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Speaker 1: Yeah. Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene

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Speaker 1: Jay Leye. We bring you insight from the best in economics, finance,

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Speaker 1: investment and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud,

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Speaker 1: Bloomberg dot Com, and of course, on the Bloomberg Yeah.

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Speaker 1: Your main story. Following a weekend of claims by President

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Speaker 1: Donald Trump that he has the upper hand in a

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Speaker 1: trade war with China, Beijing responding through state media by

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Speaker 1: saying the nation is ready to endure the economic fallout.

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Speaker 1: China is prepared for a protracted war and doesn't fear

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Speaker 1: sacrificing short term economic interest. That's according to an editorial

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Speaker 1: in the nationalist Global Times on Sunday evening joined me

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Speaker 1: to discusses. Jeffrey you ubs wef Management, head of UK

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Speaker 1: Investment Office, and he joins us from landon. Good morning

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Speaker 1: to your Jeffrey, get me up to speed on where

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Speaker 1: on earth we are with this trade dispute. Well, I

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Speaker 1: mean know, firstly in the Global Times and probably will

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Speaker 1: have its own let's just say in the readership to

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Speaker 1: h to a cater to us. I wouldn't put it

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Speaker 1: that far yet, but at the same time, you're going

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Speaker 1: to see a combination of retric and restraint as what

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Speaker 1: our economists start calling it. Uh And I think there

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Speaker 1: are plenty of opportunities that China seas as well. I

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Speaker 1: think there's a similar editorial, you know, and it was

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Speaker 1: on the People's Daily or are somewhere else, So we

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Speaker 1: noted external pressure is going to be an opportunity for

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Speaker 1: reform in China and stressing that they need to play

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Speaker 1: the long game as well, beyond a US political cycle

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Speaker 1: or even any other economical business cycle there. So I

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Speaker 1: don't think consure they're too fuss about it, but the prerogative,

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Speaker 1: but the priority remains to stabilize growth. I think that's

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Speaker 1: what Beijing is looking at right ye if that's a

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Speaker 1: really interesting perspective because for many people, the external pressures

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Speaker 1: and not an incentive to reform domestically, it's perhaps an

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Speaker 1: incentive to deep away from those reforms. The big push

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Speaker 1: to de leverage is perhaps a little bit too ambitious

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Speaker 1: at this point. Why is it an incentive to reform um?

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Speaker 1: I think there are two things there. You know. Firstly,

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Speaker 1: in the China is realized that can't be dependent on

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Speaker 1: and exports forever. The current account and export and value

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Speaker 1: bad that's been coming down anyway over the last a

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Speaker 1: few years or so. We've just had the fourtieth anniversary

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Speaker 1: of reform and opening up exports did the job to

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Speaker 1: start off with. Now there's a new growth model that's

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Speaker 1: needed going up the value chain. The second part is

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Speaker 1: and on the technology side. For example, various Chinese companies

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Speaker 1: have realized how dependent they are on overseas and technology

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Speaker 1: as well as parts of their supply chain. So the

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Speaker 1: supply chain story works both ways. Right, So now is

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Speaker 1: this the time for domestic innovation? Now? Does this need

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Speaker 1: perform in the education system in terms of how incentives

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Speaker 1: work in China? Those discussions ongoing right now. They just

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Speaker 1: need to draw the right conclusions. Is it fair to

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Speaker 1: say that we can draw the following conclusion that it

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Speaker 1: seems to me that the US does have the upper

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Speaker 1: hand in this trade dispute, at least in the short term. Jeff, Well,

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Speaker 1: it's clear US um international exposure as far less and

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Speaker 1: you're compared to other major economies around the world. If

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Speaker 1: you just look at the overseas earnings and the Dow

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Speaker 1: own verses those in the dacks that see um SMI

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Speaker 1: for example, it's far lower in the US, so I

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Speaker 1: would say the US is less to lose at this point.

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Speaker 1: But again China probably wants to play the longer game here.

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Speaker 1: It just seems to me, Jeff, that we viewed China

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Speaker 1: at the moment almost exclusively through the trade prison, when

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Speaker 1: there seems to me there is a lot more going

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Speaker 1: on domestically. Just where are we with the Chinese economy

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Speaker 1: at the moment and what kind of policy leavers are

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Speaker 1: they pulling to address the issues? Um, So, two things really,

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Speaker 1: you know, Firstly, on the financial side you just mentioned

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Speaker 1: deleveraging has the downside liquidity and growth impact like extension

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Speaker 1: being stronger, a bit stronger than asipated and perhaps so

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Speaker 1: now and the conditioning is clear now the PBS, so

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Speaker 1: the people's daily against stress. Now is the time for

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Speaker 1: leverage stability, you know, rather than deleveraging. It's achieved them,

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Speaker 1: it's required results. So that's the first point. Again, it's

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Speaker 1: not pumping liquidity back into the system, but make sure

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Speaker 1: it's no further tightening of financial conditions. Secondly, if we

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Speaker 1: go back to two thousand and fifteen, two thou sixteen,

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Speaker 1: perhaps the financial authority use the fiscal authorities and the

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Speaker 1: PBOC the monetary authorities are not on the same page

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Speaker 1: there In the end, you know, a lot could have

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Speaker 1: been done, but nothing was done or very little was

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Speaker 1: done um uh in good time. So this time around,

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Speaker 1: it's very clear coordinated fiscal and a monetary response that's

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Speaker 1: going to come through. But again within reason. I think

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Speaker 1: the pre BOC is clear keen and the regulators as well,

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Speaker 1: not to unwind some of the reforms that have been achieved.

