Speaker 1: Yeah. Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene
Speaker 1: Jay Leye. We bring you insight from the best in economics, finance,
Speaker 1: investment and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud,
Speaker 1: Bloomberg dot Com, and of course, on the Bloomberg Yeah.
Speaker 1: Your main story. Following a weekend of claims by President
Speaker 1: Donald Trump that he has the upper hand in a
Speaker 1: trade war with China, Beijing responding through state media by
Speaker 1: saying the nation is ready to endure the economic fallout.
Speaker 1: China is prepared for a protracted war and doesn't fear
Speaker 1: sacrificing short term economic interest. That's according to an editorial
Speaker 1: in the nationalist Global Times on Sunday evening joined me
Speaker 1: to discusses. Jeffrey you ubs wef Management, head of UK
Speaker 1: Investment Office, and he joins us from landon. Good morning
Speaker 1: to your Jeffrey, get me up to speed on where
Speaker 1: on earth we are with this trade dispute. Well, I
Speaker 1: mean know, firstly in the Global Times and probably will
Speaker 1: have its own let's just say in the readership to
Speaker 1: h to a cater to us. I wouldn't put it
Speaker 1: that far yet, but at the same time, you're going
Speaker 1: to see a combination of retric and restraint as what
Speaker 1: our economists start calling it. Uh And I think there
Speaker 1: are plenty of opportunities that China seas as well. I
Speaker 1: think there's a similar editorial, you know, and it was
Speaker 1: on the People's Daily or are somewhere else, So we
Speaker 1: noted external pressure is going to be an opportunity for
Speaker 1: reform in China and stressing that they need to play
Speaker 1: the long game as well, beyond a US political cycle
Speaker 1: or even any other economical business cycle there. So I
Speaker 1: don't think consure they're too fuss about it, but the prerogative,
Speaker 1: but the priority remains to stabilize growth. I think that's
Speaker 1: what Beijing is looking at right ye if that's a
Speaker 1: really interesting perspective because for many people, the external pressures
Speaker 1: and not an incentive to reform domestically, it's perhaps an
Speaker 1: incentive to deep away from those reforms. The big push
Speaker 1: to de leverage is perhaps a little bit too ambitious
Speaker 1: at this point. Why is it an incentive to reform um?
Speaker 1: I think there are two things there. You know. Firstly,
Speaker 1: in the China is realized that can't be dependent on
Speaker 1: and exports forever. The current account and export and value
Speaker 1: bad that's been coming down anyway over the last a
Speaker 1: few years or so. We've just had the fourtieth anniversary
Speaker 1: of reform and opening up exports did the job to
Speaker 1: start off with. Now there's a new growth model that's
Speaker 1: needed going up the value chain. The second part is
Speaker 1: and on the technology side. For example, various Chinese companies
Speaker 1: have realized how dependent they are on overseas and technology
Speaker 1: as well as parts of their supply chain. So the
Speaker 1: supply chain story works both ways. Right, So now is
Speaker 1: this the time for domestic innovation? Now? Does this need
Speaker 1: perform in the education system in terms of how incentives
Speaker 1: work in China? Those discussions ongoing right now. They just
Speaker 1: need to draw the right conclusions. Is it fair to
Speaker 1: say that we can draw the following conclusion that it
Speaker 1: seems to me that the US does have the upper
Speaker 1: hand in this trade dispute, at least in the short term. Jeff, Well,
Speaker 1: it's clear US um international exposure as far less and
Speaker 1: you're compared to other major economies around the world. If
Speaker 1: you just look at the overseas earnings and the Dow
Speaker 1: own verses those in the dacks that see um SMI
Speaker 1: for example, it's far lower in the US, so I
Speaker 1: would say the US is less to lose at this point.
Speaker 1: But again China probably wants to play the longer game here.
