1 00:00:00,040 --> 00:00:03,040 Speaker 1: To our guests Jason Katz, Managing director and private wealth 2 00:00:03,040 --> 00:00:09,119 Speaker 1: advisor at UBS Jason win recession is actually part of 3 00:00:09,160 --> 00:00:14,000 Speaker 1: the Fed's playbook. Does that delay then the normal equity 4 00:00:14,040 --> 00:00:16,360 Speaker 1: bounce back since the Fed and we just heard this 5 00:00:16,400 --> 00:00:19,119 Speaker 1: from the commentary today, the FED is not likely to 6 00:00:19,239 --> 00:00:24,439 Speaker 1: soften at the first sign of weakness. No, that's exactly right. 7 00:00:24,680 --> 00:00:28,000 Speaker 1: I mean, look, markets were very right for a pullback. 8 00:00:28,200 --> 00:00:30,680 Speaker 1: You know, the SMP was up fiftcent off the low. 9 00:00:31,200 --> 00:00:34,360 Speaker 1: We're bumping up against the two day moving averages. Multiples 10 00:00:34,360 --> 00:00:37,800 Speaker 1: got to seventeen times, the VIS got to one. So 11 00:00:37,960 --> 00:00:40,520 Speaker 1: China just sort of was the charity on top. And yes, 12 00:00:40,880 --> 00:00:45,640 Speaker 1: I think today was more about recession concerns resulting from 13 00:00:45,720 --> 00:00:48,840 Speaker 1: what's happening in China, not to mention how long they 14 00:00:48,880 --> 00:00:53,360 Speaker 1: remain at whatever terminal rate that they land at. Well, 15 00:00:53,680 --> 00:00:55,920 Speaker 1: and of course this is all being reflected in the 16 00:00:56,240 --> 00:00:59,320 Speaker 1: butt market in particular. And you know, with where we've 17 00:00:59,400 --> 00:01:01,480 Speaker 1: gone with the bonemark, I mean, it's it's been a 18 00:01:01,480 --> 00:01:04,080 Speaker 1: horrible year if you just there for the price action, 19 00:01:04,080 --> 00:01:06,120 Speaker 1: and we're looking at what the worst year I believe 20 00:01:06,120 --> 00:01:10,480 Speaker 1: of fixed income since surely this is also at the 21 00:01:10,480 --> 00:01:14,039 Speaker 1: same time one way one would consider looking for gains 22 00:01:14,080 --> 00:01:15,720 Speaker 1: in terms of the amount of juice you're getting here 23 00:01:15,760 --> 00:01:19,840 Speaker 1: in the possibility of an uplift. That's exactly right. I mean, 24 00:01:19,880 --> 00:01:22,640 Speaker 1: this is not only the worst year since n could 25 00:01:22,640 --> 00:01:25,760 Speaker 1: be the worst year on record for a balanced portfolio 26 00:01:25,840 --> 00:01:30,160 Speaker 1: of sixty forty. So for investors that have cash or 27 00:01:30,240 --> 00:01:32,720 Speaker 1: want to pivot a little bit away from risk assets, 28 00:01:33,240 --> 00:01:36,119 Speaker 1: I think you could definitely find opportunities and fixed income 29 00:01:36,240 --> 00:01:39,399 Speaker 1: land certainly we called cash alternatives, and even if you 30 00:01:39,440 --> 00:01:42,120 Speaker 1: extend duration a little bit, despite some of the pullback 31 00:01:42,160 --> 00:01:45,400 Speaker 1: we've seen on the tenuere you're looking at corporate bond 32 00:01:45,440 --> 00:01:49,000 Speaker 1: portfolios and that five semi percent range and getting bonds 33 00:01:49,040 --> 00:01:51,880 Speaker 1: at discounts. So I think you're gonna get returns that 34 00:01:52,040 --> 00:01:56,320 Speaker 1: after taxes better than the muted equity returns were likely 35 00:01:56,360 --> 00:01:58,720 Speaker 1: to see in the next few years. But what's odd 36 00:01:58,840 --> 00:02:01,160 Speaker 1: is that the equity market doesn't seem to be fully 37 00:02:01,160 --> 00:02:04,240 Speaker 1: embracing recession. We've had a very nice bounce back and 38 00:02:04,720 --> 00:02:07,360 Speaker 1: the job growth and everything. It seems like that part 39 00:02:07,440 --> 00:02:10,280 Speaker 1: of the market is saying things are going to be okay. 40 00:02:10,280 --> 00:02:12,400 Speaker 1: But then the bond market, now, if you look at 41 00:02:12,440 --> 00:02:15,440 Speaker 1: how much the yield on the tenure has dropped. It 42 00:02:15,480 --> 00:02:19,680 Speaker 1: seems that that the bond market is actually changing from 43 00:02:19,720 --> 00:02:24,560 Speaker 1: the overall view. Is that not correct? No, that's precisely right. 