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Markets Amid War And ESG Investing · Bloomberg Intelligence

• 0:00
  Speaker 1: Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney alongside
• 0:04
  Speaker 1: my co host Matt Miller. Every business day we bring
• 0:06
  Speaker 1: you interviews from CEOs, market pros, and Bloomberg experts, along
• 0:11
  Speaker 1: with essential market moving news. Find the Bloomberg Markets podcast
• 0:15
  Speaker 1: called Apple Podcasts or wherever you listen to podcasts, and
• 0:18
  Speaker 1: at Bloomberg dot com slash podcast bat We have a
• 0:22
  Speaker 1: really cool guest with us now. Back in and the
• 0:25
  Speaker 1: heat of the pandemic, we had KKR investing billions of
• 0:29
  Speaker 1: dollars and credit strategies as most investors had dipped out.
• 0:33
  Speaker 1: Now a person familiar tells me KKR invested more than
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  Speaker 1: five billion dollars in the last couple of months. Joining
• 0:40
  Speaker 1: us now to talk about what KKR is doing is
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  Speaker 1: a director at the company tall reback. Thank you so
• 0:45
  Speaker 1: much for joining us. Tell what are you buying right now?
• 0:48
  Speaker 1: And why are you able to step in when others
• 0:51
  Speaker 1: are stepping out? He needs a lot of great opportunities
• 0:54
  Speaker 1: being created, you know, albeit on the Vaultwible backdrop, and
• 0:58
  Speaker 1: you know, we're starting to think that Hi, You'll is
• 1:00
  Speaker 1: getting more attractives are in high quality pockets. Senior secured
• 1:03
  Speaker 1: loan paper, there's a lot of interesting dispersion also being created,
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  Speaker 1: I would say interest sector, and you know, from an
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  Speaker 1: inflationary perspective, we've already known about that for quite some time.
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  Speaker 1: So we've been really looking at durability of cash flows
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  Speaker 1: really using that as our true north and credit and
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  Speaker 1: downside protection as we look across the spectrum on what
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  Speaker 1: we want to lean into right now, what do you
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  Speaker 1: expect the FED to do? Um, And especially given your
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  Speaker 1: affiliation with the FED, I mean, you've you've got some
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  Speaker 1: really deep knowledge of how how they work. But they're
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  Speaker 1: in a difficult place right now because they're going to
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  Speaker 1: have to fight inflation and yet um, there are worries
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  Speaker 1: about slowing growth. Absolutely, you know, I think our base
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  Speaker 1: cases that the FED has to continue to tighten again.
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  Speaker 1: We think that's something that the market has priced in
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  Speaker 1: and it should have been on investors minds for some time,
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  Speaker 1: but that we don't see a way that they can
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  Speaker 1: pivot away from that, you know, given all of the
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  Speaker 1: moving parts in the market. So we do foresee the
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  Speaker 1: rate types taking place as that continues to unfold, making
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  Speaker 1: sure that we're as flexibly toggling between six and floating
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  Speaker 1: great assets really thinking about our portfolio construction and keeping
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  Speaker 1: in mind all of the geopolitical issues in the backdrop.
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  Speaker 1: When you look around you I know that you are
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  Speaker 1: finding opportunities, but where do you find big risks and
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  Speaker 1: the places that investors might lose a lot of money.
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  Speaker 1: Oh it's a great question. You know. One thing that
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  Speaker 1: we've talked about a lot at KKR. Sometimes the market
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  Speaker 1: grapples with a concept we like to call perception versus reality,
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  Speaker 1: And in this current chapter of the market, we think
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  Speaker 1: duration risk is one thing to really highlight. Given the
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  Speaker 1: FED stepping in in twenty you know, conducive monetary backsdrop
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  Speaker 1: or borrowers or extending their liabilities, the longer end of
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  Speaker 1: the curve could see a little bit more volatility, which
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  Speaker 1: we actually saw in January. So really mindful of that
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  Speaker 1: duration risk across our asset allocation. And you know, understanding
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  Speaker 1: that what was perceived once upon a time of safe
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  Speaker 1: for example, something like fixed income and I G that
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  Speaker 1: that may not be the best risk adjusted return right now.
