Latest / Bloomberg Intelligence / Trump's Bi-Lat Trade Strategy Failed With China Deal

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Trump's Bi-Lat Trade Strategy Failed With China Deal · Bloomberg Intelligence

0:02
Speaker 1: Welcome to the Bloomberg Penil Podcast. I'm Paul swing you.
0:05
Speaker 1: Along with my co host Lisa Brahma Wicks. Each day
0:07
Speaker 1: we bring you the most noteworthy and useful interviews for
0:10
Speaker 1: you and your money. Whether at the grocery store or
0:12
Speaker 1: the trading floor. Find a Bloomberg Penil podcast on Apple
0:15
Speaker 1: podcast or wherever you listen to podcasts, as well as
0:17
Speaker 1: at Bloomberg dot com. Well, the U S and China
0:21
Speaker 1: continue to make gradual progress on a Phase one trade deal,
0:25
Speaker 1: although we have not yet seen anything on paper. To
0:27
Speaker 1: get the latest, we welcome and Stevenson Yang, co founder
0:30
Speaker 1: and research director of JA Capitol Research, also a Bloomberg
0:33
Speaker 1: opinion contributor based in DC and Hong Kong, and thanks
0:37
Speaker 1: so much for joining us. What do you from your perspective,
0:40
Speaker 1: what is the latest on the China US trade negotiation? Hi? Um,
0:47
Speaker 1: you know, to be honest, it's nonsense. So we have
0:51
Speaker 1: we have almost two years of back and forth market
0:55
Speaker 1: gyrations and you know, high expectations in order to get
0:59
Speaker 1: back to the state of quo anti like, what's special
1:01
Speaker 1: about this? All right? Well, okay, this is an argument
1:05
Speaker 1: that people say we're going back to levels that said
1:09
Speaker 1: the forty billion dollars to fifty billion dollars of extra
1:13
Speaker 1: uh goods, and that China is supposed to import from
1:17
Speaker 1: the United States. There is a question of how feasible
1:19
Speaker 1: that is given the structure currently of their economy and
1:23
Speaker 1: the different trade routes. What's your sense of that. Do
1:27
Speaker 1: you think that that seems very doable at this point? Yeah,
1:31
Speaker 1: this reminds me of you know, for many years, the
1:34
Speaker 1: Chinese Trade Ministry has been has been running these um
1:38
Speaker 1: these buying missions to the US where they'll send a
1:41
Speaker 1: whole lot of you know, soe presidents on a delegation
1:46
Speaker 1: with the Ministry of Commerce and they'll say they'll sign
1:48
Speaker 1: all these agreements and China is going to buy all
1:50
Speaker 1: this stuff, and John's gonna invest all this money. It
1:53
Speaker 1: never actually happens, it's it's for the headline effects. So
1:57
Speaker 1: what China is going to do is they're going to
2:00
Speaker 1: kind of um slice away at at the commitments by uh,
2:05
Speaker 1: you know, re renaming Hong Kong imports as as mainland
2:09
Speaker 1: imports and then uh, you know, signing a deal that
2:13
Speaker 1: they don't actually implement, you know, stuff like that. So
2:16
Speaker 1: what's happened is that the all the structural demands for
2:20
Speaker 1: for Chinese economic change have just disappeared because the US
2:25
Speaker 1: realized that they're they're not realistic. In the US really
2:28
Speaker 1: has sort of, you know, caved in order to get
2:30
Speaker 1: a deal, and instead the US says, okay, just buy
2:33
Speaker 1: more stuff please, and China says, yeah, we might do that.
2:37
Speaker 1: So and does this call into question the value of
2:39
Speaker 1: kind of this bilateral type of negotiation as opposed to
2:43
Speaker 1: you know what probably was more the norm of a
2:46
Speaker 1: multilateral maybe the transpecific partnership. From your perspective, all the
2:50
Speaker 1: history that you have with China and China trade, what
2:54
Speaker 1: do you think is the best way to proceed with China? Yeah, yeah, Look,
2:58
Speaker 1: it's totally understandable why there's great frustration with China. But
3:02
Speaker 1: but the fact is that the real problem has been
3:06
Speaker 1: lack of use of the of the dispute resolution mechanisms
3:10
Speaker 1: that exist in the w t O, lack of accession
3:13
Speaker 1: to the t p P and so forth. There's a
3:16
Speaker 1: lot of stuff that we could be doing in demands
3:18
Speaker 1: we could be making of China that we have not made,
3:21
Speaker 1: and we've hobbled the w t O. And yes, I
3:23
Speaker 1: agree the bilateral mechanisms are just not very satisfactory going forward.
3:28
Speaker 1: What are you looking forward to determine whether the Phase
3:30
Speaker 1: one deal is moving ahead as expected in terms of
3:34
Speaker 1: Phase one A, Phase one B, Phase one C that
3:38
Speaker 1: actually effectuates the existing tariffs being rolled back. Well, it's
3:43
Speaker 1: it seems to me that the only real demand because
3:46
Speaker 1: all the concessions on on you know, stuff like intellectual
3:49
Speaker 1: property have already been baked into into Chinese um you know,
3:54
Speaker 1: new laws and resolutions and the currency thing kind of
3:58
Speaker 1: that was that became unimp written about ten years ago.
