1 00:00:00,080 --> 00:00:03,320 Speaker 1: Let's get to our guest, Adam Comb's chief portfolio manager 2 00:00:03,360 --> 00:00:08,080 Speaker 1: at Winthrop Capital Management. Adam, mean reversion is a pretty 3 00:00:08,119 --> 00:00:12,640 Speaker 1: powerful force in markets. We've had a disastrous two years 4 00:00:12,880 --> 00:00:16,120 Speaker 1: in the China and Hong Kong markets one and twenty 5 00:00:16,160 --> 00:00:20,400 Speaker 1: two have been tough to to stomach UM and so 6 00:00:20,640 --> 00:00:23,800 Speaker 1: a lot of investors are thinking about going along that 7 00:00:24,160 --> 00:00:27,320 Speaker 1: end of the market and maybe even going short UM 8 00:00:27,480 --> 00:00:31,360 Speaker 1: today the SMP five, but the policy making in China 9 00:00:31,880 --> 00:00:34,760 Speaker 1: is you know, is not so consistent. How are you 10 00:00:34,800 --> 00:00:40,120 Speaker 1: looking at this in terms of your plan? For first all, 11 00:00:40,159 --> 00:00:42,920 Speaker 1: thanks for having me, you know, I think UM, that's 12 00:00:42,920 --> 00:00:46,360 Speaker 1: always been the challenge when investing into China. Uh, there's 13 00:00:46,360 --> 00:00:49,319 Speaker 1: always a lot of question marks and so uh in 14 00:00:49,400 --> 00:00:52,559 Speaker 1: some in some ways you have to invest without all 15 00:00:52,600 --> 00:00:55,440 Speaker 1: the information that you may have here in the US. 16 00:00:55,600 --> 00:00:59,200 Speaker 1: But when we look at really the dynamics that are 17 00:00:59,240 --> 00:01:03,760 Speaker 1: pushing the economy UM and the markets there, you've got 18 00:01:03,760 --> 00:01:06,960 Speaker 1: to look at to your point, mean reversion. You can't 19 00:01:07,000 --> 00:01:10,000 Speaker 1: have mean reversion without a catalyst. And and for us, 20 00:01:10,319 --> 00:01:14,720 Speaker 1: what we've been paying close attention to UM our evaluations. 21 00:01:14,760 --> 00:01:18,520 Speaker 1: So evaluations became very very cheap. So that was that 22 00:01:18,600 --> 00:01:21,280 Speaker 1: was the first marker for US to begin to really 23 00:01:21,280 --> 00:01:24,440 Speaker 1: pay attention, but was not not the reason to get in. 24 00:01:25,000 --> 00:01:28,040 Speaker 1: But then we started to see a shift in the 25 00:01:28,160 --> 00:01:32,559 Speaker 1: narrative around China, and while you weren't hearing it at first, 26 00:01:32,760 --> 00:01:38,279 Speaker 1: we we started to really build a case that, uh, 27 00:01:38,319 --> 00:01:41,760 Speaker 1: you know, that the government was going to not only 28 00:01:41,880 --> 00:01:45,640 Speaker 1: move away from COVID zero zero policies, but step into 29 00:01:45,680 --> 00:01:49,240 Speaker 1: actually support these internet companies that they had kind of 30 00:01:49,800 --> 00:01:54,520 Speaker 1: beaten down over the last two years. So in short, 31 00:01:54,640 --> 00:01:56,640 Speaker 1: does that mean tick as a buy in trying to 32 00:01:56,720 --> 00:02:01,360 Speaker 1: right now? We yes, we believe it is. Um you mentioned, 33 00:02:01,400 --> 00:02:04,520 Speaker 1: you know, going along China and shorting the US. We 34 00:02:04,560 --> 00:02:06,680 Speaker 1: wouldn't go that far. We still think the US is 35 00:02:08,160 --> 00:02:11,360 Speaker 1: a good place to be, but when you look elsewhere 36 00:02:11,400 --> 00:02:14,239 