840 --> 00:14:57,120 Speaker 2: we're likely to see in ourview, about half of them 241 00:14:57,320 --> 00:15:01,760 Speaker 2: actually implemented, because it it's really part of a broader, 242 00:15:02,960 --> 00:15:06,680 Speaker 2: I think by partisan view of a competition with China 243 00:15:07,160 --> 00:15:10,800 Speaker 2: from here on out. So that impacts our view of 244 00:15:10,880 --> 00:15:15,840 Speaker 2: Chinese growth next year. At face value, it's something that 245 00:15:15,880 --> 00:15:19,400 Speaker 2: could shave off one two percentage points from China's annual 246 00:15:19,400 --> 00:15:22,720 Speaker 2: GDP growth of course, it has ways to counteract that. 247 00:15:22,800 --> 00:15:26,480 Speaker 2: We're likely to see more physical stimulus from China. We're 248 00:15:26,520 --> 00:15:29,640 Speaker 2: likely to see weakness in the Chinese yuan to partly 249 00:15:29,720 --> 00:15:33,840 Speaker 2: offset the increase in tariffs, so that can help at 250 00:15:34,000 --> 00:15:37,920 Speaker 2: least offset some of that downward pressure on economic growth, 251 00:15:37,960 --> 00:15:41,600 Speaker 2: but not all. And this is what leaves us thinking 252 00:15:41,640 --> 00:15:47,080 Speaker 2: that within international markets, within emerging markets especially, we prefer 253 00:15:47,160 --> 00:15:51,480 Speaker 2: to focus on stories where there are other structural drivers 254 00:15:51,520 --> 00:15:54,840 Speaker 2: in place that are not dependent on the cyclical recovery 255 00:15:54,880 --> 00:15:58,000 Speaker 2: here from China or from Europe, which is very much 256 00:15:58,040 --> 00:15:59,920 Speaker 2: an indirect play on China. 257 00:16:01,560 --> 00:16:03,600 Speaker 1: One of the reasons we're really excited to have you 258 00:16:03,680 --> 00:16:06,120 Speaker 1: in the studio in New York, Gariela, is that you 259 00:16:06,160 --> 00:16:08,880 Speaker 1: have a really broad mandate. You see a lot of things. 260 00:16:08,960 --> 00:16:10,400 Speaker 1: I don't know how you find time for all of it. 261 00:16:10,440 --> 00:16:13,760 Speaker 1: But talk to us a bit about how credit fits 262 00:16:13,800 --> 00:16:17,640 Speaker 1: into a portfolio more, you know, versus equity versus other things. 263 00:16:17,680 --> 00:16:19,440 Speaker 1: People in credit that we have on this show talk 264 00:16:19,480 --> 00:16:23,120 Speaker 1: about equity like returns in areas of private credit, and 265 00:16:23,160 --> 00:16:25,760 Speaker 1: you know, some of the more arcane parts of this market. 266 00:16:26,280 --> 00:16:30,479 Speaker 1: But what from an outside perspective, what is the opportunity 267 00:16:30,720 --> 00:16:33,280 Speaker 1: in corporate credit right now for a global investor. 268 00:16:33,800 --> 00:16:37,200 Speaker 2: Thank you. And actually it's been really exciting time in 269 00:16:37,240 --> 00:16:40,400 Speaker 2: fixed income markets, not just for the volatility and interest 270 00:16:40,480 --> 00:16:42,800 Speaker 2: rates and all this discussion of the FED, but also 271 00:16:44,200 --> 00:16:47,720 Speaker 2: exciting time in terms of what it brings to portfolio construction. 272 00:16:49,000 --> 00:16:51,640 Speaker 2: I grew up in Brazil. I study emerging markets. That's 273 00:16:51,680 --> 00:16:54,320 Speaker 2: where I focus my research on, and fixed income, of 274 00:16:54,480 --> 00:16:57,840 Speaker 2: course is a key part of you know, any investor's allocation. 275 00:16:58,440 --> 00:17:02,280 Speaker 2: And in the US it used to be about equities, equity, equity, equity, 276 00:17:02,360 --> 00:17:05,880 Speaker 2: and then finally now that we have some more normal, 277 00:17:06,040 --> 00:17:09,440 Speaker 2: positive real rates again, I feel like it's it's become 278 00:17:09,520 --> 00:17:13,199 Speaker 2: much more of a balanced conversation. You know, if you 279 00:17:13,240 --> 00:17:15,600 Speaker 2: want to take risk, is it better to take it 280 00:17:15,640 --> 00:17:18,840 Speaker 2: in the equity market and the corporate credit market? How 281 00:17:18,840 --> 00:17:21,240 Speaker 2: can you balance total return and income. There's a lot 282 00:17:21,280 --> 00:17:25,399 Speaker 2: to play for. It's actually quite an exciting time, especially 283 00:17:25,440 --> 00:17:29,879 Speaker 2: for institutional clients. If you're a pension and insurance company, 284 00:17:30,560 --> 00:17:33,520 Speaker 2: you're actually fully funded now you can actually meet your 285 00:17:33,800 --> 00:17:36,800 Speaker 2: return targets, and you can do that by de risking, 286 00:17:37,400 --> 00:17:42,400 Speaker 2: by allocating more to fixed income, including corporate credit. We're 287 00:17:42,440 --> 00:17:46,680 Speaker 2: also starting to see more retail individual investors get a 288 00:17:46,720 --> 00:17:50,040 Speaker 2: bit more excited about fixed income, kind of leaving behind 289 00:17:50,080 --> 00:17:52,840 Speaker 2: the memory of those that bear market and fixed income 290 00:17:52,840 --> 00:17:56,440 Speaker 2: in twenty twenty two and start getting excited about building 291 00:17:56,440 --> 00:18:00,919 Speaker 2: a more core fixed income allocation. When it comes to 292 00:18:02,200 --> 00:18:05,880 Speaker 2: corporate credit in the traditional sense, investment grade, high yield, 293 00:18:06,200 --> 00:18:10,159 Speaker 2: I think the double digit you know, equity like returns, 294 00:18:11,200 --> 00:18:14,159 Speaker 2: A good part of that is probably behind us. With 295 00:18:14,240 --> 00:18:17,840 Speaker 2: think credit spreads. If you think about valuations are incredibly 296 00:18:17,880 --> 00:18:22,000 Speaker 2: incredibly tight, but they can stay tight given those good 297 00:18:22,040 --> 00:18:25,880 Speaker 2: fundamentals we talked about. It's more just expecting the return 298 00:18:26,000 --> 00:18:29,320 Speaker 2: to come from the carry, and the carry's pretty good. 299 00:18:29,840 --> 00:18:32,680 Speaker 2: Five five and a half percent in investment grades, seven 300 00:18:32,800 --> 00:18:35,399 Speaker 2: seven and a half percent in high yield. That's not bad. 301 00:18:36,840 --> 00:18:40,359 Speaker 2: And so if you think about the fundamentals looking good, 302 00:18:41,440 --> 00:18:45,159 Speaker 2: spreads looking tight, but all in income looking attractive, if 