4:01
Speaker 1: Um So, so the only significant issue here is whether
4:06
Speaker 1: China will actually make the purchases that it says it will.
4:10
Speaker 1: And most of those purchases are focused on soybeans and
4:13
Speaker 1: corn ethanol, right so, and that's very important obviously to
4:19
Speaker 1: Trump because they're they're they're base constituencies that rely on
4:24
Speaker 1: selling those commodities. So it's kind it becomes a question
4:27
Speaker 1: of well, China, does China really want to boost the
4:30
Speaker 1: Trump chances of reelection? Um there have been signs that
4:35
Speaker 1: it did for a long time. Now it's not so clear.
4:39
Speaker 1: So as we look back on this process, or not
4:41
Speaker 1: even done the process yet, because yet We've not even
4:43
Speaker 1: seen anything on paper, but assume the Phase one deal
4:45
Speaker 1: turns out the way it's been reported. Looking back, well,
4:48
Speaker 1: this will this outcome, this Phase one deal will be
4:50
Speaker 1: worth two years of all this uncertainty in the global markets. Yeah,
4:55
Speaker 1: totally not did did there need to be a reset
4:58
Speaker 1: of the US China relationship, Absolutely, But I think that
5:02
Speaker 1: a lot of that reset is about uh no longer
5:07
Speaker 1: um capitulating to unreasonable Chinese you know, actually bullying over
5:13
Speaker 1: things like you know, the name that we called Taiwan
5:15
Speaker 1: and whether Leotill boy gets a Nobel Prize and stuff
5:19
Speaker 1: like that. Um, so we need to stop being cowed
5:22
Speaker 1: by that sort of thing. But this, you know, weaving
5:25
Speaker 1: back and forth on tariff levels is really just not
5:28
Speaker 1: a good thing for either economy. And Stevenson Yang thank
5:31
Speaker 1: you so much for being with us. And Stevenson Yang
5:34
Speaker 1: is co founder and research director at Jay Capital Research,
5:37
Speaker 1: as well as a Bloomberg opinion contributor. There are a
5:54
Speaker 1: number of ways to sort of size and scope the
5:57
Speaker 1: fang stocks, or as I call them earlier fanmag which
5:59
Speaker 1: is Facebook, Amazon, Netflix, Microsoft, Apple, and Google. Um well,
6:06
Speaker 1: I mean that's sort of the sort of guts of
6:08
Speaker 1: the of the tech sector. I think you just is
6:10
Speaker 1: that yours and I remember discussing it with some colleagues.
6:14
Speaker 1: I don't want to take full credit about this, but
6:17
Speaker 1: I think that it's important to to look at the
6:20
Speaker 1: performance of the fanmag socks aside from the rest of
6:23
Speaker 1: the SMP to understand the rally and understand going forward
6:26
Speaker 1: how big a bet you're making on big tech in
6:29
Speaker 1: the U S if you invest in the index. Nichols
6:31
Speaker 1: joining us here, co founder of Data Trek Research LLC
6:35
Speaker 1: uh here in our interactive broker studios, can you give
6:37
Speaker 1: us some some sense of how responsible this sector has
6:40
Speaker 1: been for the overall US equity performance. Yeah, it's been sizeable. Obviously.
6:45
Speaker 1: If you look at the past five years, you can
6:47
Speaker 1: have a point of single names like Amazon that hasn't
6:50
Speaker 1: done all this all that well this year, but over
6:52
Speaker 1: the last five years is something like seven percent of
6:54
Speaker 1: the entire SMPS return, even though it's obviously was coming
6:58
Speaker 1: from a small base. UH and XLK, the e t
7:02
Speaker 1: F that follows it is now up thirty plus percent
7:04
Speaker 1: for the year. If you look at sector waitings, it's
7:07
Speaker 1: even more impressive for tech. If you add in Google, Facebook,
7:10
Speaker 1: and Amazon that aren't in tech. You're talking about thirty
7:13
Speaker 1: two percent of the SMP, and that gives people pause.
7:16
Speaker 1: But I would point to two things. The first is
7:18
Speaker 1: there is no European or EFA tech sector to speak of.
7:21
Speaker 1: It's seven percent of EFA. So the waiting that you
7:23
Speaker 1: see in the SMP isn't just for the US economy.
7:26
Speaker 1: It's for US and Europe and Japan and parts of
7:29
Speaker 1: emerging market. So you're looking at a global franchise. And
7:32
Speaker 1: the second issue is, unlike a lot of other sectors,
7:35
Speaker 1: tech is not a stranded asset. If you think about
7:37
Speaker 1: the energy sector, which I think by most accounts is
7:39
Speaker 1: virgin on stranded asset territory, it's now smaller than Apple's
7:43
Speaker 1: market cap or Microsoft's market cap and the SP five
7:45
Speaker 1: hundred and so you have a combination of things. A.