44 00:02:24,600 --> 00:02:28,400 Speaker 1: I mean you're looking at what forty year highs in 45 00:02:28,520 --> 00:02:32,320 Speaker 1: terms of spreads, and I think there's this this push 46 00:02:32,360 --> 00:02:35,480 Speaker 1: pull between equity investors saying it's going to be a 47 00:02:35,520 --> 00:02:38,680 Speaker 1: recession but a long shallow one and the bond market 48 00:02:38,760 --> 00:02:42,200 Speaker 1: seeing it differently. So we'll see who's right. Generally speaking, 49 00:02:42,200 --> 00:02:45,440 Speaker 1: the bonds market is correct in these uh in these 50 00:02:45,480 --> 00:02:49,440 Speaker 1: tug of wars, but you know, look, equity earnings have 51 00:02:49,560 --> 00:02:52,519 Speaker 1: to be revised. The street at a five percent growth 52 00:02:52,600 --> 00:02:56,360 Speaker 1: next year just seems absurd. Jayson, Let's just have a 53 00:02:56,360 --> 00:02:59,000 Speaker 1: look at these protests in China and how they perhaps 54 00:02:59,080 --> 00:03:01,720 Speaker 1: moved the dial with regards to how you look at 55 00:03:01,960 --> 00:03:05,360 Speaker 1: the possibility of investing in the country, because just in 56 00:03:05,400 --> 00:03:07,920 Speaker 1: the last few couple of weeks, really we've seen a 57 00:03:08,000 --> 00:03:11,280 Speaker 1: lot of positivity coming. There's been a real shifting sentiment 58 00:03:11,400 --> 00:03:14,440 Speaker 1: and made people really begin thinking that, based on a 59 00:03:14,480 --> 00:03:17,040 Speaker 1: reopen trade, that it's time to perhaps to be looking 60 00:03:17,080 --> 00:03:20,440 Speaker 1: at China rather closely. What's your take look in a 61 00:03:20,520 --> 00:03:24,960 Speaker 1: vacuum I think it's an extraordinary opportunity, and yet you 62 00:03:25,080 --> 00:03:28,320 Speaker 1: have to take into account what's happening there. This negative 63 00:03:28,360 --> 00:03:32,359 Speaker 1: food feedback loop from the protests have a profound impact 64 00:03:32,400 --> 00:03:34,839 Speaker 1: on whether you enter as an investor. In the short run, 65 00:03:35,320 --> 00:03:39,600 Speaker 1: the tighter China's grip, the more pushback from their population, 66 00:03:39,680 --> 00:03:43,200 Speaker 1: and the more pushback from the population, the tighter the 67 00:03:43,240 --> 00:03:46,000 Speaker 1: grip from She and Company. And I think frankly, in 68 00:03:46,040 --> 00:03:49,200 Speaker 1: the long run this will actually weaken China's power on 69 00:03:49,200 --> 00:03:52,960 Speaker 1: the world stage. So we think that China, when and 70 00:03:53,000 --> 00:03:55,600 Speaker 1: if they not if, but when they do reopen, from 71 00:03:55,600 --> 00:03:58,440 Speaker 1: a standpoint of valuation, is probably one of the cheapest 72 00:03:58,480 --> 00:04:01,360 Speaker 1: regions in the world. But the question is when to enter, 73 00:04:01,440 --> 00:04:03,480 Speaker 1: and it seems a little bit too early to do so. 74 00:04:04,240 --> 00:04:07,640 Speaker 1: One other outcome that you didn't mention might be that 75 00:04:07,680 --> 00:04:12,480 Speaker 1: it strengthens some of She's opponents within the party structure. 