Speaker 1: in the world, there's really no other place we would 37 00:02:14,280 --> 00:02:18,400 Speaker 1: put money. Um because when you look at these tech companies, 38 00:02:18,400 --> 00:02:24,600 Speaker 1: they're there, cash flowing machines with great business models. That 39 00:02:24,720 --> 00:02:27,720 Speaker 1: never changed. It was just about the narrative of what 40 00:02:28,040 --> 00:02:30,480 Speaker 1: the Chinese government was going to do, how they were 41 00:02:30,480 --> 00:02:33,680 Speaker 1: going to crack down and and surely they stepped into 42 00:02:33,880 --> 00:02:37,120 Speaker 1: to show their power. But we've got to remember that 43 00:02:37,160 --> 00:02:40,840 Speaker 1: the Chinese government let these companies grow to their size, 44 00:02:41,160 --> 00:02:44,240 Speaker 1: because they want to be taken seriously throughout the world, 45 00:02:44,520 --> 00:02:47,240 Speaker 1: throughout the investing world, and so it is not a 46 00:02:47,280 --> 00:02:50,640 Speaker 1: benefit to them to let this thing that they helped 47 00:02:50,680 --> 00:02:53,640 Speaker 1: grow die. So we knew eventually that they were going 48 00:02:53,720 --> 00:02:58,160 Speaker 1: to put the national champions and US the world over, 49 00:02:58,200 --> 00:03:00,840 Speaker 1: and you can't name all that many in these companies 50 00:03:00,840 --> 00:03:04,080 Speaker 1: that were So that's I'd still say that's a pretty 51 00:03:04,080 --> 00:03:07,160 Speaker 1: aggressive bet that you've got. But then you've got you've 52 00:03:07,200 --> 00:03:10,600 Speaker 1: got defensive stocks that you like as well on your 53 00:03:10,800 --> 00:03:14,280 Speaker 1: conviction calls and long duration bonds. Let's start with the defensive. 54 00:03:14,400 --> 00:03:18,240 Speaker 1: So would those be value companies, cyclicals? What do you 55 00:03:18,280 --> 00:03:22,760 Speaker 1: see as the most comfortable cyclical I mean defensive areas. Yeah, 56 00:03:22,919 --> 00:03:26,640 Speaker 1: So when we're looking at defensive stocks, it's largely driven 57 00:03:26,680 --> 00:03:29,080 Speaker 1: by the uncertainty that we have here in the US 58 00:03:29,160 --> 00:03:32,320 Speaker 1: and and really globally with what central banks are going 59 00:03:32,360 --> 00:03:35,840 Speaker 1: to do, how far they're going to push um to 60 00:03:37,000 --> 00:03:40,400 Speaker 1: you know, get rid of this this high inflation that 61 00:03:40,480 --> 00:03:43,360 Speaker 1: we've been experiencing it over last year. And so because 62 00:03:43,360 --> 00:03:45,480 Speaker 1: of that, we don't want to just jump in. We 63 00:03:45,680 --> 00:03:47,280 Speaker 1: want to stay invested, but we don't want to just 64 00:03:47,360 --> 00:03:50,360 Speaker 1: jump into growth markets. Or really you know, kind of 65 00:03:50,400 --> 00:03:52,640 Speaker 1: had this pedal to the metal mentality. So that that's 66 00:03:52,680 --> 00:03:56,520 Speaker 1: the driver of you know, focusing on defensive the defensive 67 00:03:56,560 --> 00:03:59,080 Speaker 1: factor and what we mean by that is similar to 68 00:03:59,120 --> 00:04:01,960 Speaker 1: what I just said about Chinese stocks, but it's really 69 00:04:02,040 --> 00:04:06,560 Speaker 1: driven by business model and cash flow. You're getting away 70 00:04:06,640 --> 00:04:10,520 Speaker 1: from narrative based