7:48
Speaker 1: It's a growth sector, be it's not a stranded asset,
7:50
Speaker 1: and it probably will never be. So we talk about
7:53
Speaker 1: the fangs in tech, you know, really dominating the market.
7:55
Speaker 1: But that raises a concern of breath. When we think
7:58
Speaker 1: about the lack of breath of the market in this
8:01
Speaker 1: move up we've had, is that a real concern? Do
8:04
Speaker 1: you think to professional investors. It certainly is to professional investors,
8:08
Speaker 1: and certainly to our clients. We we get a lot
8:10
Speaker 1: of emails about this. The way we try to explain
8:12
Speaker 1: it is basically a permutation of what I just discussed is, Look,
8:16
Speaker 1: this is the sector that is growing. If you want
8:18
Speaker 1: to put if you had to lock your money up
8:20
Speaker 1: for ten years, would you either it be in tech
8:22
Speaker 1: or in any other sector of the SMP. Although there's
8:26
Speaker 1: a question of which tech, right, I mean, yes, some
8:29
Speaker 1: of these big giants, particularly Amazon has had an amazing
8:32
Speaker 1: run of it. Uh, Facebook certainly as well. The new
8:35
Speaker 1: tech might be different. It might be cybersecurity, it might
8:38
Speaker 1: be you know, cloud computing, and there will be a
8:41
Speaker 1: breakdown of the halves and the have nots within the
8:43
Speaker 1: tech sector. Netflix may be subsumed by another company based
8:47
Speaker 1: on the increasing competition and streaming. So how do you
8:50
Speaker 1: sort of understand the lasting quality of of of tech
8:54
Speaker 1: that's offered by these companies. Yeah, it's a great question.
8:56
Speaker 1: I mean I would say two points. The first is,
8:58
Speaker 1: if you think about the Big four, the Big five
9:00
Speaker 1: or your fanmag paradigm, they don't really compete with each
9:03
Speaker 1: other very much. That's very unlike the Chinese tech sector,
9:06
Speaker 1: where you have social media companies actively pushing into e
9:09
Speaker 1: commerce and e commerce companies building social networks. We don't
9:13
Speaker 1: have any of that in the States. The giants stick
9:15
Speaker 1: to themselves and that's kind of bad for competition in
9:17
Speaker 1: the US, but awesome for stock returns, and it probably
9:20
Speaker 1: won't change the second digit. You think about Amazon, what
9:22
Speaker 1: is Amazon right now? It's a cloud computing company. What
9:24
Speaker 1: does it want to be? It wants to be a
9:26
Speaker 1: cloud computing e tailor of AI solutions. That's what's really
9:29
Speaker 1: focused on. That's what recognition, facial recognition is about. That's
9:32
Speaker 1: what it wants to be. So if these companies do
9:34
Speaker 1: it right, they should also be the next leg. When
9:37
Speaker 1: you say that there isn't a lot of competition, there's
9:41
Speaker 1: these like alarm bells that go off in my head.
9:43
Speaker 1: Regulatory risk, regulatory risk. I mean, that's sort of the
9:45
Speaker 1: big concern here is that there aren't major competitors for
9:48
Speaker 1: any of these tech giants. How big of a potential
9:51
Speaker 1: headwind are regulatory concerns given the fact that so far
9:55
Speaker 1: it does not seem like there is much motion on that.
9:56
Speaker 1: While the talk not a lot of action, the most
9:59
Speaker 1: motion has been you know, California eight five, which is
10:01
Speaker 1: the Privacy rule which goes into effect on January one,
10:04
Speaker 1: and it is going to basically be the de facto
10:06
Speaker 1: US standard, but the Senate is still working on regulation.
10:10
Speaker 1: The bottom line to your answer your question is it
10:12
Speaker 1: really kind of depends on the elections, and it depends
10:14
Speaker 1: on how much traction the privacy aspects of this guy.
10:17
Speaker 1: That's the only thing that really people care about. Otherwise,
10:19
Speaker 1: people i think are pretty happy with the way technology
10:22
Speaker 1: interfaces with their life, except for privacy that needs to
10:25
Speaker 1: get resolved. But barring that, regulations should not be that
10:29
Speaker 1: big a deal, and from a shareholder productive hopefully they're
10:32
Speaker 1: not because the system works really well for shareholders right now.
10:35
Speaker 1: So as we think about coming off a very strong
10:39
Speaker 1: even if it would take a look at it from
10:41
Speaker 1: the peak of eighteen, still a real strong period, what
10:45
Speaker 1: do you think investors should be expecting for returns in
10:48
Speaker 1: twenty I've heard either boy load of mid single digits
10:51
Speaker 1: after the big run we've had, or I've had somebody.