Speaker 1: It just seems to me, Jeff, that we viewed China
Speaker 1: at the moment almost exclusively through the trade prison, when
Speaker 1: there seems to me there is a lot more going
Speaker 1: on domestically. Just where are we with the Chinese economy
Speaker 1: at the moment and what kind of policy leavers are
Speaker 1: they pulling to address the issues? Um, So, two things really,
Speaker 1: you know, Firstly, on the financial side you just mentioned
Speaker 1: deleveraging has the downside liquidity and growth impact like extension
Speaker 1: being stronger, a bit stronger than asipated and perhaps so
Speaker 1: now and the conditioning is clear now the PBS, so
Speaker 1: the people's daily against stress. Now is the time for
Speaker 1: leverage stability, you know, rather than deleveraging. It's achieved them,
Speaker 1: it's required results. So that's the first point. Again, it's
Speaker 1: not pumping liquidity back into the system, but make sure
Speaker 1: it's no further tightening of financial conditions. Secondly, if we
Speaker 1: go back to two thousand and fifteen, two thou sixteen,
Speaker 1: perhaps the financial authority use the fiscal authorities and the
Speaker 1: PBOC the monetary authorities are not on the same page
Speaker 1: there In the end, you know, a lot could have
Speaker 1: been done, but nothing was done or very little was
Speaker 1: done um uh in good time. So this time around,
Speaker 1: it's very clear coordinated fiscal and a monetary response that's
Speaker 1: going to come through. But again within reason. I think
Speaker 1: the pre BOC is clear keen and the regulators as well,
Speaker 1: not to unwind some of the reforms that have been achieved.
Speaker 1: But on the fiscal side, if you look at where
Speaker 1: the budget deficit is, especially on the central level, there's
Speaker 1: a lot more room they can deploy, but they're being
Speaker 1: sparing about it. On Friday they stepped in, the authorities
Speaker 1: stepped into stabilize the Chinese currency, and Jeff, I'm trying
Speaker 1: to work out whether the authorities are uncomfortable with the
Speaker 1: pace of the decline or the overall level of dollar Shina.
Speaker 1: I think it's always about pace rather than level. And
Speaker 1: again we've been above seven before, right, and so in
Speaker 1: the level, I think it's less of an issue pace.
Speaker 1: You don't want to precipitate um You know, these are
Speaker 1: a vicious circle master appreciation expectations. But if you look
Speaker 1: at reserve holdings, and if you look at the fact
Speaker 1: that between two thousand and sixteen when we have that
Speaker 1: major wobble, right be seen two thousand and sixteen, and
Speaker 1: now they really haven't unwound you know, capital controls. They
Speaker 1: were limiting you know, overseas expenditures, and I've got in
Speaker 1: laws you know here right now, and they're probably not
Speaker 1: gonna be able to buy ten handbags, you know in
Speaker 1: the sulverages, right so because of the purchase restrictions. So
Speaker 1: all of that is in place. So I think they've
Speaker 1: got a lot more to control. It's about the level
Speaker 1: they don't want to fand appreciation and expectations on shore. Jeff,
Speaker 1: let's talk about your risk, asset exposure at the moment
Speaker 1: and how you put money to work. Five weeks of
Speaker 1: solid gains on the S and P five coming into
Speaker 1: this week. The trade story is kind of humming away
Speaker 1: in the background, but for US assets, so I don't
Speaker 1: see it's shaping things too much. You have you on
Speaker 1: how you put money to work at the moment. Still
Speaker 1: overweight equities, but global equities were not particularly overweight any
Speaker 1: individual market. But again it's a case of managing risk
Speaker 1: it's more turbulent up ahead. You want to be decorrelated.
Speaker 1: So still you know, have that general risk on exposure,
Speaker 1: but if there are ways to actually benefit or limit
Speaker 1: your draw downs, and that's the message we're giving to
Speaker 1: clients right now. If the markets are going to suffer
Speaker 1: from bolit Lucie, especially any correlated sell off in bonds
Speaker 1: and equities as we saw in January, then you want
Speaker 1: to have be at alternatives, you know, be it through
Speaker 1: you know, off market assets which could actually benefit from
Speaker 1: that decorrelation. So that's our approach at this point. One
Speaker 1: trade haven in the United States was the small caps.
Speaker 1: That position is unwound and quite significant way Jeff do
Speaker 1: if you want small camps in America, Well, that's actually
Speaker 1: a less of a focus on the part of our clients,
Speaker 1: especially outside of the US. We've had more questions about
Speaker 1: tech you know, of late for example, to be honest,
Speaker 1: to give them the cell often. But again we want
Speaker 1: to take the medium to longer a point, a longer
Speaker 1: term approach here for small caps. You know, if they
Speaker 1: actually do have the potential to benefit from the domestic similars,
Speaker 1: you actually tend to see a much stronger you know,
Speaker 1: support for current policies on the part of small and
Speaker 1: medium as sized enterprises. You know they pulled on them,
Speaker 1: for example, often likes a higher idea n f IB
Speaker 1: survey server for example. I think that's quite well correlated
Speaker 1: with them small caps sentiment. Then I think the sentiment
Speaker 1: is there. And again if they're less exposed to the
Speaker 1: global trade picture. Um, if you just look at the
Speaker 1: over sea no revenues, I think for the broader Dow
Speaker 1: Jones in dust ronage about forty percent. For small captain
Speaker 1: it's going to be lower, and then they're in a
Speaker 1: better spot. But again we're not really interested in adding
Speaker 1: to risk at this point. It's about managing risk. Jeff.