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  Speaker 1: So going a little bit sub i G is where
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  Speaker 1: we would play what are the effects of the war
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  Speaker 1: tal I mean, I know geopolitical uncertainty is hard to
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  Speaker 1: price in but now we know what Russia is going
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  Speaker 1: to do, has done, is doing um and you can
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  Speaker 1: see the effects of businesses around the world. Yeah, absolutely,
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  Speaker 1: you know, first and foremost our thoughts are with people
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  Speaker 1: of Ukraine's during this tragic and terrible time. And you know,
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  Speaker 1: KKR is fortunate enough to have established the Kkeyre Global
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  Speaker 1: Institute over a decade ago, led by General Petraus, and
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  Speaker 1: we're staying very close to this and over communicating with
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  Speaker 1: our clients and portfolio companies. But we've we've incorporated into
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  Speaker 1: our investment process geopolitical risk. So we're being extremely thoughtful,
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  Speaker 1: you know, intra day as the situations of our looks,
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  Speaker 1: and quite honestly, in Europe that's closer to the unfortunate
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  Speaker 1: conflict we could were being collective. You know, there could
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  Speaker 1: be growth slowing there, you know, the net effects and
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  Speaker 1: second and third derivatives of supply chain issues and commodities.
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  Speaker 1: So we're being extremely thoughtful. UM and we'll see, but
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  Speaker 1: we're you know, we're just staying on our toes like
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  Speaker 1: everyone else. Yeah. Interesting, that's kind of like what me
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  Speaker 1: and met we're talking about earlier. Even though the stock
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  Speaker 1: market is up, that people are worried about those growth concerns.
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  Speaker 1: I'm wondering. You know, you mentioned General for Trayas and
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  Speaker 1: his work with KKR. How are you answering questions from clients?
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  Speaker 1: What are the biggest things on their mind as they
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  Speaker 1: navigate this market here and broad? Yeah? Absolutely, you know, firstly,
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  Speaker 1: we're we're over communicating, and you know, from a business perspective,
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  Speaker 1: we have very limited indirect exposure to begin with, really
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  Speaker 1: in large part to our investment process, and our platform
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  Speaker 1: is so connected and global that we're constantly cross pollinating
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  Speaker 1: across our different disciplines. So we're just making sure we're
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  Speaker 1: ready in the veil doable. We're taking note of every
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  Speaker 1: angle of the market. And one thing to say is,
• 5:04
  Speaker 1: you know, we're in the market day and day out
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  Speaker 1: at very different verticals, so we're one team is seeing
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  Speaker 1: something where another is not. We're exchanging that information and
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  Speaker 1: making sure everyone is consistent on the same page. By
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  Speaker 1: the way, Nale was and I've been talking about the
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  Speaker 1: library OI spread for the past a few days and
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  Speaker 1: I see that you are responsible for um the firm's
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  Speaker 1: lie or transition effort. How how is that going to go?
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  Speaker 1: You know, what what are we going to really see
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  Speaker 1: in a world without libor Yeah, no, you came to
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  Speaker 1: the right person on that. So I think it's it's
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  Speaker 1: really interesting to see the widening and o I s
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  Speaker 1: right now, particularly because most of those quotes are really
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  Speaker 1: coming from the panel bank, something that we call expert judgment.