10:54
Speaker 1: We've had some people come in and say, gee, the
10:56
Speaker 1: data kind of shows after a big double digit year,
10:58
Speaker 1: you're gonna get another double digit how do you how
11:00
Speaker 1: do you thinking about it? We're very data focus on
11:02
Speaker 1: We've done the same math and it's two observations. The
11:05
Speaker 1: first day is it's very uncommon for the SMP to
11:08
Speaker 1: hover around uh zero to five percent up or down
11:11
Speaker 1: in the following year. In any year, it's like a
11:13
Speaker 1: thirteen percent out of the last ninety one years, so
11:15
Speaker 1: it's not very common. So I wouldn't put a lot
11:17
Speaker 1: of money on the idea that you're not going to
11:19
Speaker 1: move very far. I do agree that you're probably going
11:21
Speaker 1: to get something slightly below long term average that is
11:26
Speaker 1: prefaced on some earnings growth, probably not as high as
11:29
Speaker 1: it's looking for a called three to five percent. And
11:32
Speaker 1: they said that, you know, is true to their sort
11:34
Speaker 1: of devish slanting word that they're not going to raise
11:37
Speaker 1: rates unless inflation gets really out of control and that
11:39
Speaker 1: will keep the ten year low and global growth is slow,
11:42
Speaker 1: so we shouldn't have much of a of a rally
11:44
Speaker 1: and yields. That's the recipe for a decent but not
11:46
Speaker 1: great year. What would you say to people who argued
11:50
Speaker 1: that big tech has just taken the growth from the
11:53
Speaker 1: other sectors, like say retail that's gotten kind of covered
11:58
Speaker 1: by Amazon's rise. I mean, is that sort of what's
12:01
Speaker 1: going on here. It's a piece of it, And I'd
12:03
Speaker 1: say it's more of a feature than a bug as
12:05
Speaker 1: far as as far as stocks go, because you have
12:09
Speaker 1: sectors that competed like retail and fairly inefficient forms and
12:13
Speaker 1: didn't really adapt in over time. Those should not receive
12:17
Speaker 1: capital because they're not innovating, and the companies that are
12:19
Speaker 1: do receive the capital and do receive the valuations that
12:22
Speaker 1: allow them to continue to grow. So I'd say it's
12:25
Speaker 1: a positive, but I get it, it's a painful positive
12:27
Speaker 1: if you happen to own retailers or other ship to sectors,
12:30
Speaker 1: or energy for that matter. Nicholas, thanks so much for
12:33
Speaker 1: joining us again. Nicholas is co founder of Data Trek
12:36
Speaker 1: Research based in New York City, joining us here in
12:38
Speaker 1: our Bloomberg Interactive Broker studio. Nick is also a Bloomberg
12:41
Speaker 1: Opinion Comments. We always love getting his thoughts on the market. Yeah,
12:44
Speaker 1: and this to me is such an interesting issue because
12:46
Speaker 1: people say, well, if you strip out the big tech
12:49
Speaker 1: from the SMP performance, it's really unimpressive or even a loss,
12:52
Speaker 1: and just say, you know, this is a potential problem
12:55
Speaker 1: for the market right, that there's weakness elsewhere, and is
12:58
Speaker 1: it a problem or is it, you know, one of
13:00
Speaker 1: the strengths of the market frankly, because if these companies
13:02
Speaker 1: continue to innovate, or if they continue to make as
13:05
Speaker 1: much money, then it will be something that can drive
13:08
Speaker 1: things forward. But it is sort of one of the
13:09
Speaker 1: existential questions facing the market. Today is a great day
13:28
Speaker 1: to get an informed perspective on what is going on
13:31
Speaker 1: with the pound. We see a big drop today, the biggest,
13:34
Speaker 1: I believe since July. As we hear, Boris Johnson raised
13:37
Speaker 1: the specter essentially of a hard Brexit if there isn't
13:41
Speaker 1: some sort of trade agreement created with the European Union.
13:43
Speaker 1: Allah what they did with Canada but in approximately six
13:47
Speaker 1: years fewer time joining us now. Marcus Ashworth, Bloomberg opinion columnist,
13:52
Speaker 1: And I'm wondering, Marcus, is your take here that markets
13:56
Speaker 1: are overreacting to something that Boris Johnson said with respect
14:01
Speaker 1: to basically raising the spectrum of hard Brexit again, or
14:04
Speaker 1: do you think that this is real uncertainty that the
14:07
Speaker 1: markets have been overly sanguine about in their post election enthusiasm.
14:12
Speaker 1: HIU high very much the former I mean, this is
14:15
Speaker 1: a gift for next year. I mean, it's very difficult
14:19
Speaker 1: to get on board ahead of in liquid markets before
14:24
Speaker 1: the new year. But let's face it, the most stable
14:26
Speaker 1: government in the Western world now we have a very
14:29
Speaker 1: clear majority under Boris Johnson, a very undervalued, very very
14:35
Speaker 1: undervalued stock market. It's it's dramatically on the performed europe US, etcetera.