Speaker 1: You they're great to catch up with your Jeff Ubs
Speaker 1: Wealth Management ahead of the UK Investment Office joining us
Speaker 1: out of London. As the sanctions clock is ticking, the
Speaker 1: first round kicking at midnight tonight on Iran. The next
Speaker 1: round of sanctions all important for the all market kicking
Speaker 1: in several months time. Let's discuss them show with Dantanna
Speaker 1: bum PwC Principal and Global Sanctions leader joins us here
Speaker 1: in New York. Always great to catch up with your Dann.
Speaker 1: Good morning, to you. Good morning, John. So what do
Speaker 1: we learn later today? What happens and then what happens
Speaker 1: again in three months. So the first tranche of sanctions
Speaker 1: being reimposed focuses on the reimposition of secondary sanction and essentially,
Speaker 1: broadly speaking, it forces foreign companies to choose between doing
Speaker 1: business with Iran or doing business with the US, but
Speaker 1: not both. So it criminalizes in the US lens UH
Speaker 1: European companies, for example, continuing to do business with Iran,
Speaker 1: with the later phase focusing primarily on oil and gas
Speaker 1: transactions being wound down in November, So before midnight to night,
Speaker 1: how busy of companies in Iran being to secure business
Speaker 1: and execute on deals before midnight? Well, I mean, let's
Speaker 1: be clear, this is not a popular move by the
Speaker 1: United States. This is not something that even many in
Speaker 1: the US wanted. As United States companies got into the
Speaker 1: market and created transactions with the Iranian space. Now financial
Speaker 1: services is largely out of the market and didn't engage,
Speaker 1: and there were much more limited supply. I don't think
Speaker 1: there's necessarily going to be a mad rush because this
Speaker 1: has been out there for months now. Everyone knew this
Speaker 1: was coming. What's going to be interesting is who's still
Speaker 1: transacting tomorrow and the rest of the week. There's been
Speaker 1: talks now in the EU, and I believe a regulation
Speaker 1: went into effect across the EU member states this week
Speaker 1: that is a resurrection of the anti blocking boycott from
Speaker 1: on Cuba, basically telling European companies or companies operating Europe,
Speaker 1: you can't comply with the u S sanctions on Cuba.
Speaker 1: They've amended them to include that with Iran. Now, how
Speaker 1: that looks from an enforcement standpoint, what the US does
Speaker 1: from an enforcement standpoint really unclear at this point. And Dan,
Speaker 1: if you're a European multinational with operations in Iran, do
Speaker 1: you have the confidence in the regulation that the EU
Speaker 1: brings forward or do you just are on the side
Speaker 1: of caution and go with the u S sanctions? You
Speaker 1: are you are on the side of caution. The EU
Speaker 1: anti blocking statute on Cuba was never enforced, it was
Speaker 1: never used, it wasn't even universally adopted. Um. This is
Speaker 1: a little different. Um. This is a bit more of
Speaker 1: a hot potato issue than Cuba was even twenty plus
Speaker 1: years ago. That being said, I mean a number of
Speaker 1: large insurers and if you think about kind of how
Speaker 1: globe commerce works. Most of the major global insurers have
Speaker 1: already announced in May that they're backing out of Iran.
Speaker 1: If you can ensure trade, I mean, what chance does
Speaker 1: trade have to exist anyway. We're going to talk about
Speaker 1: the old market in just a moment, but I want
Speaker 1: to explore that concept backing out of Iran. It's it's
Speaker 1: something a lot of us will say, but I want
Speaker 1: to know what it actually means, because the sanctions regime
Speaker 1: over the last few years has always been uncertain, and
Speaker 1: it's been incredibly fluid, and we've seen it change again.
Speaker 1: If you're a multinational, let's just say you're a European
Speaker 1: company with operations on Iran. Does backing out mean you
Speaker 1: stop executing deals with Iran? Does it mean you move offices?
Speaker 1: Does it mean you move equipment? How does it work
Speaker 1: logistically just in terms of operations? Do you maintain a
Speaker 1: presence there? What you do? So? Given the uncertainty when
Speaker 1: the j c p o A the Iran Deal was enacted,
Speaker 1: um not many companies necessarily established a physical presence, but
Speaker 1: they did start dealing with Iran, shipping goods and services
Speaker 1: into Iran, sending people on temporary assignments into Iran. It's
Speaker 1: really elimination of deals, less so about movement of physical resources.
