Speaker 1: Bloomberg Audio Studios, Podcasts, Radio News.
Speaker 2: We'll begin the sour stocks pushing Kai looking to snap
Speaker 2: a three day losing streak as countries rushed to the
Speaker 2: negotiating table. Peter Roppenheimer of Garment SAX, writing, we would
Speaker 2: argue that we are in an event driven bear market
Speaker 2: triggered by taris. However, it could easily morph into a
Speaker 2: cyclical bear market given growing recession risk. Peter joins us
Speaker 2: now for more, Peter, welcome to the program, sir, It's
Speaker 2: good to see you. What's the difference between the two
Speaker 2: Why is that distinction so important this morning?
Speaker 3: Well, actually, the distinction is not that much when you
Speaker 3: look at the typical falls that you tend to get
Speaker 3: in both cases, the falls on average in equities are
Speaker 3: roughly about thirty percent. There's a reasonable distribution around that
Speaker 3: that's the average. But mainly they're distinguished by how long
Speaker 3: it takes for the market to fall and then recover.
Speaker 3: And in what we call a ven driven bear markets,
Speaker 3: that process is a lot faster. What's the difference between
Speaker 3: them to well, a venture of in bear markets, as
Speaker 3: we call them, something that's sort of triggered by an
Speaker 3: exogenous shop an event like tariffs that really just forces
Speaker 3: the economy off its previous track, whereas a cyclical one.
Speaker 3: The most common type of bear market we see in
Speaker 3: equities is really about recessions. So the critical thing from
Speaker 3: here really is to what extent investors really start to
Speaker 3: fully price the recession, which would imply profits for and
Speaker 3: equity evaluations have further to declineter.
Speaker 1: I guess we're trying to figure out how much the
Speaker 1: damage is being done by just simply uncertainty, and how
Speaker 1: much the damage is being done by actual profit margin
Speaker 1: contraction by consumers facing off higher prices, which is the
Speaker 1: bigger impetus for some sort of recession at this point
Speaker 1: in your.
Speaker 3: Mind, well, I think one of the triggers here is
Speaker 3: you say, is uncertainty. In the end, uncertainty is the
Speaker 3: enemy of activity and of risk assets, because what tends
Speaker 3: to happen is that both investors and companies as well
Speaker 3: as consumers tend to just hold back decisions appalled, and
Speaker 3: that results in slowing activity. But obviously as economy is slow,
Speaker 3: then you tend to get other sort of factors that
Speaker 3: come into play. Now, the good thing I would say
Speaker 3: is that there are some important underlying supports of economic activity.
Speaker 3: Private setor balance sheets generally are quite strong, both corporates
Speaker 3: and banks. Of course, there's also room generally for central
Speaker 3: banks to be cutting interest rates, which will be helpful
Speaker 3: in time and is usually one of the necessary conditions
Speaker 3: before equities really recover from a bare phase. But I
Speaker 3: think at the moment this is really about uncertainty and
Speaker 3: about investors trying to calibrate how far economy is slow
Speaker 3: and for how long.
Speaker 1: Yesterday's price action was interesting to me, Peter, because it
Speaker 1: highlighted the fragility of the liquidity in the market on
Speaker 1: all sides. Just this idea that why would anyone have
Speaker 1: conviction to buy right now when you could be blown
Speaker 1: out of the water by just simply a headline there's
Speaker 1: unsourced that comes out and then gets reversed fifteen minutes later.
Speaker 1: How much is that kind of volatility if it persists
Speaker 1: enough for you to actually lower your forecast yet again
Speaker 1: for the s and p.
Speaker 3: Well, I think the critical issue here again comes back
Speaker 3: to whether there's likely to be a recession or not.
Speaker 3: Our economists believe that the probability of a recession in
Speaker 3: the US, for example, over the next twelve months is
Speaker 3: now around forty five percent. But indeed, if the full
Speaker 3: expected tariffs come through and there is no pullback, that
Speaker 3: would likely trigger a recession. And look, in a recession
Speaker 3: typically profits due fall anywhere from sort of ten to
Speaker 3: twenty percent or more, depending on what industry is there
Speaker 3: in and in what regions. And of course if investors
Speaker 3: start to price that as a likely outcome the most
Speaker 3: likely outcome, then equity indexes have further to decline as
Speaker 3: a price in lower profits and probably a lower valuation
Speaker 3: as well. So you know, we still have downside in
Speaker 3: the short run in our targets. But I think also
Speaker 3: the source of conditions you're likely to see to really
Speaker 3: sustain a base in equity markets for a proper recovery,
Speaker 3: and not really yet there, I would say, Peter.
Speaker 1: At the beginning of this year, there was this idea
Speaker 1: that if the US didn't act tariffs, you would end
Speaker 1: up seeing the pain more greatly around the world, particularly
Speaker 1: in Europe, maybe even in China. That has been shifted,
Speaker 1: although now it seemed to be heading back to that
Speaker 1: kind of idea. Where do you stand on this? Do
Speaker 1: you think that the US is the apticenter of pain
Speaker 1: or simply a part of a global trend that is
Speaker 1: not going to leave really any Brice spots.