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  Speaker 1: You're not seeing a whole lot of wholesale transactions, so
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  Speaker 1: there's a gauge on what that bank and credit risk
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  Speaker 1: looks like. But if you look at the spots bread
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  Speaker 1: and you look how so for has the liquid and
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  Speaker 1: SOFA is really deep in. What we're seeing is, you know,
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  Speaker 1: a true adoption of the life after live boar, which
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  Speaker 1: I think is a net positive and as testament to
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  Speaker 1: all the work being done. But it is not, you know,
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  Speaker 1: notwithstanding something that highlights a few of the challenges we've
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  Speaker 1: seen with live brar historically, that it can start to
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  Speaker 1: get a bit wonky, especially in market environments like these
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  Speaker 1: where there's lacking liquidity. Teal great having you on. Thank
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  Speaker 1: you so much for joining us, and thanks to Chinali
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  Speaker 1: um for for booking or tal reback their director at KKR.
• 6:36
  Speaker 1: Now I told you we're gonna talk to Will Naskovitz.
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  Speaker 1: He's the chairman and CEO of Heartland Advisors, and UM,
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  Speaker 1: great day to have you on, Will, thanks so much
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  Speaker 1: for joining us. What do you think about this bounce
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  Speaker 1: back we're seeing? Um, even after we heard UM, you know,
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  Speaker 1: the US is going to embargo Russian oil. That's gonna
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  Speaker 1: put some real um put put some Americans in real
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  Speaker 1: difficulty as prices are rising. In fact, Jeff Gunlock said,
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  Speaker 1: maybe even ten inflation. Why are we up today? Well,
• 7:09
  Speaker 1: thanks for having me. I think it's this volatility is
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  Speaker 1: going to be with us for some time. And I'm
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  Speaker 1: certainly not trying to diminish the significance or the gravity
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  Speaker 1: of the situation in Ukraine, but for some perspective, I
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  Speaker 1: think is worthwhile. And we've had hundreds of crises, you know,
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  Speaker 1: going in, dozens of prices going back the hundred years
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  Speaker 1: or so, and you know, typically your post the event,
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  Speaker 1: whether it's at a war or terrorist attack or some
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  Speaker 1: type of financial panic, the market is up. So I
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  Speaker 1: don't know that this circumstance is going to play out
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  Speaker 1: like that, but I do. I think it feeds the
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  Speaker 1: should of trying to capitalize on some of the opportunities
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  Speaker 1: that are presenting. Two investors and that's what you know,
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  Speaker 1: we're going to continue to do at here at Hartman.
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  Speaker 1: We're gonna continue to apply our our ten principles of
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  Speaker 1: value investing and look at this specific risks and outlooks
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  Speaker 1: in any particular company. I mean, what we're finding here
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  Speaker 1: in this sell off, and this is perhaps why we're
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  Speaker 1: seeing buying day, is that in many cases, the valuations
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  Speaker 1: of companies have really disconnected from you know, their fundamentals
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  Speaker 1: that they're going to be seen over over the longer term,
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  Speaker 1: notwithstanding all the uncertainties that are out there. So what
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  Speaker 1: are you recommending to clients? What do you do? Do
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  Speaker 1: you buy amid the volatility or do you sit on
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  Speaker 1: the sidelines? Well, I think you just have to be
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  Speaker 1: aware of it, all right. You can't just be laser
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  Speaker 1: focused on the macro and all the geopolitical. You have
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  Speaker 1: to do that in conjunction with adhering to your process
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  Speaker 1: and I referenced earlier us remaining focused on the specific
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  Speaker 1: company risks and opportunities out there and looking at it
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  Speaker 1: a case by case basis, where perhaps the valuations look
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  Speaker 1: really compelling because the market overestimated some of these risks,
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  Speaker 1: risks or at the very least taking a very short
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  Speaker 1: term view. I mean, I think a good example, maybe
• 8:50
  Speaker 1: get a little more specifics on this. The health care
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  Speaker 1: sector was not a great place to be last year.