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Speaker 1: But on the fiscal side, if you look at where

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Speaker 1: the budget deficit is, especially on the central level, there's

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Speaker 1: a lot more room they can deploy, but they're being

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Speaker 1: sparing about it. On Friday they stepped in, the authorities

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Speaker 1: stepped into stabilize the Chinese currency, and Jeff, I'm trying

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Speaker 1: to work out whether the authorities are uncomfortable with the

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Speaker 1: pace of the decline or the overall level of dollar Shina.

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Speaker 1: I think it's always about pace rather than level. And

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Speaker 1: again we've been above seven before, right, and so in

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Speaker 1: the level, I think it's less of an issue pace.

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Speaker 1: You don't want to precipitate um You know, these are

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Speaker 1: a vicious circle master appreciation expectations. But if you look

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Speaker 1: at reserve holdings, and if you look at the fact

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Speaker 1: that between two thousand and sixteen when we have that

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Speaker 1: major wobble, right be seen two thousand and sixteen, and

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Speaker 1: now they really haven't unwound you know, capital controls. They

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Speaker 1: were limiting you know, overseas expenditures, and I've got in

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Speaker 1: laws you know here right now, and they're probably not

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Speaker 1: gonna be able to buy ten handbags, you know in

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Speaker 1: the sulverages, right so because of the purchase restrictions. So

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Speaker 1: all of that is in place. So I think they've

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Speaker 1: got a lot more to control. It's about the level

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Speaker 1: they don't want to fand appreciation and expectations on shore. Jeff,

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Speaker 1: let's talk about your risk, asset exposure at the moment

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Speaker 1: and how you put money to work. Five weeks of

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Speaker 1: solid gains on the S and P five coming into

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Speaker 1: this week. The trade story is kind of humming away

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Speaker 1: in the background, but for US assets, so I don't

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Speaker 1: see it's shaping things too much. You have you on

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Speaker 1: how you put money to work at the moment. Still

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Speaker 1: overweight equities, but global equities were not particularly overweight any

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Speaker 1: individual market. But again it's a case of managing risk

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Speaker 1: it's more turbulent up ahead. You want to be decorrelated.

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Speaker 1: So still you know, have that general risk on exposure,

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Speaker 1: but if there are ways to actually benefit or limit

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Speaker 1: your draw downs, and that's the message we're giving to

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Speaker 1: clients right now. If the markets are going to suffer

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Speaker 1: from bolit Lucie, especially any correlated sell off in bonds

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Speaker 1: and equities as we saw in January, then you want

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Speaker 1: to have be at alternatives, you know, be it through

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Speaker 1: you know, off market assets which could actually benefit from

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Speaker 1: that decorrelation. So that's our approach at this point. One

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Speaker 1: trade haven in the United States was the small caps.

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Speaker 1: That position is unwound and quite significant way Jeff do

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Speaker 1: if you want small camps in America, Well, that's actually

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Speaker 1: a less of a focus on the part of our clients,

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Speaker 1: especially outside of the US. We've had more questions about

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Speaker 1: tech you know, of late for example, to be honest,

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Speaker 1: to give them the cell often. But again we want

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Speaker 1: to take the medium to longer a point, a longer

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Speaker 1: term approach here for small caps. You know, if they

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Speaker 1: actually do have the potential to benefit from the domestic similars,

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Speaker 1: you actually tend to see a much stronger you know,

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Speaker 1: support for current policies on the part of small and

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Speaker 1: medium as sized enterprises. You know they pulled on them,

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Speaker 1: for example, often likes a higher idea n f IB

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Speaker 1: survey server for example. I think that's quite well correlated

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Speaker 1: with them small caps sentiment. Then I think the sentiment

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Speaker 1: is there. And again if they're less exposed to the

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Speaker 1: global trade picture. Um, if you just look at the

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Speaker 1: over sea no revenues, I think for the broader Dow

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Speaker 1: Jones in dust ronage about forty percent. For small captain

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Speaker 1: it's going to be lower, and then they're in a

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Speaker 1: better spot. But again we're not really interested in adding

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Speaker 1: to risk at this point. It's about managing risk. Jeff.

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Speaker 1: You they're great to catch up with your Jeff Ubs

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Speaker 1: Wealth Management ahead of the UK Investment Office joining us

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Speaker 1: out of London. As the sanctions clock is ticking, the

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Speaker 1: first round kicking at midnight tonight on Iran. The next

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Speaker 1: round of sanctions all important for the all market kicking

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Speaker 1: in several months time. Let's discuss them show with Dantanna

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Speaker 1: bum PwC Principal and Global Sanctions leader joins us here

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Speaker 1: in New York. Always great to catch up with your Dann.

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Speaker 1: Good morning, to you. Good morning, John. So what do

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Speaker 1: we learn later today? What happens and then what happens

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Speaker 1: again in three months. So the first tranche of sanctions

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Speaker 1: being reimposed focuses on the reimposition of secondary sanction and essentially,

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Speaker 1: broadly speaking, it forces foreign companies to choose between doing

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Speaker 1: business with Iran or doing business with the US, but

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Speaker 1: not both. So it criminalizes in the US lens UH

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Speaker 1: European companies, for example, continuing to do business with Iran,

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Speaker 1: with the later phase focusing primarily on oil and gas

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Speaker 1: transactions being wound down in November, So before midnight to night,

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Speaker 1: how busy of companies in Iran being to secure business

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Speaker 1: and execute on deals before midnight? Well, I mean, let's

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Speaker 1: be clear, this is not a popular move by the

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Speaker 1: United States. This is not something that even many in

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Speaker 1: the US wanted. As United States companies got into the

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Speaker 1: market and created transactions with the Iranian space. Now financial

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Speaker 1: services is largely out of the market and didn't engage,

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Speaker 1: and there were much more limited supply. I don't think

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Speaker 1: there's necessarily going to be a mad rush because this

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Speaker 1: has been out there for months now. Everyone knew this

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Speaker 1: was coming. What's going to be interesting is who's still

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Speaker 1: transacting tomorrow and the rest of the week. There's been

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Speaker 1: talks now in the EU, and I believe a regulation

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Speaker 1: went into effect across the EU member states this week

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Speaker 1: that is a resurrection of the anti blocking boycott from

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Speaker 1: on Cuba, basically telling European companies or companies operating Europe,

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Speaker 1: you can't comply with the u S sanctions on Cuba.