303 00:18:45,160 --> 00:18:48,320 Speaker 2: you think about the technicals, then as that third thing 304 00:18:48,359 --> 00:18:51,720 Speaker 2: we focus on, we're likely to continue seeing a lot 305 00:18:51,880 --> 00:18:56,720 Speaker 2: of demand for credit from institutional and more and more 306 00:18:56,760 --> 00:18:59,640 Speaker 2: from individual as well. And we still think next year 307 00:18:59,680 --> 00:19:01,639 Speaker 2: can be a year where you have more demand that 308 00:19:01,760 --> 00:19:06,280 Speaker 2: actual issuance coming online. So a similar backdrop to this 309 00:19:06,359 --> 00:19:09,000 Speaker 2: year in that respect, I've. 310 00:19:08,800 --> 00:19:13,600 Speaker 3: Heard you talk a lot about taking credit risk versus duration, 311 00:19:14,160 --> 00:19:17,640 Speaker 3: and I'm just wondering, like, recognizing how tight spreads are, 312 00:19:17,880 --> 00:19:20,960 Speaker 3: what does that mean in terms of how far down 313 00:19:21,320 --> 00:19:26,280 Speaker 3: the credit curve are you suggesting people go, And where's 314 00:19:26,320 --> 00:19:31,320 Speaker 3: that cut off between real credit risk and relative returns, 315 00:19:31,480 --> 00:19:35,080 Speaker 3: particularly for total rate of return managers who just don't 316 00:19:35,119 --> 00:19:36,639 Speaker 3: have that extra juice to play with. 317 00:19:37,400 --> 00:19:39,679 Speaker 2: Yeah, So I think when you are in an environment 318 00:19:39,720 --> 00:19:42,919 Speaker 2: where you have such tight spreads, you should listen to 319 00:19:43,000 --> 00:19:46,399 Speaker 2: it in the sense that it suggests that there's little 320 00:19:46,480 --> 00:19:50,120 Speaker 2: room for error there in terms of the market overall 321 00:19:50,240 --> 00:19:54,280 Speaker 2: or specific issuances. And so I think that's the environment 322 00:19:54,440 --> 00:19:58,840 Speaker 2: where it's really, really, really important to take credit risk 323 00:19:58,920 --> 00:20:02,399 Speaker 2: by focusing on credit selection right, to actually think through 324 00:20:02,920 --> 00:20:06,080 Speaker 2: what's going on in specific sectors, specific names, because there 325 00:20:06,160 --> 00:20:10,120 Speaker 2: is little room prayerr. But what credit spreads don't tell 326 00:20:10,200 --> 00:20:14,480 Speaker 2: us is that there's actual reason for a red traffic 327 00:20:14,560 --> 00:20:18,320 Speaker 2: light here, or reason to avoid altogether the acid class 328 00:20:18,400 --> 00:20:21,600 Speaker 2: if those fundamentals are there, which they are, and if 329 00:20:21,640 --> 00:20:25,359 Speaker 2: those all in yields are still attractive and additive to 330 00:20:25,440 --> 00:20:30,119 Speaker 2: portfolio construction, which which they are at this moment. So 331 00:20:30,240 --> 00:20:33,320 Speaker 2: when we think about where we take risk. Is it 332 00:20:33,359 --> 00:20:36,639 Speaker 2: in the equity market, is it in corporate credit? To 333 00:20:36,640 --> 00:20:39,800 Speaker 2: be honest, neither one is a screaming cheap option. Right. 334 00:20:41,119 --> 00:20:44,199 Speaker 2: Spreads are tight, equities are at all time highs with 335 00:20:44,240 --> 00:20:47,520 Speaker 2: a twenty two time pe. So it's hard to say, 336 00:20:47,600 --> 00:20:49,919 Speaker 2: let's overweight credit at the expensive equities. 337 00:20:51,160 --> 00:20:53,399 Speaker 3: Is there a credit bucket you prefer, you know, triple 338 00:20:53,440 --> 00:20:55,120 Speaker 3: c's over triple. 339 00:20:54,800 --> 00:20:59,760 Speaker 2: B's, And so I think what's interesting is earlier this year, 340 00:21:00,640 --> 00:21:04,000 Speaker 2: last year, when we were still worried about, you know, 341 00:21:04,400 --> 00:21:07,800 Speaker 2: the possibility of a hard landing, it was very much 342 00:21:08,040 --> 00:21:12,480 Speaker 2: up in quality investment grade over high yield, highest rated possible. 343 00:21:13,000 --> 00:21:16,080 Speaker 2: I think now that we've arrived we have a soft landing, 344 00:21:16,160 --> 00:21:19,520 Speaker 2: we know that it's more just shaping the contours. There 345 00:21:19,640 --> 00:21:22,760 Speaker 2: is the confidence to take a little bit more risk 346 00:21:22,920 --> 00:21:26,480 Speaker 2: within credit. So maybe, for example, for high yield, not 347 00:21:26,640 --> 00:21:30,920 Speaker 2: stay solely focused on double b's, Maybe look at single bee. 348 00:21:32,440 --> 00:21:34,680 Speaker 2: I don't think it's the environment though, to be looking 349 00:21:34,760 --> 00:21:39,679 Speaker 2: at triple c's. It's not that kind of nirvana economy. 350 00:21:39,720 --> 00:21:44,040 Speaker 2: It's a good, good enough and good corporate profits. But 351 00:21:44,160 --> 00:21:47,600 Speaker 2: that's still where you're likely to see a mild increase 352 00:21:47,640 --> 00:21:51,200 Speaker 2: in defaults, which right now are very very low and 353 00:21:51,240 --> 00:21:53,879 Speaker 2: we think could reach closer to two percent, but exclusively 354 00:21:53,920 --> 00:21:57,480 Speaker 2: in the triple sea bucket. So maybe a good happy 355 00:21:57,520 --> 00:22:01,000 Speaker 2: medium between recognizing the resiliance and so the economy, but 356 00:22:01,160 --> 00:22:05,399 Speaker 2: being aware of certain headwinds we've spoken about is to 357 00:22:05,440 --> 00:22:07,360 Speaker 2: focus more on that single bee bucket. 358 00:22:08,119 --> 00:22:10,640 Speaker 1: Even in that bucket though the low rated single bees, 359 00:22:10,680 --> 00:22:15,080 Speaker 1: you know, they've they've got very high funding costs relatively speaking, 360 00:22:15,160 --> 00:22:17,760 Speaker 1: and as we've talked about, rates aren't really going to 361 00:22:17,800 --> 00:22:19,280 Speaker 1: go down as fast as a little and we're hoping 362 00:22:19,520 --> 00:22:22,320 Speaker 1: next year, so they're kind of, you know, potentially going 363 00:22:22,359 --> 00:22:24,280 Speaker 1: to hit the wall. Some of them might get helped 364 00:22:24,320 --> 00:22:28,320 Speaker 1: out by private credit. Others, you know, maybe not distressed, 365 00:22:28,880 --> 00:22:31,240 Speaker 1: maybe not bankruptcy, maybe not default. But you know, there 366 00:22:31,240 --> 00:22:33,919 Speaker 1: are a lot more liability management deals going out there, 367 00:22:33,960 --> 00:22:35,840 Speaker 1: a lot more so called credits are on credit of violence. 