Speaker 1: I mean. The important thing to note though, is with
Speaker 1: all the rhetoric around sanctions this year, this has been
Speaker 1: the slowest year from an enforcement standpoint in the U
Speaker 1: S that I've ever seen. There's been one enforcement action
Speaker 1: at the federal level. Usually there's ten to fifteen at
Speaker 1: this time in the year. So how this looks in
Speaker 1: terms of the stick versus that can speak, It's really
Speaker 1: unclear what the administration is going to do. So how
Speaker 1: may it makes sense of that. Is it not being
Speaker 1: enforced as heavily in terms of the issues that arise
Speaker 1: because more people are abiding by some of the rules,
Speaker 1: or is it not happening because the US administration isn't
Speaker 1: actually being that forceful. So it's interesting. These cases that
Speaker 1: you've historically seen come out take years to get adjudicated
Speaker 1: to settle. So this isn't anything about near term activity.
Speaker 1: You could be settling a case in eighteen for activity.
Speaker 1: In so, even with a budget increase that Treasury has
Speaker 1: had in this area for the first time in years,
Speaker 1: there's still a very slow move on enforcement. Despite all
Speaker 1: of the changes to the different sanctions regimes. So the
Speaker 1: big question I think is in several months time for
Speaker 1: a lot of our listeners who maybe have exposure to
Speaker 1: the all market, is what happens in several months time
Speaker 1: when that round of sanctions kicks in the target of
Speaker 1: this administration that the objective overall. I imagine they'd like
Speaker 1: to see Iranian oil exports drop down to zero. The
Speaker 1: Chinese are saying they're not going to go with it.
Speaker 1: How does that work? It would have been simpler if
Speaker 1: we didn't have the trade spat that was kind of
Speaker 1: underpinning all of the U S. China related issues. That
Speaker 1: is going to be the real test. China has been
Speaker 1: very clear that they're going to continue to buy oil
Speaker 1: from Iran, and that doesn't look like it's going to start.
Speaker 1: I mean, frankly, you used to have a bit more
Speaker 1: predictability in the space. Right now, it's a lot harder
Speaker 1: to tell. But based on all of the different issues
Speaker 1: that Trump is picking with China, where this could actually
Speaker 1: land in a few months time. See, I want to
Speaker 1: know how the enforcement works. Because the Chinese is settling
Speaker 1: those deals in yuan. How does the United States not
Speaker 1: incentivized but prevent the Chinese from wanting to deal with Iran,
Speaker 1: from from not coming back those crude all impacts. There's
Speaker 1: likely going to need to be some balance, and potentially
Speaker 1: who knows, all of the tariffs speak could be the
Speaker 1: stick that you know, easing back on that for allowing
Speaker 1: them to transact at certain levels of ranny and crude.
Speaker 1: That could be part of the deal creating the issue
Speaker 1: to allow him to come in and create a deal.
Speaker 1: From the Trump administration standpoint, what's fascinating about this for
Speaker 1: a lot of people as this is three months away
Speaker 1: and we've still got zero clarity on how this is
Speaker 1: going to work. India, for instance, says we abide by
Speaker 1: U N sanctions and now they've got a really nuance
Speaker 1: approach and no one knows what India is going to do.
Speaker 1: Have you ever seen anything like this where three months
Speaker 1: out we could have a huge sanctions push on a
Speaker 1: country of oil exports and we have zero clarity on
Speaker 1: who's going to do what I mean, these are somewhat
Speaker 1: unprecedented times to begin with, and you know, Secretary Low
Speaker 1: as he was leaving its the Obama administration was ending
Speaker 1: spoke about sanctions over use. Were there I mean last
Speaker 1: week there were sanctions levied against the NATO Allies government
Speaker 1: ministers as a result for the kidnapping or the perceived
Speaker 1: kidnapping of a US pastor in Turkey. I mean, this
Speaker 1: is not how sanctions have generally been used historically. And
Speaker 1: then North Korea as well on the right part, because
Speaker 1: it doesn't look like those talks a going as well
Speaker 1: as maybe this administration hoped. Yeah that that is not
Speaker 1: entirely a surprise for those who really watched the space closely,
Speaker 1: that the North Koreans aren't eagerly handing over their nuclear
Speaker 1: weapons regime. I mean that being said, North Korea is
Speaker 1: another interesting one. Unlike Iran. People don't want to do
Speaker 1: business in North Korea, so all of the focus and
Speaker 1: making them kind of a good guy and sharing in
Speaker 1: kind of global prosperity, I mean, Iran was a very
Speaker 1: different situation. European companies, global companies have been Iran for years.