76 00:04:12,720 --> 00:04:15,280 Speaker 1: Now and you're looking at the party congress that we 77 00:04:15,360 --> 00:04:18,919 Speaker 1: just went through, it doesn't seem very likely that you 78 00:04:18,960 --> 00:04:21,600 Speaker 1: know that they're nipping at his heels. But then if 79 00:04:21,640 --> 00:04:24,680 Speaker 1: this goes badly wrong and you have lots and lots 80 00:04:24,720 --> 00:04:26,960 Speaker 1: of people out in the streets, all of what we 81 00:04:27,000 --> 00:04:31,760 Speaker 1: saw in. Is there a chance that that ultimately forces 82 00:04:31,839 --> 00:04:36,640 Speaker 1: him to change? It could if he senses that coming. Look, 83 00:04:36,720 --> 00:04:39,320 Speaker 1: China's the second largest economy in the world and they 84 00:04:39,320 --> 00:04:42,320 Speaker 1: contribute around eighteen and a half percent to global GDP. 85 00:04:42,560 --> 00:04:45,880 Speaker 1: And regardless if the outcome that you outline comes to 86 00:04:45,920 --> 00:04:48,760 Speaker 1: pass or not, what's happening in the meantime will weigh 87 00:04:48,839 --> 00:04:52,320 Speaker 1: on both the supply and the demand side. Demand wise, 88 00:04:53,120 --> 00:04:56,080 Speaker 1: clearly having people locked down is not good. And you know, 89 00:04:56,160 --> 00:04:58,400 Speaker 1: in terms of the lockdowns, it certainly has and will 90 00:04:58,400 --> 00:05:02,159 Speaker 1: continue to exacerbate supply chain issues. And this has and 91 00:05:02,200 --> 00:05:05,200 Speaker 1: will affect corporate earnings. And I don't think that earnings 92 00:05:05,320 --> 00:05:08,720 Speaker 1: estimates properly reflect what's gone on there and what we're 93 00:05:08,800 --> 00:05:11,839 Speaker 1: likely to continue to happen. Well, we don't know yet, 94 00:05:11,839 --> 00:05:14,239 Speaker 1: do either. I did? But you know, it isn't exactly 95 00:05:14,240 --> 00:05:18,000 Speaker 1: adding as another kind of leg to the global economy 96 00:05:18,120 --> 00:05:23,280 Speaker 1: right now, is it? No? It isn't. Yeah, one thing 97 00:05:23,800 --> 00:05:28,000 Speaker 1: go ahead now, it's the thing is what does that 98 00:05:28,040 --> 00:05:30,200 Speaker 1: actually mean? Also in terms of the way that the 99 00:05:30,800 --> 00:05:34,279 Speaker 1: inflation is not an issue, and certainly we've got a 100 00:05:34,320 --> 00:05:36,640 Speaker 1: bit of disinflation. One could argue to perhaps in the 101 00:05:36,640 --> 00:05:39,360 Speaker 1: pipeline looking at some of those factory gate numbers. Could 102 00:05:39,440 --> 00:05:46,960 Speaker 1: China again start to export deflation globally? Yeah, that's certainly 103 00:05:47,160 --> 00:05:50,200 Speaker 1: possible if they remain in this mode. But look, the 104 00:05:50,279 --> 00:05:53,800 Speaker 1: FEDS policy is really focused more state side, but now 105 00:05:53,800 --> 00:05:56,320 Speaker 1: they have to take into account what's happening there. And 106 00:05:56,680 --> 00:05:59,640 Speaker 1: you know somebody who manages money for individual high net 107 00:05:59,720 --> 00:06:04,000 Speaker 1: worth investors, they've gone from obsessing over inflation to now 108 00:06:04,040 --> 00:06:08,360 Speaker 1: obsessing over a recession, and their focus is completely turned 109 00:06:08,400 --> 00:06:10,800 Speaker 1: to the previous and the future rate hikes and the 110 00:06:10,800 --> 00:06:13,880 Speaker 1: effect on the economy here state side, and what it's 111 00:06:13,880 --> 00:06:16,240 Speaker 1: going to do for corporate earnings. And now that we 112 00:06:16,279 --> 00:06:19,520 Speaker 1: have divided government, the fate and the onus of the 113 00:06:19,560 --> 00:06:23,120 Speaker 1: economy in the US and probably globally rest squarely on 114 00:06:23,120 --> 00:06:26,000 Speaker 1: the shoulders of the Fed. And but the FED rather 115 00:06:26,040 --> 00:06:29,440 Speaker 1: build a bridge a hundred feet too long than ten 116 00:06:29,520 --> 00:06:32,160 Speaker 1: feet too short. So they're going to remain at that 117 00:06:32,240 --> 00:06:34,440 Speaker 1: terminal rate for some time and it will weigh on 118 00:06:34,560 --> 00:06:37,240 Speaker 1: the economy and corporate profits. Well, this begs the question. 