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  Speaker 1: We're all familiar with with COVID and all the protocols
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  Speaker 1: and the labor challenges that really damp in the sidures
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  Speaker 1: that companies and hospitals experience. You know, that's presenting opportunities
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  Speaker 1: in that space here today because we think those procedures
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  Speaker 1: come back in the evaluations aren't reflecting it. So I
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  Speaker 1: think you just have to be very choosy, very specific
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  Speaker 1: in your work and be you know, entrepreneurial and an
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  Speaker 1: active investor. Here, let's get over Tom Stringfellow and ask
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  Speaker 1: him those questions. He's the chief investment Strategies at Argent
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  Speaker 1: Financial Group. Tom Um, thanks for joining us. We've been
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  Speaker 1: talking about these big inflation predictions and warnings from good
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  Speaker 1: luck and think what do you think? Well, I appreciate
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  Speaker 1: the opportunity, and you have the ten percent number. Yeah,
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  Speaker 1: that's kind of a scary number and it's certainly not
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  Speaker 1: one that I'm looking at at this point in time,
• 9:45
  Speaker 1: you know, and you know, just thinking back to the
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  Speaker 1: charts that were just mentioned, absolutely correct. Everything is is,
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  Speaker 1: you know, it's just escalated and elevating. And I put that,
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  Speaker 1: you know, kind of a momentum rush right now that
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  Speaker 1: I don't think it's sustainable in inflation if you start
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  Speaker 1: talking about ten. But I wouldn't be surprised if we
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  Speaker 1: don't get hit with something just shy of north of
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  Speaker 1: eight percent, you know, with this coming month. Uh, you know,
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  Speaker 1: in terms of CPI and maybe core somewhere around six
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  Speaker 1: and a half percent. Either way, those are still well
• 10:21
  Speaker 1: here high. With Texas Intermedia trading at a hundred and
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  Speaker 1: seventeen dollars a barrel um. You know, yesterday it looked
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  Speaker 1: like we were gonna get closer to one thirty. That's
• 10:30
  Speaker 1: gotta that's got either brought under control or I mean,
• 10:34
  Speaker 1: how do you see that from Texas? Well, you know,
• 10:37
  Speaker 1: good point from Texas. You know, we kind of look
• 10:39
  Speaker 1: at it, and you know, if you're a mental owner,
• 10:42
  Speaker 1: you gotta love oil. Uh, if you're driving back and forth,
• 10:47
  Speaker 1: you know, that changes the perspective. And and you know
• 10:50
  Speaker 1: there is some thought that maybe you know, these higher
• 10:53
  Speaker 1: wall prices at the pump or somewhat deflationary because it's
• 10:57
  Speaker 1: taken money away from you know, what might be spent
• 10:59
  Speaker 1: on endurables, you know, by consumers over the next several months.
• 11:03
  Speaker 1: But you know, if you believe prices are going to
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  Speaker 1: higher in the oil business, you've got to also believe
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  Speaker 1: that the Ukraine situation gets much much worse and continues
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  Speaker 1: to be an absolute uh channel blocker on the oil industry.
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  Speaker 1: And and you know that's the question. What happens over
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  Speaker 1: there certainly has a lot of impact on how inflationary
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  Speaker 1: we're going to be, you know, not only at the
• 11:29
  Speaker 1: at the fuel pump, but also at the grocery store.