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Speaker 1: They've amended them to include that with Iran. Now, how

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Speaker 1: that looks from an enforcement standpoint, what the US does

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Speaker 1: from an enforcement standpoint really unclear at this point. And Dan,

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Speaker 1: if you're a European multinational with operations in Iran, do

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Speaker 1: you have the confidence in the regulation that the EU

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Speaker 1: brings forward or do you just are on the side

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Speaker 1: of caution and go with the u S sanctions? You

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Speaker 1: are you are on the side of caution. The EU

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Speaker 1: anti blocking statute on Cuba was never enforced, it was

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Speaker 1: never used, it wasn't even universally adopted. Um. This is

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Speaker 1: a little different. Um. This is a bit more of

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Speaker 1: a hot potato issue than Cuba was even twenty plus

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Speaker 1: years ago. That being said, I mean a number of

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Speaker 1: large insurers and if you think about kind of how

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Speaker 1: globe commerce works. Most of the major global insurers have

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Speaker 1: already announced in May that they're backing out of Iran.

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Speaker 1: If you can ensure trade, I mean, what chance does

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Speaker 1: trade have to exist anyway. We're going to talk about

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Speaker 1: the old market in just a moment, but I want

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Speaker 1: to explore that concept backing out of Iran. It's it's

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Speaker 1: something a lot of us will say, but I want

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Speaker 1: to know what it actually means, because the sanctions regime

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Speaker 1: over the last few years has always been uncertain, and

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Speaker 1: it's been incredibly fluid, and we've seen it change again.

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Speaker 1: If you're a multinational, let's just say you're a European

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Speaker 1: company with operations on Iran. Does backing out mean you

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Speaker 1: stop executing deals with Iran? Does it mean you move offices?

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Speaker 1: Does it mean you move equipment? How does it work

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Speaker 1: logistically just in terms of operations? Do you maintain a

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Speaker 1: presence there? What you do? So? Given the uncertainty when

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Speaker 1: the j c p o A the Iran Deal was enacted,

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Speaker 1: um not many companies necessarily established a physical presence, but

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Speaker 1: they did start dealing with Iran, shipping goods and services

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Speaker 1: into Iran, sending people on temporary assignments into Iran. It's

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Speaker 1: really elimination of deals, less so about movement of physical resources.

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Speaker 1: I mean. The important thing to note though, is with

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Speaker 1: all the rhetoric around sanctions this year, this has been

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Speaker 1: the slowest year from an enforcement standpoint in the U

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Speaker 1: S that I've ever seen. There's been one enforcement action

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Speaker 1: at the federal level. Usually there's ten to fifteen at

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Speaker 1: this time in the year. So how this looks in

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Speaker 1: terms of the stick versus that can speak, It's really

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Speaker 1: unclear what the administration is going to do. So how

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Speaker 1: may it makes sense of that. Is it not being

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Speaker 1: enforced as heavily in terms of the issues that arise

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Speaker 1: because more people are abiding by some of the rules,

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Speaker 1: or is it not happening because the US administration isn't

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Speaker 1: actually being that forceful. So it's interesting. These cases that

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Speaker 1: you've historically seen come out take years to get adjudicated

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Speaker 1: to settle. So this isn't anything about near term activity.

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Speaker 1: You could be settling a case in eighteen for activity.

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Speaker 1: In so, even with a budget increase that Treasury has

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Speaker 1: had in this area for the first time in years,

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Speaker 1: there's still a very slow move on enforcement. Despite all

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Speaker 1: of the changes to the different sanctions regimes. So the

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Speaker 1: big question I think is in several months time for

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Speaker 1: a lot of our listeners who maybe have exposure to

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Speaker 1: the all market, is what happens in several months time

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Speaker 1: when that round of sanctions kicks in the target of

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Speaker 1: this administration that the objective overall. I imagine they'd like

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Speaker 1: to see Iranian oil exports drop down to zero. The

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Speaker 1: Chinese are saying they're not going to go with it.

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Speaker 1: How does that work? It would have been simpler if

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Speaker 1: we didn't have the trade spat that was kind of

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Speaker 1: underpinning all of the U S. China related issues. That

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Speaker 1: is going to be the real test. China has been

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Speaker 1: very clear that they're going to continue to buy oil

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Speaker 1: from Iran, and that doesn't look like it's going to start.

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Speaker 1: I mean, frankly, you used to have a bit more

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Speaker 1: predictability in the space. Right now, it's a lot harder

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Speaker 1: to tell. But based on all of the different issues

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Speaker 1: that Trump is picking with China, where this could actually

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Speaker 1: land in a few months time. See, I want to

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Speaker 1: know how the enforcement works. Because the Chinese is settling

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Speaker 1: those deals in yuan. How does the United States not

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Speaker 1: incentivized but prevent the Chinese from wanting to deal with Iran,

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Speaker 1: from from not coming back those crude all impacts. There's

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Speaker 1: likely going to need to be some balance, and potentially

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Speaker 1: who knows, all of the tariffs speak could be the

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Speaker 1: stick that you know, easing back on that for allowing

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Speaker 1: them to transact at certain levels of ranny and crude.