14:40
Speaker 1: This year. Um. Yes, there's some wibbly wobbily about whether
14:45
Speaker 1: a deal is going to be done. I think no
14:47
Speaker 1: deal Brexit, which everyone in the media seems to go
14:50
Speaker 1: on and on and on about, has been clearly ruled
14:53
Speaker 1: out by the faculty, along with the rest of most
14:58
Speaker 1: of the mimeral media. But the reality is is that
15:01
Speaker 1: Boris dawn't got that sorted in very short order. He's
15:05
Speaker 1: just serving notice to both his party and indeed it's
15:10
Speaker 1: more of a domestic signal but equally to the European
15:13
Speaker 1: negotiators that let's get on with this. Stop coming up
15:15
Speaker 1: the excuses why it should be seven years or ten years.
15:18
Speaker 1: That shows you how rubbish the EU are negotiating things.
15:22
Speaker 1: Let's do something. We both stand at one with each other.
15:25
Speaker 1: We want to diverge by X on this, and why
15:28
Speaker 1: on the other Let's just get on with it, stop
15:30
Speaker 1: coming out the excuses, and let's make everything better for
15:33
Speaker 1: everyone else. And I think that he has the backing
15:36
Speaker 1: and the confidence from from the European leaders which his
15:39
Speaker 1: predecessor did not have. So bloody blah blah, stunning has
15:45
Speaker 1: come down to a level which is I think fairly priced,
15:49
Speaker 1: if not cheap, under pretty much every monitor. So as
15:53
Speaker 1: far as I'm concerned, do I think stuning will be
15:56
Speaker 1: higher in a year's time. Absolutely? Do I think the
15:58
Speaker 1: stock market in the UK will be higher? Absolutely? It
16:01
Speaker 1: might have some wi wobbilis, of course, but I think
16:03
Speaker 1: it's it's one of the gifts of all Right, So
16:06
Speaker 1: Marcus asking me the time period we're uh, the UK
16:10
Speaker 1: and the EU and the US are gonna have to
16:12
Speaker 1: get down to hard work about bilateral trade deals. What
16:14
Speaker 1: do you think the market's discounting as it relates to
16:17
Speaker 1: those negotiations. Well, it's funny you'd say that, because that's
16:20
Speaker 1: exactly the way I think. I think it's a three
16:22
Speaker 1: way deal. It's going to be done, and it needs
16:24
Speaker 1: to be done that way. If we have intelligence to
16:27
Speaker 1: link in the fact that the U, EU and the
16:29
Speaker 1: US absolutely needs a deal and vice versa to each other.
16:33
Speaker 1: Why not trying to do one big, happy deal? Now,
16:35
Speaker 1: I know that's that's a land of fantasy, but that's
16:38
Speaker 1: where we ought to go heading towards. And I think
16:40
Speaker 1: the cently coordination much more now between the UK and
16:44
Speaker 1: the US, and it's whether you can get over itself
16:47
Speaker 1: and work out what with a massively declining manufacturing setcher
16:52
Speaker 1: in Germany and the France in on riots and riots
16:55
Speaker 1: a variety of other problems with governments across Europe that
16:58
Speaker 1: they could do with a big, nice, lovely fat trade
17:02
Speaker 1: deal to keep everyone happy in I'm going to be
17:05
Speaker 1: optimistic and think it can be done, and I think
17:08
Speaker 1: we've seen that that whether Donald Trump caved in or
17:12
Speaker 1: the Chinese cajun I'm not getting to the semantics of that,
17:14
Speaker 1: but certainly it's the first bottle of trade deal has
17:16
Speaker 1: been done. There are is a way forward. In twenty
17:19
Speaker 1: was a very big year outside your UK equities, I
17:23
Speaker 1: think can still be okay, if not better than okay,
17:27
Speaker 1: if the world's government's get out of themselves. So you
17:30
Speaker 1: said that you think that UK assets are dramatically undervalued
17:34
Speaker 1: heading into and that this is a gift for people
17:37
Speaker 1: who can bet on some of the stocks and bonds
17:40
Speaker 1: and housing and anything else. I'm wondering how the economy
17:44
Speaker 1: factors in because we are looking at a potential contraction
17:47
Speaker 1: in the UK economy for the fourth quarter. I think
17:51
Speaker 1: it's noise with its contract. I don't think it will contract,
17:53
Speaker 1: but let's us say it does. It doesn't mean anything.