119 00:06:37,320 --> 00:06:41,320 Speaker 1: Then we have these two major forces China and and 120 00:06:41,640 --> 00:06:44,800 Speaker 1: you know the inflation picture globally and and the Fed's actions. 121 00:06:45,320 --> 00:06:48,040 Speaker 1: One has to be patient you outlined that with China 122 00:06:48,160 --> 00:06:52,039 Speaker 1: yet still positive longer term in terms of that patients 123 00:06:52,240 --> 00:06:54,320 Speaker 1: um which one will take longer do you think to 124 00:06:54,320 --> 00:06:59,360 Speaker 1: get to a positive outcome from an investing standpoint, I 125 00:06:59,400 --> 00:07:01,920 Speaker 1: think it's a good take a longer period of time 126 00:07:01,960 --> 00:07:05,400 Speaker 1: to make China investible. I think the second half of 127 00:07:06,040 --> 00:07:09,440 Speaker 1: next year bodes pretty well here for the US. Look, 128 00:07:09,440 --> 00:07:12,200 Speaker 1: the risk reward globally and in the US in particular 129 00:07:12,440 --> 00:07:15,200 Speaker 1: is not great in the next six months between inflation, 130 00:07:15,520 --> 00:07:19,560 Speaker 1: higher rates, earnings estimates coming down, and the Fed just 131 00:07:19,640 --> 00:07:23,560 Speaker 1: doesn't want a positive wealth effect or any loose financial conditions. 132 00:07:23,560 --> 00:07:26,600 Speaker 1: But durable improvement and sentiment looks likely at some point 133 00:07:26,840 --> 00:07:30,760 Speaker 1: next year. That's why we're encouraging investors to remain invested. 134 00:07:30,840 --> 00:07:34,960 Speaker 1: But tactically, you know, simply and blindly owning UM the 135 00:07:35,040 --> 00:07:38,240 Speaker 1: indices is not the way that it's going to translate 136 00:07:38,280 --> 00:07:41,280 Speaker 1: into results this year. That begs a question ricious Let 137 00:07:41,360 --> 00:07:44,040 Speaker 1: me ask this follow to Jason, because you know, you're 138 00:07:44,120 --> 00:07:46,280 Speaker 1: dealing with the type of individual as a private wealth 139 00:07:46,320 --> 00:07:50,800 Speaker 1: advisor UBS who's probably looking pretty long term. When you 140 00:07:50,840 --> 00:07:53,920 Speaker 1: talk to them about that longer term structure for China, 141 00:07:54,480 --> 00:08:00,600 Speaker 1: you get positive feedback or or negative, generally speaking, negative 142 00:08:00,680 --> 00:08:03,680 Speaker 1: because US investors tend to have a home bias and 143 00:08:03,720 --> 00:08:06,240 Speaker 1: they tend to have an US versus them attitude when 144 00:08:06,240 --> 00:08:10,720 Speaker 1: it comes to investing overseas, especially in China. But sometimes 145 00:08:10,720 --> 00:08:14,280 Speaker 1: in crisis come opportunity, and you know, with the country 146 00:08:14,320 --> 00:08:17,240 Speaker 1: that has such a huge component to the global world, 147 00:08:17,280 --> 00:08:20,040 Speaker 1: global supply chain, it's hard to ignore them, and there's 148 00:08:20,080 --> 00:08:24,920 Speaker 1: certainly opportunities and it's important that investors gain exposure there 149 00:08:25,160 --> 00:08:27,760 Speaker 1: when there's peak pessimism, and I'm not sure we're quite 150 00:08:27,760 --> 00:08:29,760 Speaker 1: there yet, but when it gets there, I'll be doing 151 00:08:29,800 --> 00:08:32,840 Speaker 1: my darndist to convince them of of of wading into 152 00:08:32,840 --> 00:08:37,720 Speaker 1: the water there. I love the alliteration peak pessimism. Anyway, Jason, 153 00:08:38,120 --> 00:08:41,600 Speaker 1: you're saying is going to be a year, it's going 154 00:08:41,640 --> 00:08:45,240 Speaker 1: to be defined by a year of inflections and two halves. 