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Speaker 1: That could be part of the deal creating the issue

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Speaker 1: to allow him to come in and create a deal.

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Speaker 1: From the Trump administration standpoint, what's fascinating about this for

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Speaker 1: a lot of people as this is three months away

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Speaker 1: and we've still got zero clarity on how this is

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Speaker 1: going to work. India, for instance, says we abide by

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Speaker 1: U N sanctions and now they've got a really nuance

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Speaker 1: approach and no one knows what India is going to do.

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Speaker 1: Have you ever seen anything like this where three months

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Speaker 1: out we could have a huge sanctions push on a

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Speaker 1: country of oil exports and we have zero clarity on

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Speaker 1: who's going to do what I mean, these are somewhat

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Speaker 1: unprecedented times to begin with, and you know, Secretary Low

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Speaker 1: as he was leaving its the Obama administration was ending

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Speaker 1: spoke about sanctions over use. Were there I mean last

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Speaker 1: week there were sanctions levied against the NATO Allies government

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Speaker 1: ministers as a result for the kidnapping or the perceived

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Speaker 1: kidnapping of a US pastor in Turkey. I mean, this

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Speaker 1: is not how sanctions have generally been used historically. And

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Speaker 1: then North Korea as well on the right part, because

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Speaker 1: it doesn't look like those talks a going as well

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Speaker 1: as maybe this administration hoped. Yeah that that is not

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Speaker 1: entirely a surprise for those who really watched the space closely,

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Speaker 1: that the North Koreans aren't eagerly handing over their nuclear

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Speaker 1: weapons regime. I mean that being said, North Korea is

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Speaker 1: another interesting one. Unlike Iran. People don't want to do

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Speaker 1: business in North Korea, so all of the focus and

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Speaker 1: making them kind of a good guy and sharing in

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Speaker 1: kind of global prosperity, I mean, Iran was a very

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Speaker 1: different situation. European companies, global companies have been Iran for years.

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Speaker 1: No one had been in North Korea. Dan Sanna Baum

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Speaker 1: always great to catch up with you and get the

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Speaker 1: inside on what happens next and potentially how companies have

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Speaker 1: got a deal with a new sanctions regime that is

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Speaker 1: implemented once again, the clock is ticking. The first round

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Speaker 1: of sanctions kick out tonight at midnight. The next round

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Speaker 1: on oil kicks in in about three months time. PWC's

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Speaker 1: principal and at Global Sanctions Leader great to catch Hell

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Speaker 1: we do down and Milletty is a managing director lead

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Speaker 1: portfolio manager for Wells Fargo Asset Management, and she joins

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Speaker 1: us from the lovely state of Wisconsin. And thank you

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Speaker 1: very much for being here. Happy summer to you. Is

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Speaker 1: there no is there no worry in your life right now?

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Speaker 1: Do you want something to worry about? Oh, pim, I

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Speaker 1: have plenty to worry about. And for anyone who really

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Speaker 1: knows me, they know that I am a professional warrior

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Speaker 1: at heart. Um, I spent all of my time worrying

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Speaker 1: and having a job in this market and dealing with

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Speaker 1: the stock market every day. I think most of us

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Speaker 1: spend a good majority of our time worrying. But you

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Speaker 1: also have to have a lot of conviction and a

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Speaker 1: process and other things to extract the emotion out and

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Speaker 1: to be able to operate every day. Okay, Well, the

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Speaker 1: reason I bring up the concept of worrying is that

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Speaker 1: you've described your the current situation is no matter how

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Speaker 1: much time you spend worrying about the market, all you

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Speaker 1: do is experience accelerating growth. Yeah, well, the the economy

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Speaker 1: is certainly experiencing that accelerating growth, and the market, I know,

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Speaker 1: is forward looking, and the market also has been going up,

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Speaker 1: and so certainly the market anticipated the economy to be strong.

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Speaker 1: It has been, And even with a lot of fears

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Speaker 1: and challenges that we hear every day in the headlines,

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Speaker 1: the market continues to kind of slowly march higher. And

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Speaker 1: I think that tells us that for the most part,

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Speaker 1: we you know, the market at least is predicting that

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Speaker 1: the the stock market will continue in the economy will

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Speaker 1: continue to accelerate from here. And then I think, you know,

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Speaker 1: I know, certainly for the last two years, one of

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Speaker 1: the headlines that I see quite often and that I

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Speaker 1: hear about and people challenge me on all the time

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Speaker 1: is the length of this bowl market and how long

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Speaker 1: it has lasted. That when you think about the cumulative

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Speaker 1: returns that we've gotten over the last nine plus years,

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Speaker 1: it's actually twenty five lower the cumulative return of this

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Speaker 1: last ball market cycle than it than historical bowl market

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Speaker 1: cycles have been um And so again, you know, history

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Speaker 1: is no certain judge of what's going to happen in

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Speaker 1: the future. But if the headline read that this bowl

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Speaker 1: market cycle has produced lower cumulative returns with an accelerating economy,

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Speaker 1: there's a possibility that we might look at things differently. Certainly,

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Speaker 1: the market probably wouldn't act any different. The story would

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Speaker 1: still be the story, but the headlines might be a

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Speaker 1: little different. Right. Well, here here's a just maybe just

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Speaker 1: to put it into a little bit of short term context.

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Speaker 1: If you look at what the SMP has done since

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Speaker 1: the beginning of May, we've seen an increase of about

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Speaker 1: nine so it's worked off all of the turmoil that

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Speaker 1: we experienced from the beginning, let's say, from the end

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Speaker 1: of January. Do you do you think that that's going

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Speaker 1: to continue or is this sort of a head fake?