17:55
Speaker 1: Um there's a massive fiscal spending splurgs coming. I still
17:59
Speaker 1: think if you read what all right, that that probably
18:02
Speaker 1: the next cut, the next movement banging and should be
18:05
Speaker 1: a cut, but it will be an insurance cut like
18:08
Speaker 1: the Fed's done three already. There will be a hockey
18:10
Speaker 1: stick squish um coming when that that physical spending kicks
18:14
Speaker 1: in and a bit of a Brexit bounce and all
18:16
Speaker 1: that sort of stuff. But I think the banking will
18:18
Speaker 1: try that to resist cutting. But if they need to,
18:21
Speaker 1: let's cut basis points doesn't really matter. The point is
18:25
Speaker 1: is that the economy is very soft, because that is
18:29
Speaker 1: why Boris Johnson won, because the economy was absolutely going
18:33
Speaker 1: into into a into a absolute channel of doom because
18:37
Speaker 1: of this extended Brexit nightmare which he is about to
18:40
Speaker 1: get us out of. Whether you agree with that or not,
18:43
Speaker 1: it's just what's happening. It's democratically put forward. The EU
18:47
Speaker 1: itself needs to realize the fact that it's second thirdligest
18:51
Speaker 1: members leaving the fifth lige economy world is leaving it
18:54
Speaker 1: and it needs to shape shift and get over itself
18:57
Speaker 1: and make a deal. And I think that can be
19:00
Speaker 1: done politics aside by the end of the year. It
19:03
Speaker 1: may not be the full deal. I think that's where
19:05
Speaker 1: the fudge comes. We've seen this for the US China
19:07
Speaker 1: trade deal, a nice little phase one deal by this
19:10
Speaker 1: time next year, and then we have Phase two which
19:12
Speaker 1: fills in all the gaps. That's that's the direction travel
19:15
Speaker 1: and I think the markets will will probably see through
19:18
Speaker 1: that over the course of the year, see through the politics,
19:20
Speaker 1: and all things being equal, it should be better for
19:24
Speaker 1: the europe stock markets and better for the UK and
19:27
Speaker 1: and hopefully better for the US as well. So Marcuts
19:29
Speaker 1: just give us a just some color as to how
19:31
Speaker 1: this will actually proceed over the next days, weeks, months,
19:34
Speaker 1: the negotiations if any in terms of ratifying this Brexit
19:38
Speaker 1: deal between the UK and the EU. What are the
19:41
Speaker 1: actual steps in timing? Well, we have um the withdrawal agreement,
19:46
Speaker 1: build the web, if you want to call it, coming
19:48
Speaker 1: through first steps or second steps. Technically, um, right here,
19:51
Speaker 1: right now, in the next couple of days, that'll be
19:53
Speaker 1: formally rapti fied um. But later in January, and then
19:57
Speaker 1: we're out of the Upean union from the by the
20:00
Speaker 1: end of Janut one. Then we're go into this period
20:03
Speaker 1: of negotiating in the transition period which the EU classic
20:07
Speaker 1: EU are trying to limit in June July. And you can't,
20:11
Speaker 1: you know, you must tell us we can extend. By
20:12
Speaker 1: this period, all this will be washed away. I'm sure
20:15
Speaker 1: of it, because it's it's just roadblocks that they're putting
20:17
Speaker 1: there to try and help their own procrastination, which which
20:21
Speaker 1: suits their their sides. They don't really want to face
20:23
Speaker 1: up the reality of the fact. As I said, the
20:26
Speaker 1: largest colom the world is exiting um their single market.
20:30
Speaker 1: But it needs to be done in an elegant way
20:32
Speaker 1: for everyone either side. All the important stuff like aircraft
20:36
Speaker 1: flying and pharmaceutical licensing can be done in a heartbeats
20:41
Speaker 1: already there. Um, it's it's a bit more motive on
20:44
Speaker 1: certain things, on certain tariffs, and of course financial services
20:47
Speaker 1: is something which will probably at the very end of it.
20:50
Speaker 1: It always is, but you know, there is ability to
20:52
Speaker 1: get a bare bones deal done by December twenty, which
20:56
Speaker 1: is the circled end the transition period which boris Johnson's
20:59
Speaker 1: and Dust announced today that he's going to make sure
21:02
Speaker 1: he is stuck to That is meaningless because he can
21:05
Speaker 1: actually introduce a bill a month beforehand and extended. But
21:09
Speaker 1: it's just a signal. What's it is? Marcus, Thanks so
21:11
Speaker 1: much for joining us. I really appreciate your commentary. Marcus
21:14
Speaker 1: Ashworth Bloomberg Opinion columns covering European markets, giving us his
21:17
Speaker 1: thoughts on the ongoing Brexit issue clearly is coming to
21:22
Speaker 1: a head. Here. You can read more on this and
21:24
Speaker 1: other stories from Bloomberg Opinion at Bloomberg dot com, slash
21:27
Speaker 1: Opinion and on the Terminal by typing O p I
21:30
Speaker 1: n GOT. One consistent theme throughout the past few years
21:46
Speaker 1: has been the incredible rush of cash into private markets
21:50
Speaker 1: of all sites, of all sorts. Private equity, private debt,
21:54
Speaker 1: and the convergence of those two sectors in particular has
21:58
Speaker 1: led to a boom in jer's and acquisitions and buyouts
22:02
Speaker 1: within the middle market sector in particular, and Luckily for us,
22:05
Speaker 1: we have somebody who knows a lot about that, Karen
22:07
Speaker 1: Davies joining us here in our Interactive Broger studio as
22:09
Speaker 1: private equity managing director and group head at Huntington National
22:13
Speaker 1: Bank and usually in Cleveland, but today here in our
22:16
Speaker 1: eleven three oh studios. Karen, I want to just get
22:19
Speaker 1: a sense of twenty nineteen. Deal count a little lower,
22:23
Speaker 1: valuations very high. What's your big takeaway? So, I think
22:28
Speaker 1: nineteen has been UM basically on pace with what was.