368 00:22:35,840 --> 00:22:38,040 Speaker 1: There's a lot more risk, it seems, you know, maybe 369 00:22:38,040 --> 00:22:40,919 Speaker 1: it's all lawyer work at this point, but how do 370 00:22:40,960 --> 00:22:42,160 Speaker 1: you kind of factor all that in? 371 00:22:42,560 --> 00:22:44,440 Speaker 2: And I think that brings us to the point about 372 00:22:44,520 --> 00:22:48,280 Speaker 2: security selection. Right when you have expensive valuations, when you 373 00:22:48,400 --> 00:22:53,160 Speaker 2: have you know, normal rates for longer, that's the environment 374 00:22:53,160 --> 00:22:57,240 Speaker 2: where there's actual real value add in thinking through which 375 00:22:57,240 --> 00:23:00,000 Speaker 2: ones are stressed, which ones aren't, where there's value where 376 00:23:00,080 --> 00:23:03,879 Speaker 2: there isn't, and that goes beyond just the sector level, 377 00:23:03,920 --> 00:23:08,600 Speaker 2: but at a true security name level. I think in 378 00:23:08,680 --> 00:23:12,720 Speaker 2: terms of the Raids conversation, I would make two points 379 00:23:12,760 --> 00:23:15,080 Speaker 2: that give us a little bit more comfort that we're 380 00:23:15,119 --> 00:23:18,960 Speaker 2: not at the beginning of a broader, more ominous credit 381 00:23:19,040 --> 00:23:23,840 Speaker 2: cycle here. The first is it's been really impressive to 382 00:23:23,840 --> 00:23:26,439 Speaker 2: see and we have this fabulous chart that shows that 383 00:23:26,480 --> 00:23:29,720 Speaker 2: it's really more of a credit mountain rather than a 384 00:23:29,760 --> 00:23:35,639 Speaker 2: credit wall, including in high yield, where we have a 385 00:23:35,760 --> 00:23:38,560 Speaker 2: pickup over the next few years, but a very moderate 386 00:23:38,640 --> 00:23:44,040 Speaker 2: pickup in terms of actual maturity and refinancing at higher rates. 387 00:23:45,200 --> 00:23:47,120 Speaker 2: The second thing that gives us a lot of comfort 388 00:23:47,200 --> 00:23:52,200 Speaker 2: actually is private markets, right, whether it's plenty of demand 389 00:23:52,200 --> 00:23:55,360 Speaker 2: in public markets and if not at not the right 390 00:23:55,400 --> 00:23:59,679 Speaker 2: price and conditions, then the private markets are there. And 391 00:23:59,760 --> 00:24:03,280 Speaker 2: this actually includes both for high yields and for investment grade, 392 00:24:04,040 --> 00:24:08,200 Speaker 2: which private managers are trying to move into more and more. 393 00:24:08,600 --> 00:24:12,159 Speaker 2: And I think that's been a secret weapon here for 394 00:24:13,119 --> 00:24:15,600 Speaker 2: this cycle where we've had this move higher in rates, 395 00:24:15,600 --> 00:24:18,000 Speaker 2: but we've seen less of a transmission, less of a 396 00:24:18,080 --> 00:24:21,920 Speaker 2: disruption into the economy and credit markets. I think a 397 00:24:21,960 --> 00:24:25,600 Speaker 2: big reason is that the liquidity was there, including from 398 00:24:25,640 --> 00:24:26,480 Speaker 2: private markets. 399 00:24:27,520 --> 00:24:29,280 Speaker 3: I'm sorry, you know we are hearing a lot more 400 00:24:29,280 --> 00:24:35,240 Speaker 3: about bespoke type of private high grade credit type of deals, 401 00:24:35,240 --> 00:24:37,679 Speaker 3: and that's definitely growing. I'm interested going back to your 402 00:24:37,680 --> 00:24:42,359 Speaker 3: comment though about more demand next year than supply, and 403 00:24:42,440 --> 00:24:46,679 Speaker 3: I wonder how that plays in to access, availability and 404 00:24:46,720 --> 00:24:49,760 Speaker 3: cost the capital. In terms of what your thoughts are 405 00:24:50,040 --> 00:24:52,520 Speaker 3: on M and A for next year, it would seem 406 00:24:52,640 --> 00:24:57,360 Speaker 3: like it would increase significantly, And also if there's even 407 00:24:57,359 --> 00:25:01,960 Speaker 3: a bigger private credit ROLEMA expanding beyond to going back 408 00:25:02,000 --> 00:25:05,680 Speaker 3: to maybe not the golden tastes of LBOs, but having 409 00:25:05,840 --> 00:25:09,200 Speaker 3: more leverage transaction that we've seen over the last few years, 410 00:25:09,200 --> 00:25:13,639 Speaker 3: and how you manage that from both offensive and defensive perspective. 411 00:25:13,880 --> 00:25:16,800 Speaker 2: Yes, and you mentioned a second important risk for this 412 00:25:17,320 --> 00:25:21,359 Speaker 2: positive view we have for next year. The first we 413 00:25:21,440 --> 00:25:24,760 Speaker 2: had discussed previously around interest rate volatility related to inflation 414 00:25:24,920 --> 00:25:29,760 Speaker 2: and fiscal concerns. The second one is around exactly how 415 00:25:29,840 --> 00:25:31,959 Speaker 2: much of an M and A pickup are we going 416 00:25:32,000 --> 00:25:36,200 Speaker 2: to see? And here specifically thinking of large mega deals 417 00:25:36,560 --> 00:25:41,880 Speaker 2: that need to be financed through large issues. And here 418 00:25:41,960 --> 00:25:45,520 Speaker 2: is where I think one of the policy aspects that's 419 00:25:45,600 --> 00:25:49,320 Speaker 2: much talked about certainly is this focus on less regulation. 420 00:25:49,760 --> 00:25:54,160 Speaker 2: Under this new administration versus the previous one, we are 421 00:25:54,359 --> 00:25:57,720 Speaker 2: likely to see businesses have a bit more confidence in 422 00:25:58,359 --> 00:26:03,520 Speaker 2: pursuing deals as a result. But I think it's not 423 00:26:03,680 --> 00:26:07,120 Speaker 2: quite the environment where we just expect a fire hose 424 00:26:07,320 --> 00:26:13,040 Speaker 2: of large deals and issuance coming day one. So that's 425 00:26:13,040 --> 00:26:15,120 Speaker 2: a risk if we do see that, But if it's 426 00:26:15,119 --> 00:26:17,280 Speaker 2: something where there's a slight pickup in M and A 427 00:26:17,440 --> 00:26:22,760 Speaker 2: in certain sectors and especially more of mid small range, 428 00:26:22,840 --> 00:26:26,080 Speaker 2: and that's something that can be absorbed by a tremendous 429 00:26:26,080 --> 00:26:28,520 Speaker 2: amount of demand. And here it's important to think on 430 00:26:28,520 --> 00:26:31,919 Speaker 2: the demand not just from the US investor base, but 431 00:26:32,000 --> 00:26:36,879 Speaker 2: also internationally. We talked about tariffs and kind of the 432 00:26:37,320 --> 00:26:43,200 Speaker 2: challenge globally. I do think still US corporate credit markets 433 00:26:43,240 --> 00:26:47,359 Speaker 2: are by far the best option when we look at 434 00:26:47,400 --> 00:26:51,240 Speaker 2: global corporate credit markets, and with still attractive all anials, 435 00:26:51,280 --> 00:26:55,160 Speaker 2: that means still pretty decent international demand for that debt. 436 00:26:56,520 --> 00:27:01,439 Speaker 2: The last thing you mentioned leverage buyouts, one thing we 437 00:27:02,359 --> 00:27:04,920 Speaker 2: hear thinking about the secret sauce and thinking about the trends. 