Speaker 3: Yeah, I think it's interesting the point that you raise them. Certainly,
Speaker 3: when we surveyed invest earlier this year asking them about
Speaker 3: what they thought the impact of US policies would be,
Speaker 3: it was very much a focus on being negative for
Speaker 3: the rest of the world, particularly Europe and China as
Speaker 3: people focused on the impact of tariffs, but would be
Speaker 3: really quite positive for the US because people had in
Speaker 3: mind the potential for tax cuts and for deregulation. And
Speaker 3: while that potential still exists, what's happened, I think in
Speaker 3: the US is that the focus has very much shifted
Speaker 3: towards the impact of tariffs in the US, both in
Speaker 3: terms of higher inflation and investment and growth uncertainty. So
Speaker 3: it's really now become a sort of global issue engulfing
Speaker 3: the world at this uncertainty and therefore raising the risks
Speaker 3: of an economic shock that hits a profitability and profit margins.
Speaker 3: More broadly and so well, we heard from.
Speaker 1: The Turner secretary yesterday who talked about how the President
Speaker 1: gave himself maximum negotiating leverage and now work Jameis and
Speaker 1: Grill will be leading this negotiation starting with Japan. Does
Speaker 1: that give you some sense of optimism? Can you put
Speaker 1: this genie back in the bottle?
Speaker 3: Well, look, anything is possible. We know that the tarifts
Speaker 3: are about to be enacted, but of course there is
Speaker 3: room I think for negotiation, and that's the signals that
Speaker 3: have come out of the administration. But again, negotiations can
Speaker 3: take a long time and can be quite complex, and
Speaker 3: that's going to create an environment of uncertainty, at least
Speaker 3: for a period of time. But also I think it
Speaker 3: does demonstrate that we've we're in a change sort of
Speaker 3: global environment in terms of the world trade architecture, and
Speaker 3: this was already beginning to shift in the months that
Speaker 3: followed the pandemic as companies around the world tried to
Speaker 3: diversified supply chains. So we're in a less globalized environment.
Speaker 3: That's going to put some down with pressure on world
Speaker 3: trade and of course has implications both for inflation and growth.
Speaker 3: But I think it is of course possible that this
Speaker 3: is part of a tactic to negotiate and come to agreements,
Speaker 3: but we've got some time yet of uncertainty. Bear in
Speaker 3: mind also that we came into this year with relatively
Speaker 3: high valuations in risk assets, both in equities and credit.
Speaker 3: They were not pricing much downside risk at all. We're
Speaker 3: still in the process of that adjustment coming through talking.
Speaker 1: About valuations, and that's really where I wanted to end,
Speaker 1: was this idea of large cap tech stocks that seemed
Speaker 1: to lead the way, and there was sort of a
Speaker 1: hint that maybe they could lead on the way up yesterday.
Speaker 1: But some of the damage has been pretty impressive. I mean, Apple,
Speaker 1: for example, has lost almost six hundred and forty billion
Speaker 1: dollars of market capitalization since the end of the day
Speaker 1: on April second. That's about nineteen percent of its value.
Speaker 1: Do you see big cap tech leading again global stocks
Speaker 1: given the fact that we are seemingly in a new
Speaker 1: world order.
Speaker 3: Yeah, I think it's an interesting point. When we came
Speaker 3: into this year, our strategy was very much about diversification,
Speaker 3: both geographically given the huge dominance that the US market
Speaker 3: had sustained up until that point, but also a cross
Speaker 3: sectors and factors, and we really emphasized the risk in
Speaker 3: a sense that the US market had become so dominated
Speaker 3: and concentrated in a small number of super large tech companies.
Speaker 3: Of course, what we've seen since the beginning of this year,
Speaker 3: aside from the slow down in growth expectations, is that
Speaker 3: some of the big tech stocks have been hit as
Speaker 3: you've seen new competition emerge, particularly from China. But to
Speaker 3: be clear, these companies are very profitable and very strong
Speaker 3: balance sheets. They're very cash generative and in that sense,
Speaker 3: pretty defensive. And we've also done to work comparing the
Speaker 3: technology ascent that we've seen in recent years to the
Speaker 3: period of the tech bubble a quarter of a century ago,
Speaker 3: and there are some major differences, particularly in terms of valuation.
Speaker 3: These large companies are nowhere near the sort of bubble
Speaker 3: type valuations that we saw a quarter of a century
Speaker 3: ago around the Internet, or indeed in other bubble periods
Speaker 3: in history, like Japan in the late nineteen eighties. So
Speaker 3: I think that the tech sector is still going to
Speaker 3: be a very important cornerstone of the recovery and ecty
Speaker 3: markets as it comes through. And many of the biggest
Speaker 3: companies are relatively defensive in terms of their balance sheets,
Speaker 3: and that's an important factor I think to bear in mind.
Speaker 2: I p good to get your thoughts this morning, Peter Ropenheimer,
Speaker 2: that Anks, I've gone a sex Thank you, sir,