22:33
Speaker 1: If you look at the total value of deals, I
22:35
Speaker 1: think the number is we you know, we should end
22:37
Speaker 1: up in the fourth quarter very close to two trillion
22:40
Speaker 1: dollars of M and A. Again, UM, that's the same
22:43
Speaker 1: number that was done in two thousand eighteen. The deal count,
22:46
Speaker 1: as you had mentioned, UM was a little off, a
22:48
Speaker 1: little lighter, but very large mega deals that got done.
22:51
Speaker 1: So the deal value was very high in the third quarter.
22:54
Speaker 1: And so we've seen that trend that the deal values
22:56
Speaker 1: are higher, the multiples are still elevated. UM. I kind
22:59
Speaker 1: of think that's the new norm. I think that's the
23:01
Speaker 1: new norm with that much capital available in the market,
23:04
Speaker 1: you know, related to UM in the banks having capital
23:09
Speaker 1: available the capital markets, having capital sovereign wealth funds coming
23:13
Speaker 1: in trillion dollars, a dry powder. On the private equity side,
23:16
Speaker 1: I think that those valuations are going to continue to hold,
23:19
Speaker 1: so one of the things at least, And I've noticed that,
23:21
Speaker 1: as you mentioned, there's just so much money coming into
23:24
Speaker 1: the private equity business over the years, and it seems
23:26
Speaker 1: like every big firm is raising just jillion dollar funds.
23:30
Speaker 1: But you, you're the one that actually has to put
23:32
Speaker 1: senior debt on these deals. You're taking a lot of risk.
23:36
Speaker 1: Are you concerned? Are you seeing some of your private
23:38
Speaker 1: equity clients maybe doing deals in the last year or
23:41
Speaker 1: two that maybe they would not have done four or
23:43
Speaker 1: five years ago. Well, I think I think that there's
23:45
Speaker 1: still using really good discipline. I think that their investment
23:48
Speaker 1: thesis work is very solid um. I don't necessarily see
23:53
Speaker 1: them taking more risk that they wouldn't have taken before,
23:56
Speaker 1: but they're paying more for it, right, So if it's
23:59
Speaker 1: a good as set um and they've done their diligence,
24:02
Speaker 1: they will pay up invaluation. We sort of hold study
24:06
Speaker 1: on the line in terms of how much senior leverage
24:08
Speaker 1: we're going to put out. Really it's the differential is
24:10
Speaker 1: coming from them, It's coming from the equity check that
24:12
Speaker 1: they're writing. So what used to be maybe thirty back
24:15
Speaker 1: in the day equity is now fifty six equity to
24:18
Speaker 1: get a deal done when you're paying twelve times. And
24:20
Speaker 1: this is something that people have actually been talking about
24:22
Speaker 1: as something giving them confidence in the private debt world
24:25
Speaker 1: that there is that huge equity cushion, right or pinning
24:28
Speaker 1: that there is a concern what if the whole things
24:30
Speaker 1: the house of cards and the valuation is ridiculous to
24:33
Speaker 1: begin with, and the business model is unsound. I mean,
24:35
Speaker 1: are you seeing anything that reeks of that? I would
24:39
Speaker 1: say not not yet. But you're as a lender, you
24:43
Speaker 1: are very selective in terms of where you put your
24:47
Speaker 1: dollars to work. And I think you're seeing the need
24:51
Speaker 1: to partner with the right private equity firms who have
24:54
Speaker 1: really good track records, who have an investment thesis that
24:57
Speaker 1: is sound, they have operating partners who know those in streets,
25:00
Speaker 1: versus sort of being a tourist. If you will, you know,
25:02
Speaker 1: I'm gonna write a big check out of my private
25:04
Speaker 1: equity fund into a line of business that I know
25:06
Speaker 1: nothing about, and then I'm going to go ahead and
25:08
Speaker 1: line it up with a senior debt provider who maybe
25:10
Speaker 1: has no expertise or special specialization in that lending of
25:13
Speaker 1: that sector. That that is sort of a dangerous combination.