438 00:27:06,400 --> 00:27:11,119 Speaker 2: I think companies investors have really come to understand that 439 00:27:11,200 --> 00:27:15,720 Speaker 2: this really is a normal for longer environment. And maybe 440 00:27:15,760 --> 00:27:17,520 Speaker 2: you know, we took out one hundred basis points of 441 00:27:17,520 --> 00:27:20,919 Speaker 2: FED rate cuts, but we're still talking about an elevated 442 00:27:21,040 --> 00:27:25,440 Speaker 2: rate environment, and one that's not just here and now, 443 00:27:25,600 --> 00:27:28,800 Speaker 2: but really a feature of this next cycle. And that 444 00:27:28,920 --> 00:27:32,119 Speaker 2: leads us to believe for new private equity deals that 445 00:27:32,119 --> 00:27:36,920 Speaker 2: there will be a bit more structurally less leverage embedded 446 00:27:36,960 --> 00:27:39,679 Speaker 2: in them, and so that also gives us a bit 447 00:27:39,720 --> 00:27:40,440 Speaker 2: of comfort there. 448 00:27:40,600 --> 00:27:42,879 Speaker 3: It's so funny just hearing the phrase normal for longer. 449 00:27:42,880 --> 00:27:46,439 Speaker 3: If you turn on any news program, it certainly doesn't 450 00:27:46,440 --> 00:27:50,200 Speaker 3: seem like it's anything is normal these days. So interesting 451 00:27:50,240 --> 00:27:52,640 Speaker 3: from a financial perspective that you can get that much 452 00:27:52,720 --> 00:27:53,720 Speaker 3: level of comfort. 453 00:27:53,400 --> 00:27:56,080 Speaker 2: From a rates environment, right, We've been here before, and 454 00:27:56,119 --> 00:27:59,760 Speaker 2: it's actually for a good reason. We entitled our Long 455 00:27:59,840 --> 00:28:05,520 Speaker 2: Term Our long Term Capital Market Assumptions p IS Healthier Foundations, 456 00:28:05,640 --> 00:28:08,439 Speaker 2: because that's ultimately why we think we have higher rates 457 00:28:08,560 --> 00:28:12,200 Speaker 2: is because we've finally broke through that malaise we had 458 00:28:12,280 --> 00:28:17,160 Speaker 2: of weak nominal growth that needed low rates, emergency medicine 459 00:28:17,280 --> 00:28:20,199 Speaker 2: and we're past that. We actually the economy not just 460 00:28:20,240 --> 00:28:24,159 Speaker 2: survived higher rates, but thrived even despite higher rates. And 461 00:28:24,240 --> 00:28:26,720 Speaker 2: I think that that's an environment where you can get 462 00:28:26,760 --> 00:28:29,840 Speaker 2: income and you can also take risk within credit to 463 00:28:29,880 --> 00:28:30,199 Speaker 2: get it. 464 00:28:30,320 --> 00:28:31,680 Speaker 3: You know, one of the things I heard you talk 465 00:28:31,680 --> 00:28:35,560 Speaker 3: about pre election was again this broadening of the growth 466 00:28:35,680 --> 00:28:38,920 Speaker 3: environment and how AI was maybe the epicenter, but it 467 00:28:39,040 --> 00:28:44,000 Speaker 3: expanded beyond that places like healthcare or utilities. I think 468 00:28:44,040 --> 00:28:46,080 Speaker 3: the trouble, at least from the credit side, at least 469 00:28:46,120 --> 00:28:49,640 Speaker 3: that I see, is that it's dominated by a handful 470 00:28:50,080 --> 00:28:55,440 Speaker 3: of super highly rated, super tightly trading names. So like, 471 00:28:55,600 --> 00:28:57,160 Speaker 3: how do you take advantage of that? What are the 472 00:28:57,200 --> 00:28:59,360 Speaker 3: sub sectors? What are the spots you can go to 473 00:29:00,040 --> 00:29:04,360 Speaker 3: as a credit as a credit investor to take advantage 474 00:29:04,400 --> 00:29:07,680 Speaker 3: of that expansion of growth beyond MAG seven. 475 00:29:07,840 --> 00:29:10,560 Speaker 2: And that's such an important point at the top line, 476 00:29:10,840 --> 00:29:15,000 Speaker 2: you know, we have nearly ten percent earnings growth expected 477 00:29:15,040 --> 00:29:18,320 Speaker 2: this year. Last year wasn't as bad as people thought, 478 00:29:18,840 --> 00:29:21,160 Speaker 2: But really the big story last year and early this 479 00:29:21,240 --> 00:29:25,200 Speaker 2: year was how concentrated that earnings growth was exclusively in 480 00:29:25,240 --> 00:29:28,800 Speaker 2: the MAG seven. So made sense that they did so well, 481 00:29:29,280 --> 00:29:32,360 Speaker 2: but really the big story that's been taking shape the 482 00:29:32,400 --> 00:29:35,640 Speaker 2: second half of this year into next year is really 483 00:29:35,680 --> 00:29:40,720 Speaker 2: the earnings recovery in other sectors. And finally, we have 484 00:29:40,840 --> 00:29:44,040 Speaker 2: about depends on the quarter of between eight and nine 485 00:29:44,120 --> 00:29:48,560 Speaker 2: sectors reporting positive earnings growth again, so it really is 486 00:29:48,800 --> 00:29:52,320 Speaker 2: a broadening out based on a broadening out of actual 487 00:29:53,320 --> 00:29:56,880 Speaker 2: corporate earnings and corporate health. One of the things that's 488 00:29:56,960 --> 00:29:59,680 Speaker 2: encouraging to see is we seem to have had a 489 00:29:59,720 --> 00:30:02,600 Speaker 2: body being out in the margin contraction, which had been 490 00:30:02,600 --> 00:30:05,160 Speaker 2: the issue for two years for a lot of sectors, 491 00:30:05,560 --> 00:30:08,440 Speaker 2: and we're back to trend, which is a board drifting 492 00:30:09,120 --> 00:30:13,240 Speaker 2: margin for US companies. The risk there for next year 493 00:30:13,280 --> 00:30:15,200 Speaker 2: and beyond, we think is more on the top line. 494 00:30:16,320 --> 00:30:20,840 Speaker 2: How much more ability to pass on colls or raise 495 00:30:20,920 --> 00:30:25,320 Speaker 2: prices do different