stocks, these story stocks like a like 71 00:04:10,560 --> 00:04:14,080 Speaker 1: a Zoom where there was a story behind this, you know, 72 00:04:14,160 --> 00:04:16,960 Speaker 1: working from home and and just trust this, we're going 73 00:04:17,000 --> 00:04:20,479 Speaker 1: to grow into this valuation. We're staying away from that, 74 00:04:20,520 --> 00:04:24,560 Speaker 1: and we're investing in companies like Microsoft Alphabet. They tried 75 00:04:24,600 --> 00:04:29,320 Speaker 1: and true cash cash flowing machines that have a business 76 00:04:29,360 --> 00:04:33,080 Speaker 1: model that can adapt is robust through different cycles, and 77 00:04:33,360 --> 00:04:35,800 Speaker 1: in those type of companies showed that they could do 78 00:04:35,880 --> 00:04:39,159 Speaker 1: that through the pandemic. Right, So we're continuing that theme 79 00:04:39,720 --> 00:04:42,920 Speaker 1: through two three. And when you think about the sources 80 00:04:42,960 --> 00:04:46,640 Speaker 1: of the endings those solids companies might deliver in two 81 00:04:46,680 --> 00:04:48,800 Speaker 1: thousand twenty three, what do you anticipate and what do 82 00:04:48,880 --> 00:04:53,640 Speaker 1: you particularly anticipate around dividends. So that's that's the other 83 00:04:53,640 --> 00:04:56,680 Speaker 1: reason for defensive stocks is that we do believe we're 84 00:04:56,680 --> 00:05:01,159 Speaker 1: going to experience a earnings recession, uh here in the 85 00:05:01,160 --> 00:05:04,360 Speaker 1: first two quarters of twenty three. And that's driven by 86 00:05:04,640 --> 00:05:08,400 Speaker 1: the fact that costs are still elevated, whether that's you know, 87 00:05:08,480 --> 00:05:13,400 Speaker 1: higher wages or higher input cost But now we're dealing 88 00:05:13,480 --> 00:05:15,960 Speaker 1: with the fact that that revenue numbers are going to 89 00:05:16,000 --> 00:05:19,080 Speaker 1: be more difficult to hit, and so if we move 90 00:05:19,080 --> 00:05:21,560 Speaker 1: into an earnings recessions, it's a going to be difficult 91 00:05:21,600 --> 00:05:23,839 Speaker 1: to pay higher dividends. We think that that's not going 92 00:05:23,920 --> 00:05:27,400 Speaker 1: to happen probably in the next year, and so you 93 00:05:27,720 --> 00:05:29,839 Speaker 1: really need to be focused on those that have a 94 00:05:29,880 --> 00:05:34,040 Speaker 1: safe dividend and and real earnings power to kind of 95 00:05:34,240 --> 00:05:36,680 Speaker 1: weather through this which is not gonna last forever. But 96 00:05:36,680 --> 00:05:38,880 Speaker 1: we're focused on companies that where the dividend and the 97 00:05:38,960 --> 00:05:42,680 Speaker 1: earnings can weather through um, you know, maybe what could 98 00:05:42,720 --> 00:05:45,080 Speaker 1: be a bit of a storm. You've gone through all 99 00:05:45,080 --> 00:05:47,880 Speaker 1: of this and haven't really mentioned much about FED policy. 