25:17
Speaker 1: So in the middle markets where you focus your team focuses,
25:21
Speaker 1: what industries are sectors? Are you seeing the most activity
25:24
Speaker 1: right now? So we have a decent amount of healthcare
25:28
Speaker 1: related businesses, uh, not just private equity owned, but privately
25:32
Speaker 1: owned at Huntington Bank through the middle market footprint that
25:34
Speaker 1: we serve, So healthcare, um, some consumer good retail, Uh,
25:39
Speaker 1: pretty select there in terms of you better have a
25:41
Speaker 1: good e commerce platform. We're starting to see a little
25:43
Speaker 1: bit more automotive aftermarket transactions coming to market because those
25:47
Speaker 1: would probably be cycled resilient to some extent. And then
25:50
Speaker 1: it's just pretty consistent business to business and you know,
25:52
Speaker 1: just your basic manufacturing. In the Midwest where we sit
25:54
Speaker 1: in Huntington's we see those companies, you know, trying to
25:57
Speaker 1: convert wealth right, sell the business, get ahead of a
26:00
Speaker 1: cycle and do it now. So are you seeing more buyouts,
26:02
Speaker 1: more mergers, more acquisitions. What's the goal other than just
26:05
Speaker 1: cashing out? Uh, Well, it depends where you ask right.
26:09
Speaker 1: So the goal is private equity has way too much
26:11
Speaker 1: dry powder on their hands and they got to put
26:13
Speaker 1: it to work, and their gps are screaming, well, but
26:14
Speaker 1: but this, but this is this is not great right,
26:17
Speaker 1: That's not a great reason. That's not a good reason
26:19
Speaker 1: to do it. Um. You also have a lot of
26:22
Speaker 1: privately held businesses in terms of if you go out
26:24
Speaker 1: and look at the generational ownership who have said, when
26:28
Speaker 1: you do these surveys, we're absolutely inquisitive. We're inquisitive. We're
26:32
Speaker 1: looking to sell. We're looking at take chips off the table.
26:34
Speaker 1: I need to transition wealth. I don't have a third
26:36
Speaker 1: gen coming in and I don't want to ride this
26:38
Speaker 1: business through the cycle. So you know, I think there's
26:41
Speaker 1: some there's a confluence of issues coming. You've got too
26:43
Speaker 1: much capital, You've got a lot of people trying to sell.
26:45
Speaker 1: It's almost like I think there was an article written
26:47
Speaker 1: that you know, everything in America was for sale. So
26:50
Speaker 1: if you read that, it's a little it's a little
26:52
Speaker 1: scary exactly. So in your markets, like you know, when
26:55
Speaker 1: I was in the bank banking world, is a question
26:57
Speaker 1: how much of a loan would we keep on books
27:00
Speaker 1: versus syndicate out, how are the deals getting done now?
27:03
Speaker 1: Because if I were a commercial lender in these deals,
27:06
Speaker 1: I'd be concerned. Towards the end of the economic cycle,
27:09
Speaker 1: I've got buyers spending you know, big multiples, maybe a
27:11
Speaker 1: little b higher than I'm comfortable with. I'd want to
27:14
Speaker 1: sell down as much as I can. What are you
27:15
Speaker 1: finding in the middle market in the credit side. Well,
27:17
Speaker 1: interestingly enough, the middle market syndicated UH lending UM space
27:22
Speaker 1: right now is way down in terms of where where
27:25
Speaker 1: we used to be in terms of volume because of
27:27
Speaker 1: the direct lenders doing the whole deal right there coming
27:29
Speaker 1: in and doing the whole deal. There still are customers
27:32
Speaker 1: who really value that senior sub sort of transaction UM
27:36
Speaker 1: and I think that the syndicate market, when we agent transactions,
27:40
Speaker 1: is a very appropriate tool to use to manage risk.
27:45
Speaker 1: And and in your book or any lenders book, you
27:47
Speaker 1: should have diversity in your book. And that's what you
27:49
Speaker 1: use syndicated lending for is is to diversify. And so
27:52
Speaker 1: I think it's a tool that you we got to
27:54
Speaker 1: continue to use. But it's certainly a competitive situation when
27:56
Speaker 1: you have one lender when them to do the whole
27:57
Speaker 1: thing exactly. Karen Daviess, thanks you so much for joining us.
28:00
Speaker 1: Karen Davies, private equity managing director and group head at
28:02
Speaker 1: Huntington National Bank based in Cleveland, but joining us here
28:05
Speaker 1: on a Bloomberg and inactive broker studio giving us a
28:07
Speaker 1: rundown on the M and A environment, particularly for a
28:09
Speaker 1: mid market M and A uh is Karen mentioned another
28:12
Speaker 1: good year for M and A broadly speaking, maybe two
28:15
Speaker 1: trillion dollars worth of deals in Thanks for listening to
28:19
Speaker 1: the Bloomberg P and L podcast. You can subscribe and
28:22
Speaker 1: listen to interviews at Apple Podcasts or whatever podcast platform
28:25
Speaker 1: you prefer. I'm Paul Sweeney. I'm on Twitter at pt Sweeney.
28:28
Speaker 1: I'm Lisa bram Woyds. I'm on Twitter at Lisa A.
28:30
Speaker 1: Bram Woits one. Before the podcast, you can always catch
28:33
Speaker 1: us worldwide. I'm Bloomberg Radio