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Speaker 1: In in a certain way, I think that the market

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Speaker 1: strength will continue, but not without volatility. So would I

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Speaker 1: be surprised if we get a correction? Now, I wouldn't be.

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Speaker 1: I wouldn't be surprised at that at all. In fact,

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Speaker 1: as a bottom up stock picker and a money manager,

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Speaker 1: I would actually welcome, you know, this, some volatility to

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Speaker 1: allow us to continue to find names and companies selling

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Speaker 1: at a discount UM, and that's what we continue to

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Speaker 1: look for in this market. But there's also been some

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Speaker 1: divergence between the names that have really outperformed in this

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Speaker 1: market and names that have truly lagged while their fundamentals

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Speaker 1: continue to improve. And so that's what we're paying attention to,

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Speaker 1: because I think the risk reward is what the you

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Speaker 1: know what what investors should be paying attention to right

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Speaker 1: now and making sure that each investment they make they

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Speaker 1: try to chip the risk reward into their favor. Well,

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Speaker 1: just to give one example of a fund that you

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Speaker 1: hold some responsibility over is the Wells Fargo Opportunity Fund. Correct, Okay,

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Speaker 1: so you're today you're up nearly seven percent, So good

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Speaker 1: on you. That's really up there with the S and

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Speaker 1: P of five. When I look at the holdings, alphabet

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Speaker 1: E Trade, Financial, Sales Force, okay, those are pretty well known.

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Speaker 1: But then you start to get to things like Leva, Nova,

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Speaker 1: Sherwin Williams and Webster Financial and bio rad Laboratories. Can

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Speaker 1: you offer a guide as to what counts as an

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Speaker 1: opportunity for that fund? Sure? Absolutely, I mean that's exactly.

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Speaker 1: We do have some names that are all known, um,

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Speaker 1: in the market. Certainly Alphabet, but even that name represents

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Speaker 1: a name that has lagged some of the other thing

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Speaker 1: names and actually looks more attractive relatively on evaluation based

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Speaker 1: the name that we can justify. But a name like

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Speaker 1: live and Nova certainly a name in the medical space

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Speaker 1: that we think is you know, although the stock has

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Speaker 1: performed well, we think it's a name that's been ignored

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Speaker 1: by a lot of the market. And you know, this

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Speaker 1: is a MidCap company, you know, around a six billion

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Speaker 1: dollars heart lung machines based in the UK, based in London,

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Speaker 1: right right, But they have some technology and development that's

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Speaker 1: even more dynamic technology that will show some good growth,

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Speaker 1: we believe. And this is you know, a good quality

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Speaker 1: management team showing some great growth. We they have trials

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Speaker 1: that are going on right now that looks to expand

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Speaker 1: a lot of their markets as well. So we think

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Speaker 1: this will be a name that a lot of other

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Speaker 1: investors start to pay attention to. We've been in the

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Speaker 1: stock for quite a while um and certainly other investors

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Speaker 1: we believe will also find this name attractive. And what's

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Speaker 1: the what's someone what's the one major mistake that you

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Speaker 1: notice investors make over and over again. How certainly buying

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Speaker 1: the things that everybody loves, it's the easiest thing to do. Um.

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Speaker 1: It's easy to buy a name that is going up um.

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Speaker 1: And that's kind of you know, momentum investing. It's another

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Speaker 1: thing when you're buying a name that has some challenges,

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Speaker 1: that has not performed in, especially in a market like this, right.

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Speaker 1: And so when you're buying a name that hasn't gone

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Speaker 1: up the rest of the with the rest of the market,

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Speaker 1: you're asking yourself what what's wrong? Right? That goes back

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Speaker 1: to your concept of conviction exactly. And you have to

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Speaker 1: know and understand the company enough you understand what you're

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Speaker 1: investing in, and so you have to have some kind

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Speaker 1: of investment thesis. Do you know why you're investing in

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Speaker 1: this company? And and so if you understand the reason why, yes,

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Speaker 1: you can be wrong, but you're going to feel better

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Speaker 1: that you understood at least why you did that. Right.

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Speaker 1: If you if somebody says, hey, invest in the stock

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Speaker 1: because it's going to go up, and you put money there,

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Speaker 1: you know it's already up, and you put money there

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Speaker 1: and it goes down a lot and you don't understand

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Speaker 1: it it's going to be bad. So I think it's

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Speaker 1: that's the worst mistake. We got to leave it there.

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Speaker 1: But I want to thank you very much. And Letty

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Speaker 1: Managing Director, Lead portfolio Manager, Wells Fargo Asset Management. Well,

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Speaker 1: the topic is a PepsiCo and Nui is stepping down

432
00:22:56,440 --> 00:23:00,000
Speaker 1: as the chief executive officer of the Food and Beverage

433
00:23:00,000 --> 00:23:02,080
Speaker 1: Alliant and here to tell us a little bit more

434
00:23:02,200 --> 00:23:05,480
Speaker 1: about the company and its future prospects is our own

435
00:23:05,560 --> 00:23:09,439
Speaker 1: Kenneth Shay. He is our Bloomberg Intelligence Senior Analyst for

436
00:23:09,520 --> 00:23:11,920
Speaker 1: Food and Beverage. Ken say, thanks very much for being

437
00:23:11,920 --> 00:23:13,880
Speaker 1: with us. You know, I was looking at a ten

438
00:23:13,960 --> 00:23:19,040
Speaker 1: year chart of PepsiCo versus the sm P five hundred

439
00:23:19,320 --> 00:23:24,760
Speaker 1: plus the SMP five consumer staples sector, and it is

440
00:23:24,800 --> 00:23:27,800
Speaker 1: not a nice picture when you look at PepsiCo the