155 00:08:45,679 --> 00:08:49,600 Speaker 1: Where are those inflection points? And what which halves are 156 00:08:49,600 --> 00:08:53,320 Speaker 1: we talking about here? Well, as I said earlier, the 157 00:08:53,360 --> 00:08:56,120 Speaker 1: first half of next year just simply is a very 158 00:08:56,240 --> 00:09:00,360 Speaker 1: challenging period. We've yet to see earnings estimates reflect what 159 00:09:00,480 --> 00:09:03,719 Speaker 1: we're contending with. But I do think now that we've 160 00:09:03,760 --> 00:09:06,160 Speaker 1: have all these rate hikes under our belt and a 161 00:09:06,160 --> 00:09:09,240 Speaker 1: few more to go will be at that terminal rate, 162 00:09:09,280 --> 00:09:11,960 Speaker 1: they'll remain remain at that terminal rate for a period 163 00:09:11,960 --> 00:09:14,120 Speaker 1: of time, and then you're going to really have a 164 00:09:14,160 --> 00:09:17,360 Speaker 1: separation of the adults from the children. And I do 165 00:09:17,480 --> 00:09:20,080 Speaker 1: think that you know, a market of stocks is going 166 00:09:20,160 --> 00:09:23,280 Speaker 1: to do far better than the market at large, that 167 00:09:23,400 --> 00:09:27,680 Speaker 1: the SMP at seventeen times earnings is full and fair. 168 00:09:27,840 --> 00:09:30,839 Speaker 1: And when historically multiples are that high, earnings growth is 169 00:09:30,920 --> 00:09:35,040 Speaker 1: usually around four and we're looking at a negative four percent. 170 00:09:35,160 --> 00:09:36,800 Speaker 1: So the first half of the year is not a 171 00:09:36,840 --> 00:09:39,160 Speaker 1: great set up. The second half of the year, however, 172 00:09:39,440 --> 00:09:42,640 Speaker 1: you're gonna have much greater clarity with inflation and the FED. 173 00:09:43,760 --> 00:09:48,000 Speaker 1: Perhaps the final question for you, Jason today, you like bond, cybersecurity, 174 00:09:48,000 --> 00:09:52,000 Speaker 1: and healthcare? Which one the most and over what sort 175 00:09:52,000 --> 00:09:58,200 Speaker 1: of time frame? I say, without equivocation, cyber security, big 176 00:09:58,200 --> 00:10:01,000 Speaker 1: tech has taken everyone to the table. Everyone's had muscle 177 00:10:01,040 --> 00:10:03,400 Speaker 1: memorying it. But that's not what's going to take us 178 00:10:03,400 --> 00:10:06,199 Speaker 1: home from the party. It's the back end of technology 179 00:10:06,320 --> 00:10:10,800 Speaker 1: such as cybersecurity and attacks are just up exponentially since 180 00:10:10,840 --> 00:10:14,320 Speaker 1: the war and the the the the amount of spending 181 00:10:14,400 --> 00:10:17,000 Speaker 1: that's going to have to occur amongst the private and 182 00:10:17,040 --> 00:10:22,000 Speaker 1: public sector, local government's, universities, hospitals like it's not a 183 00:10:22,040 --> 00:10:24,280 Speaker 1: matter of if, it's a matter of when and how 184 00:10:24,360 --> 00:10:26,880 Speaker 1: much they need to spend, regardless if we go into 185 00:10:26,960 --> 00:10:30,760 Speaker 1: a recession or not, as evidenced by Palo Alto's results 186 00:10:30,800 --> 00:10:33,800 Speaker 1: the other day. So that is a subsector choice that 187 00:10:33,880 --> 00:10:37,280 Speaker 1: I think is very secular in nature and very investable. 188 00:10:38,360 --> 00:10:41,280 Speaker 1: All right, Jason, thanks so much for joining us. Interesting 189 00:10:41,400 --> 00:10:43,920 Speaker 1: insights and nice to have a little bit longer session 190 00:10:44,360 --> 00:10:48,000 Speaker 1: with you. Will do it again. Jason Katts, Managing Direct 191 00:10:48,000 --> 00:10:50,600 Speaker 1: Brand private wealth Advisor at UBS