companies and sectors have, But overall it's 496 00:30:25,360 --> 00:30:29,960 Speaker 2: still a resilient and a broader earnings path from here, 497 00:30:30,000 --> 00:30:32,840 Speaker 2: we think, including not just large cap but also mid 498 00:30:32,920 --> 00:30:37,240 Speaker 2: cap and small cap. I think in terms of sectors, 499 00:30:38,120 --> 00:30:41,000 Speaker 2: one that we feel has really turned the quarter more 500 00:30:41,040 --> 00:30:47,120 Speaker 2: broadly is financials. So if we think about the trend 501 00:30:47,280 --> 00:30:50,960 Speaker 2: over the last year or so, it's been very heavily 502 00:30:51,280 --> 00:30:55,160 Speaker 2: favorable for very large banks, and now we seem to 503 00:30:55,200 --> 00:31:01,440 Speaker 2: be finally seeing your more super regional, regional mid size 504 00:31:01,480 --> 00:31:05,720 Speaker 2: banks also turning the corner in terms of profitability, So 505 00:31:05,840 --> 00:31:09,600 Speaker 2: less pressure right on deposits as rates have come down 506 00:31:09,680 --> 00:31:12,360 Speaker 2: and banks are able to pass that on at the 507 00:31:12,440 --> 00:31:15,080 Speaker 2: same time that there's hope for a bit more loan 508 00:31:15,160 --> 00:31:20,600 Speaker 2: growth and at still pretty elevated levels. And so financials 509 00:31:20,640 --> 00:31:26,160 Speaker 2: is one here specifically think of US financials, not necessarily 510 00:31:26,240 --> 00:31:30,120 Speaker 2: you know, Yankee banks. It's more of a US story, 511 00:31:31,040 --> 00:31:34,840 Speaker 2: is one that plays very nicely into that economic resilience 512 00:31:35,040 --> 00:31:37,920 Speaker 2: normal for longer and earning's breath coming back. 513 00:31:38,600 --> 00:31:40,760 Speaker 1: Is it not still a commercial real estate hit to 514 00:31:40,840 --> 00:31:41,959 Speaker 1: come for those banks. 515 00:31:42,680 --> 00:31:45,680 Speaker 2: So it's been interesting to see signs that actually commercial 516 00:31:45,720 --> 00:31:51,080 Speaker 2: real estate seems to be bottoming and turning around. And 517 00:31:51,440 --> 00:31:54,640 Speaker 2: here we see that in the work we do in 518 00:31:54,680 --> 00:32:00,000 Speaker 2: alternatives that a lot of the pain, the markdowns really 519 00:32:00,200 --> 00:32:03,120 Speaker 2: were felt for the last two years or so, and 520 00:32:03,480 --> 00:32:07,280 Speaker 2: some did that more heavily than others. And that actually, 521 00:32:07,560 --> 00:32:10,880 Speaker 2: now when we think about net new absorption from it's 522 00:32:10,920 --> 00:32:14,360 Speaker 2: turned from deeply negative to less bad. And that's good. 523 00:32:14,960 --> 00:32:18,920 Speaker 2: That's a sign of an inflection point, and that's a 524 00:32:19,000 --> 00:32:21,760 Speaker 2: sign to us that actually maybe the worst of what 525 00:32:21,920 --> 00:32:25,880 Speaker 2: could have come from commercial real estate. Maybe we've seen 526 00:32:26,560 --> 00:32:30,960 Speaker 2: doesn't mean there won't be issues, but that they're understood, 527 00:32:31,080 --> 00:32:34,640 Speaker 2: the activity is turning around and that actually there could 528 00:32:34,640 --> 00:32:40,240 Speaker 2: be some less clouds going forward than we've had for 529 00:32:40,360 --> 00:32:40,920 Speaker 2: a while now. 530 00:32:41,080 --> 00:32:44,360 Speaker 3: We Siri maybe is just symbol of though of like 531 00:32:44,480 --> 00:32:46,720 Speaker 3: all the things that might be able to go wrong, 532 00:32:46,800 --> 00:32:50,720 Speaker 3: Like what are the couple biggest risks? To your view, 533 00:32:50,800 --> 00:32:53,440 Speaker 3: I think from the again, from the bottoms up, spreads 534 00:32:53,480 --> 00:32:56,520 Speaker 3: are so tight, people are constantly asking like what's cheap? 535 00:32:56,880 --> 00:32:59,800 Speaker 3: What should we get long? And we have that conversation 536 00:33:00,120 --> 00:33:02,680 Speaker 3: lot you sort of own everything, you own the sector, 537 00:33:03,080 --> 00:33:05,440 Speaker 3: you ride, the carry But from a name perspective, it 538 00:33:05,480 --> 00:33:07,320 Speaker 3: seems like there's so many things can go wrong. From 539 00:33:07,360 --> 00:33:10,280 Speaker 3: the big picture, what do you worry about? What are 540 00:33:10,320 --> 00:33:11,560 Speaker 3: you toss and turn about at night? 541 00:33:12,520 --> 00:33:16,080 Speaker 2: So we toss in turn at night less about the 542 00:33:16,120 --> 00:33:19,960 Speaker 2: cyclical structural trend here, which we've talked about is pretty good, 543 00:33:21,200 --> 00:33:24,960 Speaker 2: But we think more about the shocks that can knock 544 00:33:25,040 --> 00:33:28,360 Speaker 2: us off kilter, because if you think about, you know, 545 00:33:28,520 --> 00:33:31,160 Speaker 2: the last twenty five years in the US, we've only 546 00:33:31,160 --> 00:33:34,480 Speaker 2: had two recessions, and they've been big shocks. That got 547 00:33:34,560 --> 00:33:38,880 Speaker 2: us there financial crisis and then of course the pandemic. Otherwise, 548 00:33:38,960 --> 00:33:43,120 Speaker 2: this is a pretty large, steady ship that just kind 549 00:33:43,120 --> 00:33:46,400 Speaker 2: of keeps chugging along. So what kind of shock could 550 00:33:46,440 --> 00:33:51,960 Speaker 2: we see that really knocks confidence and hence leads to 551 00:33:52,040 --> 00:33:58,400 Speaker 2: a big business retrenchment and then eventually consumer retrenchment. I 552 00:33:58,400 --> 00:34:01,400 Speaker 2: think it takes a lot. It takes lot these days. Actually, 553 00:34:02,960 --> 00:34:06,680 Speaker 2: we do worry a bit around this conversation we were 554 00:34:06,720 --> 00:34:10,960 Speaker 2: having earlier around tariffs and trade, and here it will 555 00:34:11,080 --> 00:34:14,040 Speaker 2: very much just depend on the scale and scope of it. 556 00:34:15,520 --> 00:34:17,920 Speaker 2: Maybe we are wrong, and actually it's not just a 557 00:34:18,000 --> 00:34:21,319 Speaker 2: negotiating tactic. We actually do see universal tariffs, or we 558 00:34:21,320 --> 00:34:25,719 Speaker 2: see tariffs on our main partners, Canada and Mexico. That's 559 00:34:25,760 --> 00:34:31,640 Speaker 2: something that could be particularly disruptive for autos and consumer electronics. 