441
00:23:27,880 --> 00:23:31,679
Speaker 1: total return a hundred over the last ten years, but

442
00:23:31,840 --> 00:23:36,199
Speaker 1: the SMP hundred and seventy one and the subsector that

443
00:23:36,280 --> 00:23:40,679
Speaker 1: consumer staples sector a hundred and fifty two. Is this

444
00:23:40,720 --> 00:23:44,600
Speaker 1: is going to be remembered as a positive time for PepsiCo. Yeah, Hi,

445
00:23:44,680 --> 00:23:47,800
Speaker 1: PIM will be with again today. Um. You know, PepsiCo

446
00:23:47,840 --> 00:23:50,160
Speaker 1: has had a good run over the years, I mean

447
00:23:50,240 --> 00:23:54,040
Speaker 1: in a tough space, and the consumer staples area has

448
00:23:54,080 --> 00:23:57,399
Speaker 1: been beset by just you know, tough pricing competition, and

449
00:23:57,760 --> 00:24:00,720
Speaker 1: consumers are moving to more healthful food worked it's not

450
00:24:00,760 --> 00:24:03,639
Speaker 1: as easy to make UH you know a profit margin.

451
00:24:04,000 --> 00:24:06,000
Speaker 1: Is that the mass produced goods that you know were

452
00:24:06,080 --> 00:24:09,840
Speaker 1: more familiar with UM. But to her credit, I think

453
00:24:10,040 --> 00:24:12,640
Speaker 1: and way should distinguish herself. I think in the consumer

454
00:24:12,680 --> 00:24:15,919
Speaker 1: product space is that she made a heavier bet on

455
00:24:16,680 --> 00:24:22,119
Speaker 1: product innovation and growing internally through organic UH sales means,

456
00:24:22,560 --> 00:24:25,080
Speaker 1: as opposed to the big acquisition that may or may

457
00:24:25,119 --> 00:24:28,960
Speaker 1: not work out that many of its other peers pursued. UM.

458
00:24:29,080 --> 00:24:30,800
Speaker 1: So I think it's a it's it's a very strong

459
00:24:30,840 --> 00:24:34,159
Speaker 1: record she had on a totally term basis. Again, depending

460
00:24:34,200 --> 00:24:36,400
Speaker 1: on the time you measured over those ten years, it's

461
00:24:36,640 --> 00:24:41,199
Speaker 1: pretty competitive with you know, the broad consumer big names. Okay,

462
00:24:41,200 --> 00:24:45,040
Speaker 1: but even looking at the performance, let's say of Coca

463
00:24:45,080 --> 00:24:49,760
Speaker 1: Cola over that same period of time, UH, Coca Cola

464
00:24:49,800 --> 00:24:54,840
Speaker 1: has outperformed PEPSI, it has UM and UM. You know,

465
00:24:55,040 --> 00:24:58,679
Speaker 1: there's a benefit I guess in this UH study to

466
00:24:58,720 --> 00:25:03,000
Speaker 1: be concentrated. Coca Cola has been principally a beverage company

467
00:25:03,240 --> 00:25:05,440
Speaker 1: didn't have a food assets. And there's two ways to

468
00:25:05,480 --> 00:25:08,760
Speaker 1: look at it. I mean, during some periods when you know,

469
00:25:08,840 --> 00:25:12,440
Speaker 1: when uh, the beverage business became a very tough one

470
00:25:12,480 --> 00:25:15,600
Speaker 1: and they go through cycles like other businesses, PepsiCo could

471
00:25:15,640 --> 00:25:20,040
Speaker 1: offset that with its food business. UM. In UH more

472
00:25:20,040 --> 00:25:23,800
Speaker 1: recent times, though, being a concentrated beverage company seems to

473
00:25:24,200 --> 00:25:28,160
Speaker 1: um be the way to go. UH. Having said that, though, UH,

474
00:25:28,160 --> 00:25:29,840
Speaker 1: and that circles back to PepsiCo, I think one of

475
00:25:29,880 --> 00:25:31,840
Speaker 1: the first things that new CEO is going to be

476
00:25:31,880 --> 00:25:34,440
Speaker 1: tackling is the is the big challenges that it's set

477
00:25:34,440 --> 00:25:38,440
Speaker 1: North American beverage A division is undergoing. Would an acquisition

478
00:25:38,520 --> 00:25:43,040
Speaker 1: help it? Might you know again that the concentration on

479
00:25:43,480 --> 00:25:47,280
Speaker 1: being an eternally generated innovative company UH. May you know,

480
00:25:47,320 --> 00:25:49,800
Speaker 1: critic may say, well, maybe she didn't utilize her balance

481
00:25:49,800 --> 00:25:52,160
Speaker 1: sheet as much as she could have to make acquisitions,

482
00:25:52,200 --> 00:25:57,240
Speaker 1: particularly in growthier areas in the developing markets, particularly in Asia. UM,

483
00:25:57,480 --> 00:26:00,359
Speaker 1: and so you may see a stepped up there for there.

484
00:26:00,840 --> 00:26:04,080
Speaker 1: What about a split between the beverage side of the

485
00:26:04,119 --> 00:26:07,159
Speaker 1: business and the food side of the business. Isn't this

486
00:26:07,320 --> 00:26:11,240
Speaker 1: something that at least was discussed because of the participation

487
00:26:11,280 --> 00:26:14,359
Speaker 1: of Nelson Pelts and try and fund management in PepsiCo.