Speaker 1: No one had been in North Korea. Dan Sanna Baum
Speaker 1: always great to catch up with you and get the
Speaker 1: inside on what happens next and potentially how companies have
Speaker 1: got a deal with a new sanctions regime that is
Speaker 1: implemented once again, the clock is ticking. The first round
Speaker 1: of sanctions kick out tonight at midnight. The next round
Speaker 1: on oil kicks in in about three months time. PWC's
Speaker 1: principal and at Global Sanctions Leader great to catch Hell
Speaker 1: we do down and Milletty is a managing director lead
Speaker 1: portfolio manager for Wells Fargo Asset Management, and she joins
Speaker 1: us from the lovely state of Wisconsin. And thank you
Speaker 1: very much for being here. Happy summer to you. Is
Speaker 1: there no is there no worry in your life right now?
Speaker 1: Do you want something to worry about? Oh, pim, I
Speaker 1: have plenty to worry about. And for anyone who really
Speaker 1: knows me, they know that I am a professional warrior
Speaker 1: at heart. Um, I spent all of my time worrying
Speaker 1: and having a job in this market and dealing with
Speaker 1: the stock market every day. I think most of us
Speaker 1: spend a good majority of our time worrying. But you
Speaker 1: also have to have a lot of conviction and a
Speaker 1: process and other things to extract the emotion out and
Speaker 1: to be able to operate every day. Okay, Well, the
Speaker 1: reason I bring up the concept of worrying is that
Speaker 1: you've described your the current situation is no matter how
Speaker 1: much time you spend worrying about the market, all you
Speaker 1: do is experience accelerating growth. Yeah, well, the the economy
Speaker 1: is certainly experiencing that accelerating growth, and the market, I know,
Speaker 1: is forward looking, and the market also has been going up,
Speaker 1: and so certainly the market anticipated the economy to be strong.
Speaker 1: It has been, And even with a lot of fears
Speaker 1: and challenges that we hear every day in the headlines,
Speaker 1: the market continues to kind of slowly march higher. And
Speaker 1: I think that tells us that for the most part,
Speaker 1: we you know, the market at least is predicting that
Speaker 1: the the stock market will continue in the economy will
Speaker 1: continue to accelerate from here. And then I think, you know,
Speaker 1: I know, certainly for the last two years, one of
Speaker 1: the headlines that I see quite often and that I
Speaker 1: hear about and people challenge me on all the time
Speaker 1: is the length of this bowl market and how long
Speaker 1: it has lasted. That when you think about the cumulative
Speaker 1: returns that we've gotten over the last nine plus years,
Speaker 1: it's actually twenty five lower the cumulative return of this
Speaker 1: last ball market cycle than it than historical bowl market
Speaker 1: cycles have been um And so again, you know, history
Speaker 1: is no certain judge of what's going to happen in
Speaker 1: the future. But if the headline read that this bowl
Speaker 1: market cycle has produced lower cumulative returns with an accelerating economy,
Speaker 1: there's a possibility that we might look at things differently. Certainly,
Speaker 1: the market probably wouldn't act any different. The story would
Speaker 1: still be the story, but the headlines might be a
Speaker 1: little different. Right. Well, here here's a just maybe just
Speaker 1: to put it into a little bit of short term context.
Speaker 1: If you look at what the SMP has done since
Speaker 1: the beginning of May, we've seen an increase of about
Speaker 1: nine so it's worked off all of the turmoil that
Speaker 1: we experienced from the beginning, let's say, from the end
Speaker 1: of January. Do you do you think that that's going
Speaker 1: to continue or is this sort of a head fake?
Speaker 1: In in a certain way, I think that the market
Speaker 1: strength will continue, but not without volatility. So would I
Speaker 1: be surprised if we get a correction? Now, I wouldn't be.