560 00:34:32,760 --> 00:34:34,600 Speaker 2: So we do worry about that. That could be a 561 00:34:34,640 --> 00:34:38,200 Speaker 2: shock to business confidence, to gapex, to hiring of course, 562 00:34:38,239 --> 00:34:42,919 Speaker 2: to margins and corporate fundamentals. The other one we spend 563 00:34:43,000 --> 00:34:46,799 Speaker 2: time thinking about around policy is just the debt and 564 00:34:46,840 --> 00:34:51,600 Speaker 2: deficit trajectory. We think we've seen a ceiling around five percent, 565 00:34:52,440 --> 00:34:55,320 Speaker 2: but we'll have to see and that'll very much depend 566 00:34:55,360 --> 00:34:59,640 Speaker 2: on the tax bill next year. I think investors understand 567 00:34:59,719 --> 00:35:02,399 Speaker 2: we'll have the extension of the twenty seventeen Tax Cuts 568 00:35:02,440 --> 00:35:05,480 Speaker 2: and Jobs Act provisions that are set to expire. But 569 00:35:05,520 --> 00:35:09,960 Speaker 2: do we get additional fiscal cuts on top of that, 570 00:35:10,640 --> 00:35:12,920 Speaker 2: and is that something that comes to bite again and 571 00:35:13,080 --> 00:35:17,200 Speaker 2: leads to yields disruptively moving higher and higher again, and 572 00:35:17,239 --> 00:35:19,640 Speaker 2: then it brings about the concerns all over again about 573 00:35:19,719 --> 00:35:23,720 Speaker 2: financing risk and about just the possibility of a hard landing. 574 00:35:24,360 --> 00:35:27,640 Speaker 1: Just back to private credit briefly, Gariella, you mentioned earlier. 575 00:35:27,680 --> 00:35:32,360 Speaker 1: Obviously it's good for issuers borrowers have another lever to 576 00:35:32,400 --> 00:35:35,479 Speaker 1: pull if they need financing. But on the other side, 577 00:35:35,520 --> 00:35:38,240 Speaker 1: you know, it's particularly good opportunity, it seems for investors 578 00:35:38,280 --> 00:35:40,080 Speaker 1: who are getting you know, high yields, and you know, 579 00:35:40,120 --> 00:35:43,040 Speaker 1: they have to sacrifice liquidity and maybe transparency, you know. 580 00:35:43,080 --> 00:35:45,080 Speaker 1: So there's a lot of excitement about it. We've had 581 00:35:45,120 --> 00:35:48,920 Speaker 1: some large investment firms on this show recently. You've just 582 00:35:49,000 --> 00:35:53,680 Speaker 1: told us that it's not worth the extra risk, that 583 00:35:53,719 --> 00:35:55,680 Speaker 1: there isn't enough pick up between the two markets. I'm 584 00:35:55,680 --> 00:35:58,759 Speaker 1: interested in your sort of relative value views of you know, 585 00:35:58,920 --> 00:36:02,040 Speaker 1: private versus public To this point, that's. 586 00:36:01,920 --> 00:36:04,719 Speaker 2: An excellent question, and I think we'll continue talking them 587 00:36:05,000 --> 00:36:07,920 Speaker 2: about them equally. They're roughly the same size these days, 588 00:36:08,600 --> 00:36:13,440 Speaker 2: high yield leverage loans, private credit, and so equally important 589 00:36:13,440 --> 00:36:16,560 Speaker 2: and accessible more and more to all types of investors. 590 00:36:17,400 --> 00:36:19,719 Speaker 2: So when we think about the yields pick up that 591 00:36:19,760 --> 00:36:23,200 Speaker 2: one can find and direct lending in private credit about 592 00:36:23,280 --> 00:36:26,920 Speaker 2: on average ten percent, so it's not bad, but you 593 00:36:26,960 --> 00:36:30,440 Speaker 2: know it, how yield is competitive at around seven and 594 00:36:30,440 --> 00:36:32,680 Speaker 2: a half, leverage loans around eight and a half. I 595 00:36:32,719 --> 00:36:34,920 Speaker 2: think one of the things that we think about in 596 00:36:35,000 --> 00:36:38,120 Speaker 2: private credit is actually this idea, and this is true 597 00:36:38,160 --> 00:36:42,680 Speaker 2: of alternatives broadly, right, this idea that yes, you give 598 00:36:42,760 --> 00:36:45,680 Speaker 2: up liquidity, and for that you get a certain premium, right, 599 00:36:45,719 --> 00:36:49,319 Speaker 2: you do get a certain yield pickup, and that actually, 600 00:36:49,680 --> 00:36:53,800 Speaker 2: if you're able to stomach that ill liquidity, it actually 601 00:36:53,840 --> 00:36:56,920 Speaker 2: works in your favor because one of the things that 602 00:36:57,239 --> 00:37:01,040 Speaker 2: you're getting from private credit is a person relationship with 603 00:37:01,080 --> 00:37:04,360 Speaker 2: the borrower and the ability to do what we've already 604 00:37:04,360 --> 00:37:07,799 Speaker 2: started to see, which is a mend and extend. And 605 00:37:08,239 --> 00:37:10,680 Speaker 2: of course you don't want a business that's clearly failing 606 00:37:10,760 --> 00:37:13,920 Speaker 2: to just kick the can down the road. But in 607 00:37:13,960 --> 00:37:17,000 Speaker 2: this current environment, where there has been multiple shocks that 608 00:37:17,040 --> 00:37:19,560 Speaker 2: have come on board and maybe a business just needs 609 00:37:20,200 --> 00:37:25,399 Speaker 2: a bridge to the other side. Having that personal relationship 610 00:37:25,400 --> 00:37:28,080 Speaker 2: with direct lending and private credit more broadly actually is 611 00:37:28,239 --> 00:37:31,000 Speaker 2: something that's helpful not just for the borrower but also 612 00:37:31,120 --> 00:37:34,080 Speaker 2: for the investor. And so far that seems to be 613 00:37:34,120 --> 00:37:38,320 Speaker 2: all that we're seeing. We do monitor, you can monitor 614 00:37:38,480 --> 00:37:42,200 Speaker 2: a mend and extend activity in the private credit market. 615 00:37:42,560 --> 00:37:45,440 Speaker 2: It has ticked up, but within the bounds of normal, 616 00:37:46,760 --> 00:37:49,359 Speaker 2: so still suggesting to us that it's looking pretty good, 617 00:37:49,400 --> 00:37:54,200 Speaker 2: and as long as the economy and earnings remain pretty good, 618 00:37:54,280 --> 00:37:56,360 Speaker 2: then that's all there is. And there's actually been a 619 00:37:56,360 --> 00:38:00,520 Speaker 2: benefit to having that illiquidity. But we do worry a 620 00:38:00,560 --> 00:38:02,920 Speaker 2: little bit. There are a lot of new private credit 621 00:38:02,960 --> 00:38:06,400 Speaker 2: funds and maybe you know, the two hundredth fund is 622 00:38:06,440 --> 00:38:10,920 Speaker 2: not as good as fund number five or ten. So 623 00:38:11,040 --> 00:38:13,400 Speaker 2: of course this doesn't apply to every single one, but 624 00:38:13,560 --> 00:38:14,960 Speaker 2: generally speaking, we'd. 625 00:38:14,800 --> 00:38:18,480 Speaker 1: Also given this intense competition for a limited pool of assets, 626 00:38:18,920 --> 00:38:22,200 Speaker 1: do you expect that sort of arbitrage this differential between 627 00:38:22,200 --> 00:38:24,399 Speaker 1: the private, private and public which sounds like it's two 628 00:38:24,440 --> 00:38:26,880 Speaker 1: hundred fifty base points, does that get squeezed in the process. 