100 00:05:48,400 --> 00:05:50,039 Speaker 1: How much of a factor is the FED going to 101 00:05:50,080 --> 00:05:53,240 Speaker 1: be in the first six months next year? Well, intentionally 102 00:05:53,279 --> 00:05:54,960 Speaker 1: not not mentioned it because I feel like that's all 103 00:05:55,000 --> 00:05:58,919 Speaker 1: anyone talks about. But it is the main ingredient in 104 00:05:58,960 --> 00:06:03,040 Speaker 1: this soup, right, it's whatever the FED does and really 105 00:06:03,080 --> 00:06:06,240 Speaker 1: whatever investors believe that the FED is going to do 106 00:06:06,400 --> 00:06:09,240 Speaker 1: is it has been the driver of markets um but 107 00:06:10,240 --> 00:06:16,960 Speaker 1: ultimately the feds um stance on liquidity throughout the market 108 00:06:17,160 --> 00:06:20,720 Speaker 1: is going to drive this economy. And so if they 109 00:06:20,720 --> 00:06:24,800 Speaker 1: continue to pull the punch bowl away, you're going to 110 00:06:24,880 --> 00:06:28,440 Speaker 1: see um a lack of liquidity, You're going to see 111 00:06:28,880 --> 00:06:33,560 Speaker 1: refinance risk, and you're going to see demand destruction. And 112 00:06:33,600 --> 00:06:36,440 Speaker 1: if you if you have demand destruction as a as 113 00:06:36,480 --> 00:06:39,000 Speaker 1: a way to combat inflation, which is absolutely what they're 114 00:06:39,000 --> 00:06:42,640 Speaker 1: trying to do, you have to see earnings decline, you 115 00:06:42,640 --> 00:06:45,080 Speaker 1: have to see spending go down, and so that that 116 00:06:45,120 --> 00:06:47,320 Speaker 1: will make its way through the economy. It's just a 117 00:06:47,320 --> 00:06:51,760 Speaker 1: matter of how far the FEDS willing to push. Yeah, 118 00:06:51,880 --> 00:06:55,359 Speaker 1: so a bit of medicine being administered at the moment. 119 00:06:55,400 --> 00:06:57,279 Speaker 1: But if we take a look at the bright side, 120 00:06:57,279 --> 00:07:01,680 Speaker 1: the FITS preferred inflation engauged PC deflates slowed again in November. 121 00:07:01,800 --> 00:07:04,520 Speaker 1: Do you have a sense that the tide is turning 122 00:07:04,520 --> 00:07:06,760 Speaker 1: in terms of the inflation fight closer to the end 123 00:07:06,760 --> 00:07:09,600 Speaker 1: of than the beginning. Maybe, absolutely, Yeah, I think I 124 00:07:09,880 --> 00:07:15,560 Speaker 1: think we will see accelerated deceleration in inflation. And actually 125 00:07:15,600 --> 00:07:17,760 Speaker 1: what we believe is that the FED is going to 126 00:07:17,880 --> 00:07:20,800 Speaker 1: overshoot this. At the beginning of this he played a 127 00:07:20,840 --> 00:07:23,880 Speaker 1: lot of clips um of the Fed's intention on pushing 128 00:07:23,920 --> 00:07:28,680 Speaker 1: towards that two percent policy. And in order to get 129 00:07:28,720 --> 00:07:32,040 Speaker 1: to two percent quickly, you're not just gonna suddenly get 130 00:07:32,080 --> 00:07:33,760 Speaker 1: to two percent and stop. It's going to be this 131 00:07:33,880 --> 00:07:36,360 Speaker 1: exact same scenario that we just witnessed to the upside, 132 00:07:36,800 --> 00:07:40,000 Speaker 1: and you could see this inflation that could be problematic 133 00:07:40,040 --> 00:07:42,280 Speaker 1: as well. So that that's one of our big fears 134 00:07:42,520 --> 00:07:45,560 Speaker 1: about FED policy right now. And we do believe that 135 00:07:45,800 --> 00:07:48,560 Speaker 1: naturally inflation was going to roll over and by the 136 00:07:48,560 --> 00:07:50,560 Speaker 1: FEDS action, you're going to get it. You're going to 137 00:07:50,600 --> 00:07:54,160 Speaker 1: see it happen faster. Yeah, Adam, thanks very much for 138 00:07:54,240 --> 00:07:58,640 Speaker 1: joining us. Adam Coon's chief portfolio manager at Winthrop Capital Management.