Speaker 1: I wouldn't be surprised at that at all. In fact,
Speaker 1: as a bottom up stock picker and a money manager,
Speaker 1: I would actually welcome, you know, this, some volatility to
Speaker 1: allow us to continue to find names and companies selling
Speaker 1: at a discount UM, and that's what we continue to
Speaker 1: look for in this market. But there's also been some
Speaker 1: divergence between the names that have really outperformed in this
Speaker 1: market and names that have truly lagged while their fundamentals
Speaker 1: continue to improve. And so that's what we're paying attention to,
Speaker 1: because I think the risk reward is what the you
Speaker 1: know what what investors should be paying attention to right
Speaker 1: now and making sure that each investment they make they
Speaker 1: try to chip the risk reward into their favor. Well,
Speaker 1: just to give one example of a fund that you
Speaker 1: hold some responsibility over is the Wells Fargo Opportunity Fund. Correct, Okay,
Speaker 1: so you're today you're up nearly seven percent, So good
Speaker 1: on you. That's really up there with the S and
Speaker 1: P of five. When I look at the holdings, alphabet
Speaker 1: E Trade, Financial, Sales Force, okay, those are pretty well known.
Speaker 1: But then you start to get to things like Leva, Nova,
Speaker 1: Sherwin Williams and Webster Financial and bio rad Laboratories. Can
Speaker 1: you offer a guide as to what counts as an
Speaker 1: opportunity for that fund? Sure? Absolutely, I mean that's exactly.
Speaker 1: We do have some names that are all known, um,
Speaker 1: in the market. Certainly Alphabet, but even that name represents
Speaker 1: a name that has lagged some of the other thing
Speaker 1: names and actually looks more attractive relatively on evaluation based
Speaker 1: the name that we can justify. But a name like
Speaker 1: live and Nova certainly a name in the medical space
Speaker 1: that we think is you know, although the stock has
Speaker 1: performed well, we think it's a name that's been ignored
Speaker 1: by a lot of the market. And you know, this
Speaker 1: is a MidCap company, you know, around a six billion
Speaker 1: dollars heart lung machines based in the UK, based in London,
Speaker 1: right right, But they have some technology and development that's
Speaker 1: even more dynamic technology that will show some good growth,
Speaker 1: we believe. And this is you know, a good quality
Speaker 1: management team showing some great growth. We they have trials
Speaker 1: that are going on right now that looks to expand
Speaker 1: a lot of their markets as well. So we think
Speaker 1: this will be a name that a lot of other
Speaker 1: investors start to pay attention to. We've been in the
Speaker 1: stock for quite a while um and certainly other investors
Speaker 1: we believe will also find this name attractive. And what's
Speaker 1: the what's someone what's the one major mistake that you
Speaker 1: notice investors make over and over again. How certainly buying
Speaker 1: the things that everybody loves, it's the easiest thing to do. Um.
Speaker 1: It's easy to buy a name that is going up um.
Speaker 1: And that's kind of you know, momentum investing. It's another
Speaker 1: thing when you're buying a name that has some challenges,
Speaker 1: that has not performed in, especially in a market like this, right.
Speaker 1: And so when you're buying a name that hasn't gone
Speaker 1: up the rest of the with the rest of the market,
Speaker 1: you're asking yourself what what's wrong? Right? That goes back
Speaker 1: to your concept of conviction exactly. And you have to
Speaker 1: know and understand the company enough you understand what you're
Speaker 1: investing in, and so you have to have some kind
Speaker 1: of investment thesis. Do you know why you're investing in
Speaker 1: this company? And and so if you understand the reason why, yes,
Speaker 1: you can be wrong, but you're going to feel better
Speaker 1: that you understood at least why you did that. Right.
Speaker 1: If you if somebody says, hey, invest in the stock
Speaker 1: because it's going to go up, and you put money there,
Speaker 1: you know it's already up, and you put money there
Speaker 1: and it goes down a lot and you don't understand
Speaker 1: it it's going to be bad. So I think it's
Speaker 1: that's the worst mistake. We got to leave it there.
Speaker 1: But I want to thank you very much. And Letty
Speaker 1: Managing Director, Lead portfolio Manager, Wells Fargo Asset Management. Well,
Speaker 1: the topic is a PepsiCo and Nui is stepping down
Speaker 1: as the chief executive officer of the Food and Beverage
Speaker 1: Alliant and here to tell us a little bit more
Speaker 1: about the company and its future prospects is our own
Speaker 1: Kenneth Shay. He is our Bloomberg Intelligence Senior Analyst for
Speaker 1: Food and Beverage. Ken say, thanks very much for being
Speaker 1: with us. You know, I was looking at a ten
Speaker 1: year chart of PepsiCo versus the sm P five hundred
Speaker 1: plus the SMP five consumer staples sector, and it is
Speaker 1: not a nice picture when you look at PepsiCo the
Speaker 1: total return a hundred over the last ten years, but
Speaker 1: the SMP hundred and seventy one and the subsector that
Speaker 1: consumer staples sector a hundred and fifty two. Is this
Speaker 1: is going to be remembered as a positive time for PepsiCo. Yeah, Hi,
Speaker 1: PIM will be with again today. Um. You know, PepsiCo
Speaker 1: has had a good run over the years, I mean
Speaker 1: in a tough space, and the consumer staples area has
Speaker 1: been beset by just you know, tough pricing competition, and
Speaker 1: consumers are moving to more healthful food worked it's not
Speaker 1: as easy to make UH you know a profit margin.