629 00:38:28,200 --> 00:38:31,000 Speaker 2: I think it will depend on the evolution also of 630 00:38:31,040 --> 00:38:35,000 Speaker 2: the type of lending, because what used to be really 631 00:38:35,200 --> 00:38:40,080 Speaker 2: just you know, to finance leverage, buyout or in your 632 00:38:40,239 --> 00:38:45,080 Speaker 2: distressed or high yield market now has ambitions to move 633 00:38:45,320 --> 00:38:49,080 Speaker 2: much more into the investment grade space. And so eventually 634 00:38:49,160 --> 00:38:53,360 Speaker 2: is the right comparison high yield or more of a 635 00:38:53,600 --> 00:38:59,200 Speaker 2: mix between high rated, high yield low level investment grade. 636 00:39:00,120 --> 00:39:03,799 Speaker 2: Been seeing some private some institutional investors think of it 637 00:39:03,840 --> 00:39:08,640 Speaker 2: that way. Less of a discrete buckets investment grade, high yield, leverage, loan, 638 00:39:08,680 --> 00:39:12,799 Speaker 2: private credit, and more of buckets that can can encompass 639 00:39:12,880 --> 00:39:16,560 Speaker 2: all four dependent on the rating. So this is my 640 00:39:16,680 --> 00:39:20,440 Speaker 2: high rating bucket, this is my triple B bucket, this 641 00:39:20,520 --> 00:39:22,520 Speaker 2: is my low rated bucket, and then you can kind 642 00:39:22,520 --> 00:39:24,560 Speaker 2: of cross markets that way. 643 00:39:25,440 --> 00:39:27,680 Speaker 3: Do you have a home run trade for next year? 644 00:39:27,760 --> 00:39:30,240 Speaker 3: Like if you had one dollar to put to work, 645 00:39:30,680 --> 00:39:32,759 Speaker 3: how would you do it? You know, from both the 646 00:39:32,840 --> 00:39:35,040 Speaker 3: long perspective and maybe from the short perspective. 647 00:39:35,960 --> 00:39:38,719 Speaker 2: So maybe if we think a little bit about the risks. 648 00:39:39,040 --> 00:39:41,360 Speaker 2: I do think we've seen a lot of dollar strength, 649 00:39:42,000 --> 00:39:44,520 Speaker 2: but that is probably not the end of it. And 650 00:39:44,560 --> 00:39:46,160 Speaker 2: I think a lot of the things we've been talking 651 00:39:46,200 --> 00:39:50,880 Speaker 2: about higher rates in the US for longer across the curve, 652 00:39:52,120 --> 00:39:56,480 Speaker 2: resilience in the US versus other places, tariffs and the 653 00:39:56,600 --> 00:40:00,879 Speaker 2: risk of that to growth in China and Europe as 654 00:40:00,880 --> 00:40:04,640 Speaker 2: well as the actual implementation of tariffs itself to US. 655 00:40:04,719 --> 00:40:08,480 Speaker 2: Also just unfortunately a stronger dollar and it's not quite 656 00:40:08,520 --> 00:40:11,160 Speaker 2: apples to apples with the first trade war. The dollars 657 00:40:11,160 --> 00:40:14,680 Speaker 2: already twenty percent stronger than early twenty eighteen when we 658 00:40:14,719 --> 00:40:20,239 Speaker 2: started this. But it's still environment where we see the 659 00:40:20,239 --> 00:40:24,080 Speaker 2: currencies here really at scope pricing in the risk of 660 00:40:24,120 --> 00:40:28,440 Speaker 2: tariffs and then eventually the implementation of tariffs, and unfortunately 661 00:40:28,480 --> 00:40:31,360 Speaker 2: that tends to be in emerging markets. So think of 662 00:40:31,400 --> 00:40:33,920 Speaker 2: the Chinese wand all the Asian currencies that have a 663 00:40:34,000 --> 00:40:37,719 Speaker 2: high correlation to the Chinese you want to stay competitive, 664 00:40:38,239 --> 00:40:40,759 Speaker 2: or the high beta currencies in Latin America that are 665 00:40:40,840 --> 00:40:44,600 Speaker 2: tied to Chinese and global growth. So unfortunately, I do 666 00:40:44,680 --> 00:40:47,000 Speaker 2: think one of the areas that I personally have conviction 667 00:40:47,239 --> 00:40:51,200 Speaker 2: is is dollar strength and especially versus em currencies. 668 00:40:51,600 --> 00:40:53,719 Speaker 3: So maybe the best trade is book a trip to 669 00:40:53,760 --> 00:40:56,719 Speaker 3: Europe and go buy all your luxury goods sales. 670 00:40:56,840 --> 00:41:00,520 Speaker 2: Book a trip to Europe. Maybe actually one area. And 671 00:41:00,560 --> 00:41:02,680 Speaker 2: this is interesting to the first part, the glass half 672 00:41:02,719 --> 00:41:09,359 Speaker 2: full part of Home Run Japan. I think maybe if 673 00:41:09,360 --> 00:41:12,800 Speaker 2: you haven't gone to Japan, book the trip next month, 674 00:41:13,480 --> 00:41:15,520 Speaker 2: because I don't know if this is kind of as 675 00:41:15,560 --> 00:41:19,440 Speaker 2: cheap as it's going to get. We do see Japanese 676 00:41:19,480 --> 00:41:24,240 Speaker 2: policymakers more and more getting ready to continue tightening policy, 677 00:41:24,320 --> 00:41:28,719 Speaker 2: perhaps as soon as this month. Again that as a 678 00:41:28,760 --> 00:41:32,719 Speaker 2: result suggests a slightly stronger Japanese yen. It's also tends 679 00:41:32,760 --> 00:41:36,640 Speaker 2: to be a safe haven currency, especially around this tariff 680 00:41:36,640 --> 00:41:40,319 Speaker 2: and global growth conversation. But most importantly, I think it's 681 00:41:40,360 --> 00:41:45,160 Speaker 2: about this new era in Japan that's much more shareholder focused, 682 00:41:45,719 --> 00:41:50,400 Speaker 2: that's much more focused on independent board members, buybacks, divid 683 00:41:50,400 --> 00:41:54,160 Speaker 2: and yields, MNA, unlocking value. And I think we're still 684 00:41:54,400 --> 00:41:57,120 Speaker 2: just in the beginning of that, and a lot of 685 00:41:57,160 --> 00:42:03,640 Speaker 2: our institutional clients are very interested in redeveloping strategic allocations 686 00:42:03,680 --> 00:42:04,760 Speaker 2: to Japanese equities. 