488
00:26:14,840 --> 00:26:16,760
Speaker 1: That's right. A few years ago there was a big

489
00:26:16,800 --> 00:26:19,960
Speaker 1: push to make that separation. You know. Injured made the

490
00:26:20,000 --> 00:26:23,760
Speaker 1: case that there are some significant benefits of UM keeping

491
00:26:23,800 --> 00:26:28,040
Speaker 1: them keeping them together, the business rationale essentially being you know,

492
00:26:28,400 --> 00:26:31,800
Speaker 1: the size of the company and the scale gives it

493
00:26:31,800 --> 00:26:37,439
Speaker 1: advantages with procurement, distribution, synergies in marketing. Uh. I mean

494
00:26:37,440 --> 00:26:40,560
Speaker 1: they both have the direct store delivery routing system for instance.

495
00:26:40,560 --> 00:26:43,200
Speaker 1: That's a comparative advantage this company has versus many others

496
00:26:43,240 --> 00:26:48,280
Speaker 1: who don't UM. She felt that also reminding consumers that,

497
00:26:48,400 --> 00:26:51,200
Speaker 1: you know, getting a Pepsi soft drink while you're having

498
00:26:51,200 --> 00:26:53,080
Speaker 1: a bag of chips may make a lot of sense,

499
00:26:53,320 --> 00:26:56,439
Speaker 1: and since many do do just that, UM, there's some

500
00:26:56,520 --> 00:27:00,720
Speaker 1: natural synergies there. Having said that, the growing gap between

501
00:27:00,720 --> 00:27:04,600
Speaker 1: the performance of the Freedom A division and foods in

502
00:27:04,640 --> 00:27:07,679
Speaker 1: general and that of North American beverage is now widening

503
00:27:07,720 --> 00:27:10,720
Speaker 1: to the point that I think it really is prudent

504
00:27:10,800 --> 00:27:12,840
Speaker 1: to take a look to see if there's a fit.

505
00:27:13,040 --> 00:27:14,359
Speaker 1: How does it fit. Do they have to own a

506
00:27:14,440 --> 00:27:17,159
Speaker 1: hundred percent of it or maybe a majority interest? To

507
00:27:17,280 --> 00:27:19,320
Speaker 1: keep control of it. I think all these things are

508
00:27:19,320 --> 00:27:23,159
Speaker 1: gonna be on the table going forward. Ramon Laguarta, he

509
00:27:23,520 --> 00:27:28,000
Speaker 1: is the candidate to take over for Indian NYE. What

510
00:27:28,200 --> 00:27:32,200
Speaker 1: is going to be his biggest challenge. Well, again, it's

511
00:27:32,200 --> 00:27:34,960
Speaker 1: gonna be the North American beverages. And he's no, um,

512
00:27:34,960 --> 00:27:38,680
Speaker 1: you know, stranger to it. Um. You know, his background

513
00:27:38,920 --> 00:27:41,600
Speaker 1: is very much international. He understands the role that it

514
00:27:41,640 --> 00:27:44,439
Speaker 1: can play and the opportunity that's out there. You know,

515
00:27:44,440 --> 00:27:47,960
Speaker 1: PepsiCo stands with international has been a very prudent one.

516
00:27:48,280 --> 00:27:50,320
Speaker 1: It has a lot of joint ventures as opposed to

517
00:27:50,359 --> 00:27:54,640
Speaker 1: outright you know owning some of these developing markets. Uh.

518
00:27:54,720 --> 00:27:57,240
Speaker 1: So it's taken a prudent stance in that. Yes, it

519
00:27:57,280 --> 00:27:59,879
Speaker 1: wants to tap into the long term growth opportunity at

520
00:27:59,880 --> 00:28:02,119
Speaker 1: some these markets have. At the same time, you know,

521
00:28:02,400 --> 00:28:05,159
Speaker 1: it has to be disciplined with what it's spending to

522
00:28:05,200 --> 00:28:09,360
Speaker 1: get there. Um. I think, um, you know, over long

523
00:28:09,400 --> 00:28:11,240
Speaker 1: hold to growth. I think Miss silic Wark is going

524
00:28:11,280 --> 00:28:13,280
Speaker 1: to have to make some quick decisions to say we're

525
00:28:13,280 --> 00:28:16,920
Speaker 1: gonna stick with beverages. We need to make a bet,

526
00:28:17,359 --> 00:28:19,440
Speaker 1: uh in a bolder way in terms of how we're

527
00:28:19,440 --> 00:28:22,240
Speaker 1: gonna how we're gonna do that much appreciated Ken Shay,

528
00:28:22,240 --> 00:28:26,720
Speaker 1: Bloomberg Intelligence senior analysts for the World of Food and Beverages,

529
00:28:27,040 --> 00:28:30,879
Speaker 1: talking about the transition at the top of PepsiCo, and

530
00:28:30,920 --> 00:28:33,320
Speaker 1: here to talk about the transition at the top of PepsiCo.

531
00:28:33,359 --> 00:28:36,399
Speaker 1: But in another context, I want to bring Jordan Holman

532
00:28:36,520 --> 00:28:40,360
Speaker 1: are Bloomberg Managing Diversity reporter, and Jordan's you know. One

533
00:28:40,360 --> 00:28:42,960
Speaker 1: of the things that, of course is striking is that

534
00:28:43,040 --> 00:28:46,040
Speaker 1: the injury Nui is the first was the first farm

535
00:28:46,120 --> 00:28:49,760
Speaker 1: born chief executive of Pepsi and also the first woman

536
00:28:50,240 --> 00:28:56,240
Speaker 1: to lead this consumer products company. Uh. Does the legacy

537
00:28:56,320 --> 00:29:00,800
Speaker 1: that injured Nudie leave make it easier for women too

538
00:29:01,200 --> 00:29:04,280
Speaker 1: take their rightful place at the top of these major corporations.