Speaker 1: Is that the mass produced goods that you know were
Speaker 1: more familiar with UM. But to her credit, I think
Speaker 1: and way should distinguish herself. I think in the consumer
Speaker 1: product space is that she made a heavier bet on
Speaker 1: product innovation and growing internally through organic UH sales means,
Speaker 1: as opposed to the big acquisition that may or may
Speaker 1: not work out that many of its other peers pursued. UM.
Speaker 1: So I think it's a it's it's a very strong
Speaker 1: record she had on a totally term basis. Again, depending
Speaker 1: on the time you measured over those ten years, it's
Speaker 1: pretty competitive with you know, the broad consumer big names. Okay,
Speaker 1: but even looking at the performance, let's say of Coca
Speaker 1: Cola over that same period of time, UH, Coca Cola
Speaker 1: has outperformed PEPSI, it has UM and UM. You know,
Speaker 1: there's a benefit I guess in this UH study to
Speaker 1: be concentrated. Coca Cola has been principally a beverage company
Speaker 1: didn't have a food assets. And there's two ways to
Speaker 1: look at it. I mean, during some periods when you know,
Speaker 1: when uh, the beverage business became a very tough one
Speaker 1: and they go through cycles like other businesses, PepsiCo could
Speaker 1: offset that with its food business. UM. In UH more
Speaker 1: recent times, though, being a concentrated beverage company seems to
Speaker 1: um be the way to go. UH. Having said that, though, UH,
Speaker 1: and that circles back to PepsiCo, I think one of
Speaker 1: the first things that new CEO is going to be
Speaker 1: tackling is the is the big challenges that it's set
Speaker 1: North American beverage A division is undergoing. Would an acquisition
Speaker 1: help it? Might you know again that the concentration on
Speaker 1: being an eternally generated innovative company UH. May you know,
Speaker 1: critic may say, well, maybe she didn't utilize her balance
Speaker 1: sheet as much as she could have to make acquisitions,
Speaker 1: particularly in growthier areas in the developing markets, particularly in Asia. UM,
Speaker 1: and so you may see a stepped up there for there.
Speaker 1: What about a split between the beverage side of the
Speaker 1: business and the food side of the business. Isn't this
Speaker 1: something that at least was discussed because of the participation
Speaker 1: of Nelson Pelts and try and fund management in PepsiCo.
Speaker 1: That's right. A few years ago there was a big
Speaker 1: push to make that separation. You know. Injured made the
Speaker 1: case that there are some significant benefits of UM keeping
Speaker 1: them keeping them together, the business rationale essentially being you know,
Speaker 1: the size of the company and the scale gives it
Speaker 1: advantages with procurement, distribution, synergies in marketing. Uh. I mean
Speaker 1: they both have the direct store delivery routing system for instance.
Speaker 1: That's a comparative advantage this company has versus many others
Speaker 1: who don't UM. She felt that also reminding consumers that,
Speaker 1: you know, getting a Pepsi soft drink while you're having
Speaker 1: a bag of chips may make a lot of sense,
Speaker 1: and since many do do just that, UM, there's some
Speaker 1: natural synergies there. Having said that, the growing gap between
Speaker 1: the performance of the Freedom A division and foods in
Speaker 1: general and that of North American beverage is now widening
Speaker 1: to the point that I think it really is prudent
Speaker 1: to take a look to see if there's a fit.
Speaker 1: How does it fit. Do they have to own a
Speaker 1: hundred percent of it or maybe a majority interest? To
Speaker 1: keep control of it. I think all these things are
Speaker 1: gonna be on the table going forward. Ramon Laguarta, he
Speaker 1: is the candidate to take over for Indian NYE. What
Speaker 1: is going to be his biggest challenge. Well, again, it's
Speaker 1: gonna be the North American beverages. And he's no, um,
Speaker 1: you know, stranger to it. Um. You know, his background
Speaker 1: is very much international. He understands the role that it
Speaker 1: can play and the opportunity that's out there. You know,
Speaker 1: PepsiCo stands with international has been a very prudent one.
Speaker 1: It has a lot of joint ventures as opposed to
Speaker 1: outright you know owning some of these developing markets. Uh.