687 00:42:05,320 --> 00:42:07,480 Speaker 1: That to followup on Roe's point, and also to revisit 688 00:42:07,520 --> 00:42:10,279 Speaker 1: his secret source comment from earlier, where do you think 689 00:42:10,320 --> 00:42:11,319 Speaker 1: you're most contrarian? 690 00:42:12,280 --> 00:42:16,400 Speaker 2: Well, I do think this idea of having international exposure 691 00:42:16,440 --> 00:42:20,040 Speaker 2: is pretty contrarian these days, right, it's right. The big 692 00:42:20,040 --> 00:42:21,920 Speaker 2: tagline for next year that I hear a lot is 693 00:42:22,000 --> 00:42:27,879 Speaker 2: US exceptionalism, But it's not across the board, right. There 694 00:42:27,920 --> 00:42:33,080 Speaker 2: are still many areas overseas that are less cyclical, that 695 00:42:33,160 --> 00:42:37,280 Speaker 2: are less in the firing line here around trade policy 696 00:42:37,320 --> 00:42:43,040 Speaker 2: and competition with China that have completely different stories. Japan 697 00:42:43,200 --> 00:42:47,840 Speaker 2: is one of them, India's another. They tend to be 698 00:42:47,920 --> 00:42:51,799 Speaker 2: in in Asia primarily, and a lot of it is 699 00:42:52,800 --> 00:42:59,240 Speaker 2: very much awakening in Asia about shareholder focus, domestic investor 700 00:42:59,280 --> 00:43:03,840 Speaker 2: based developed men and benefiting from this China plus one production. 701 00:43:04,880 --> 00:43:06,759 Speaker 2: So I think that actually is contrary and we see 702 00:43:06,760 --> 00:43:10,640 Speaker 2: a lot of investors just laser focus on US US only. 703 00:43:10,600 --> 00:43:13,160 Speaker 1: And on the private market side, everyone is so excited 704 00:43:13,160 --> 00:43:15,640 Speaker 1: about it. Is it a big part of your strategy 705 00:43:15,640 --> 00:43:17,560 Speaker 1: for next year? Are you going to be allocating more? 706 00:43:17,560 --> 00:43:19,319 Speaker 1: Do you think everyone's going to be putting into private 707 00:43:19,360 --> 00:43:20,080 Speaker 1: credit next year? 708 00:43:20,880 --> 00:43:23,240 Speaker 2: We do see a lot of interest in private credit 709 00:43:23,560 --> 00:43:28,719 Speaker 2: a lot, and especially from your private wealth type of 710 00:43:29,120 --> 00:43:34,280 Speaker 2: kind of mass affluent investor, where there's much more readily 711 00:43:34,960 --> 00:43:40,560 Speaker 2: available vehicles to access private markets, especially private credit. But 712 00:43:40,640 --> 00:43:43,640 Speaker 2: it is I would say, not the type of alternative 713 00:43:43,680 --> 00:43:46,759 Speaker 2: that we're the most excited about next year. I think 714 00:43:46,760 --> 00:43:49,239 Speaker 2: if you think about asset classes and alternatives that have 715 00:43:49,360 --> 00:43:53,640 Speaker 2: already suffered or repricing from higher rates, that have already 716 00:43:54,920 --> 00:43:58,880 Speaker 2: dealt with a lot of readjustment, that stand out to 717 00:43:58,960 --> 00:44:03,680 Speaker 2: us as opportunity real estate and private equity. Of course, 718 00:44:03,680 --> 00:44:06,280 Speaker 2: not across the board for real estate, pockets of single 719 00:44:06,320 --> 00:44:12,279 Speaker 2: family industriils, retail, and private equity small mid still within 720 00:44:12,320 --> 00:44:17,319 Speaker 2: the buyout sphere. Private credit we haven't quite seen much 721 00:44:17,320 --> 00:44:20,279 Speaker 2: of a meaningful repricing. Maybe we never will, but for 722 00:44:20,360 --> 00:44:24,320 Speaker 2: that marginal dollar to us, real estate and private equity 723 00:44:24,320 --> 00:44:25,240 Speaker 2: are a bit more interesting. 724 00:44:25,320 --> 00:44:28,160 Speaker 1: In the real estate you access through cnbs or direct 725 00:44:28,239 --> 00:44:28,600 Speaker 1: or how do. 726 00:44:28,560 --> 00:44:33,000 Speaker 2: You I think you can do both CMBs, but also 727 00:44:33,320 --> 00:44:37,920 Speaker 2: and more interestingly on the equity side through non traded 728 00:44:38,000 --> 00:44:42,759 Speaker 2: rates or just direct real estate vehicles. The last thing 729 00:44:42,760 --> 00:44:45,520 Speaker 2: I'll say is also we talked about inflation risk maybe 730 00:44:45,560 --> 00:44:49,319 Speaker 2: coming back, and also about these long term trends and 731 00:44:49,360 --> 00:44:53,800 Speaker 2: the financing needed for it. So infrastructure, debt and equity 732 00:44:53,880 --> 00:44:56,440 Speaker 2: is something that is really really interesting in the alternative 733 00:44:56,440 --> 00:44:57,200 Speaker 2: space as well. 734 00:44:57,800 --> 00:45:00,840 Speaker 1: Great stuff. Gabriela Sentos, chief market stre for the America's 735 00:45:00,840 --> 00:45:02,800 Speaker 1: at JP Morgan Asset Management it's been pleasure having you 736 00:45:02,880 --> 00:45:04,919 Speaker 1: on the Credit Edge. Many thanks, thank you so much, 737 00:45:05,080 --> 00:45:06,960 Speaker 1: and of course we're very grateful to Rob Shiftman from 738 00:45:06,960 --> 00:45:09,799 Speaker 1: Bloomberg Intelligence. Thanks for joining us today. Thanks James for 739 00:45:09,880 --> 00:45:12,640 Speaker 1: more credit market analysis and insight. Read all of Rob's 740 00:45:12,640 --> 00:45:15,640 Speaker 1: great work on the Bloomberg Terminal. Bloomberg Intelligence is part 741 00:45:15,680 --> 00:45:18,719 Speaker 1: of our research department, with five hundred analysts and strategists 742 00:45:18,719 --> 00:45:22,160 Speaker 1: working across all markets. Coverage includes over two thousand equities 743 00:45:22,160 --> 00:45:24,960 Speaker 1: and credits and outlooks on more than ninety industries and 744 00:45:25,000 --> 00:45:29,640 Speaker 1: one hundred market industries, currencies and commodities. Please do subscribe 745 00:45:29,640 --> 00:45:31,919 Speaker 1: to the Credit Edge wherever you get your podcasts. We're 746 00:45:31,960 --> 00:45:35,280 Speaker 1: on Apple, Spotify and all other good podcast providers, including 747 00:45:35,440 --> 00:45:38,440 Speaker 1: b Podgo on the Bloomberg Terminal, give us a review, 748 00:45:38,600 --> 00:45:41,359 Speaker 1: tell your friends, or email me directly at Jcromby eight 749 00:45:41,600 --> 00:45:44,880 Speaker 1: at Bloomberg dot net. I'm James Cromby. It's been a 750 00:45:44,880 --> 00:45:47,600 Speaker 1: pleasure having you join us again next week on the 751 00:45:47,640 --> 00:46:08,200 Speaker 1: Credit Edge.