539
00:29:04,600 --> 00:29:07,840
Speaker 1: That's a really interesting question. Um. She held the company

540
00:29:07,880 --> 00:29:10,400
Speaker 1: for twelve years, and during her time she was much

541
00:29:10,440 --> 00:29:13,640
Speaker 1: looked at as you know, a strong female leader. But

542
00:29:13,760 --> 00:29:16,440
Speaker 1: what we're seeing is that a lot of females chief

543
00:29:16,480 --> 00:29:19,720
Speaker 1: executive officers who stepped down are being replaced by men.

544
00:29:20,320 --> 00:29:24,640
Speaker 1: So while Pepsi now has UM, you can now say

545
00:29:24,680 --> 00:29:28,960
Speaker 1: that they've had a female chief UM officer, we don't.

546
00:29:29,040 --> 00:29:32,280
Speaker 1: They're not, you know, coming up with another one anytime soon.

547
00:29:32,720 --> 00:29:35,240
Speaker 1: Is it because they haven't yet to develop the talent

548
00:29:35,480 --> 00:29:39,360
Speaker 1: or is there a natural inclination to always go with

549
00:29:39,440 --> 00:29:42,840
Speaker 1: what may be perceived as the safe choice, which is

550
00:29:42,880 --> 00:29:45,880
Speaker 1: to hire a man. I think we're still getting like

551
00:29:45,920 --> 00:29:48,360
Speaker 1: as society is still getting over those perceptions of who

552
00:29:48,400 --> 00:29:51,000
Speaker 1: can lead UM. We're very much still in the phase

553
00:29:51,640 --> 00:29:56,320
Speaker 1: of companies having their first female chief officers, so that

554
00:29:56,480 --> 00:30:00,000
Speaker 1: is still UM. The talent pipeline is there, but phil

555
00:30:00,040 --> 00:30:02,440
Speaker 1: in it with the women who can take over UM

556
00:30:02,480 --> 00:30:04,600
Speaker 1: that needs to be more of a push. Well. We notice,

557
00:30:04,640 --> 00:30:08,520
Speaker 1: for example, in the aerospace and defense industry, that Cathy

558
00:30:08,720 --> 00:30:13,160
Speaker 1: Warden is scheduled to become the chief executive of North Grummant.

559
00:30:13,640 --> 00:30:17,840
Speaker 1: Is there something about that industry that ends up tipping

560
00:30:18,240 --> 00:30:22,240
Speaker 1: the scales towards a woman CEO. I'm not sure if

561
00:30:22,240 --> 00:30:26,080
Speaker 1: his industry UM is industry specific. I think what you

562
00:30:26,120 --> 00:30:29,600
Speaker 1: really need at companies or champions who will promote women

563
00:30:30,000 --> 00:30:33,600
Speaker 1: and who will, you know, make it their mission to

564
00:30:34,280 --> 00:30:37,280
Speaker 1: make diversity at all levels. For example, Land of Lakes

565
00:30:37,400 --> 00:30:41,120
Speaker 1: is named uh openly gay woman as their CEO, bet Ford.

566
00:30:41,360 --> 00:30:43,280
Speaker 1: That's still a first to have a woman as an

567
00:30:43,280 --> 00:30:46,360
Speaker 1: openly gay person. So once we get over the humps

568
00:30:46,360 --> 00:30:49,640
Speaker 1: of the first, then we can have conversations about just

569
00:30:50,360 --> 00:30:52,920
Speaker 1: having a level playing field, right, because I was noting,

570
00:30:52,920 --> 00:30:57,320
Speaker 1: for example, that Lockheed Martin is run by Marilyn Houston,

571
00:30:58,080 --> 00:31:02,920
Speaker 1: chief executive of the defense contractor. As far as the

572
00:31:02,960 --> 00:31:08,479
Speaker 1: consumer products business is concerned, is there a lack of

573
00:31:08,520 --> 00:31:12,480
Speaker 1: diversity at the top of consumer product companies? We've seen

574
00:31:12,520 --> 00:31:16,680
Speaker 1: a mix. Um, there's definitely been women's CEOs at the

575
00:31:16,720 --> 00:31:20,360
Speaker 1: top of consumer products. But once again, I don't know

576
00:31:20,400 --> 00:31:23,440
Speaker 1: if it's more so the company that you're running based

577
00:31:23,480 --> 00:31:25,480
Speaker 1: off of the products that you're selling, or the people

578
00:31:25,560 --> 00:31:27,920
Speaker 1: who are saying, you know, I believe in this person,

579
00:31:28,000 --> 00:31:30,760
Speaker 1: they can help my company. Um, and if you have

580
00:31:30,840 --> 00:31:34,240
Speaker 1: more women at the bottom of your company, who who's

581
00:31:34,240 --> 00:31:36,720
Speaker 1: in your pipeline to raise at the top, then there's

582
00:31:36,760 --> 00:31:39,680
Speaker 1: a stronger possibility that will stop having just the first

583
00:31:39,680 --> 00:31:42,960
Speaker 1: with this hap female CEO. Indeed, all right, thanks very much.

584
00:31:43,120 --> 00:31:47,480
Speaker 1: Jordan's Holman are a Bloomberg Managing diversity reporter on changes

585
00:31:47,520 --> 00:31:54,480
Speaker 1: at the top of PepsiCo. Thanks for listening to the

586
00:31:54,520 --> 00:32:01,000
Speaker 1: Bloomberg Surveillance podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud,

587
00:32:01,360 --> 00:32:05,600
Speaker 1: or whichever podcast platform you prefer. I'm on Twitter at

588
00:32:05,640 --> 00:32:09,840
Speaker 1: Tom Keene before the podcast. You can always catch us worldwide.

589
00:32:10,360 --> 00:32:11,440
Speaker 1: I'm Bloomberg Radio