Speaker 1: So it's taken a prudent stance in that. Yes, it
Speaker 1: wants to tap into the long term growth opportunity at
Speaker 1: some these markets have. At the same time, you know,
Speaker 1: it has to be disciplined with what it's spending to
Speaker 1: get there. Um. I think, um, you know, over long
Speaker 1: hold to growth. I think Miss silic Wark is going
Speaker 1: to have to make some quick decisions to say we're
Speaker 1: gonna stick with beverages. We need to make a bet,
Speaker 1: uh in a bolder way in terms of how we're
Speaker 1: gonna how we're gonna do that much appreciated Ken Shay,
Speaker 1: Bloomberg Intelligence senior analysts for the World of Food and Beverages,
Speaker 1: talking about the transition at the top of PepsiCo, and
Speaker 1: here to talk about the transition at the top of PepsiCo.
Speaker 1: But in another context, I want to bring Jordan Holman
Speaker 1: are Bloomberg Managing Diversity reporter, and Jordan's you know. One
Speaker 1: of the things that, of course is striking is that
Speaker 1: the injury Nui is the first was the first farm
Speaker 1: born chief executive of Pepsi and also the first woman
Speaker 1: to lead this consumer products company. Uh. Does the legacy
Speaker 1: that injured Nudie leave make it easier for women too
Speaker 1: take their rightful place at the top of these major corporations.
Speaker 1: That's a really interesting question. Um. She held the company
Speaker 1: for twelve years, and during her time she was much
Speaker 1: looked at as you know, a strong female leader. But
Speaker 1: what we're seeing is that a lot of females chief
Speaker 1: executive officers who stepped down are being replaced by men.
Speaker 1: So while Pepsi now has UM, you can now say
Speaker 1: that they've had a female chief UM officer, we don't.
Speaker 1: They're not, you know, coming up with another one anytime soon.
Speaker 1: Is it because they haven't yet to develop the talent
Speaker 1: or is there a natural inclination to always go with
Speaker 1: what may be perceived as the safe choice, which is
Speaker 1: to hire a man. I think we're still getting like
Speaker 1: as society is still getting over those perceptions of who
Speaker 1: can lead UM. We're very much still in the phase
Speaker 1: of companies having their first female chief officers, so that
Speaker 1: is still UM. The talent pipeline is there, but phil
Speaker 1: in it with the women who can take over UM
Speaker 1: that needs to be more of a push. Well. We notice,
Speaker 1: for example, in the aerospace and defense industry, that Cathy
Speaker 1: Warden is scheduled to become the chief executive of North Grummant.
Speaker 1: Is there something about that industry that ends up tipping
Speaker 1: the scales towards a woman CEO. I'm not sure if
Speaker 1: his industry UM is industry specific. I think what you
Speaker 1: really need at companies or champions who will promote women
Speaker 1: and who will, you know, make it their mission to
Speaker 1: make diversity at all levels. For example, Land of Lakes
Speaker 1: is named uh openly gay woman as their CEO, bet Ford.
Speaker 1: That's still a first to have a woman as an
Speaker 1: openly gay person. So once we get over the humps
Speaker 1: of the first, then we can have conversations about just
Speaker 1: having a level playing field, right, because I was noting,
Speaker 1: for example, that Lockheed Martin is run by Marilyn Houston,
Speaker 1: chief executive of the defense contractor. As far as the
Speaker 1: consumer products business is concerned, is there a lack of
Speaker 1: diversity at the top of consumer product companies? We've seen
Speaker 1: a mix. Um, there's definitely been women's CEOs at the
Speaker 1: top of consumer products. But once again, I don't know
Speaker 1: if it's more so the company that you're running based
Speaker 1: off of the products that you're selling, or the people
Speaker 1: who are saying, you know, I believe in this person,
Speaker 1: they can help my company. Um, and if you have
Speaker 1: more women at the bottom of your company, who who's
Speaker 1: in your pipeline to raise at the top, then there's
Speaker 1: a stronger possibility that will stop having just the first
Speaker 1: with this hap female CEO. Indeed, all right, thanks very much.
Speaker 1: Jordan's Holman are a Bloomberg Managing diversity reporter on changes
Speaker 1: at the top of PepsiCo. Thanks for listening to the
Speaker 1: Bloomberg Surveillance podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud,
Speaker 1: or whichever podcast platform you prefer. I'm on Twitter at
Speaker 1: Tom Keene before the podcast. You can always catch us worldwide.
Speaker 1: I'm Bloomberg Radio