• 11:32
  Speaker 1: You know, it's not it's really not just oil though,
• 11:35
  Speaker 1: right real quick here, I mean, how much are these
• 11:38
  Speaker 1: price increases going to float through the economy? Well, and yeah,
• 11:42
  Speaker 1: that's that's a great point. And you know, right now
• 11:44
  Speaker 1: we started to see companies uh starting to raise prices,
• 11:49
  Speaker 1: and you know, I think that's inevitable. You know, they're
• 11:52
  Speaker 1: going to have to continue trying to keep you know,
• 11:54
  Speaker 1: reasonable target margin for you know, their operations. So it
• 12:00
  Speaker 1: is definitely going to bleed through, especially you know, anything
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  Speaker 1: that's resource based. You know, these prices are going to
• 12:06
  Speaker 1: have to flow through to the market. And you know,
• 12:08
  Speaker 1: I don't know that we have seen that kind of
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  Speaker 1: pricing yet into the underlying financials and the into the
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  Speaker 1: market itself. Investors I think are focusing on you know,
• 12:20
  Speaker 1: the impact on interest rates and inflation and you know,
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  Speaker 1: what's that going to do based on prior history, But
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  Speaker 1: I don't see that having been priced into the market. Yeah,
• 12:31
  Speaker 1: what we're seeing today I think is just natural for
• 12:34
  Speaker 1: a volatile, uncertain market. You know, we're in a pendulum
• 12:38
  Speaker 1: swing right now that just keeps to it seems to
• 12:42
  Speaker 1: you know, go from one extream to another. That's that's
• 12:45
  Speaker 1: how I view this. But this volatility has also given
• 12:48
  Speaker 1: us some great buys. Yeah, Tom, we're gonna have to
• 12:50
  Speaker 1: get the check back in with you later on those
• 12:52
  Speaker 1: buying opportunities, But appreciate your time today, Tom string Fellow,
• 12:55
  Speaker 1: Chief Investment Strategy, Argent Financially. Just get over to Caroline
• 13:03
  Speaker 1: Bresson right now, Managing director of the Open Road Alliance
• 13:07
  Speaker 1: and the Open Road Impact Fund. UM. Caroline, Caroline talked
• 13:10
  Speaker 1: to us about what exactly you do with the Open
• 13:13
  Speaker 1: Road Alliance. Sure, and thanks mat intionally for for having
• 13:17
  Speaker 1: me today. So open Road steps up at critical moments
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  Speaker 1: and UM, there's some sort of delay or or there's
• 13:23
  Speaker 1: kind of an acceleration for an impact first company that
• 13:27
  Speaker 1: addressing climate change or inequality. Uh So, for example, we
• 13:31
  Speaker 1: actually just funded a company that provides a warning system
• 13:35
  Speaker 1: for air strikes against civilians. They give seven to ten
• 13:38
  Speaker 1: minutes warning um and and serve over two million people
• 13:41
  Speaker 1: across Syria and Yemen. So we're hoping Hollow Systems can
• 13:45
  Speaker 1: provide their services soon in Ukraine. Um. But our investment
• 13:49
  Speaker 1: helps them, uh, you know, accelerate their growth and continue
• 13:52
  Speaker 1: to keep their their impact on track when they had
• 13:54
  Speaker 1: some snags in their fundraising. Well that's just the thing
• 13:57
  Speaker 1: about impact investing. If you're if your impact invest so
• 14:00
  Speaker 1: you need to kind of stick in it for the
• 14:01
  Speaker 1: long road. What are some of the challenges along the way. Yeah, so, um,
• 14:06
  Speaker 1: you know, open road plays a very specific role. We
• 14:09
  Speaker 1: we do bridge financing. So unfortunately, UM, my dad's an economist.
• 14:12
  Speaker 1: So if you say, we have a very inefficient impact
• 14:15
  Speaker 1: investing sector where funds are committed, but they're often not
• 14:18
  Speaker 1: dispersed into the hands of entrepreneurs for you know, sometimes
• 14:22
  Speaker 1: twelve months um and so when you think about all
• 14:24
  Speaker 1: that red tape in particular, if you're getting an investment
• 14:26
  Speaker 1: from a government or something like that. Um, people, entrepreneurs
• 14:30
  Speaker 1: are just sitting on their hands waiting for for cash
• 14:32
  Speaker 1: to come in the door. So Open Road provides these
• 14:35
  Speaker 1: bridge loans that solve for those one time, discrete moments
• 14:38
  Speaker 1: of cash crunch. What does a raising rate environment mean
• 14:43
  Speaker 1: to you? Yeah, good question. So it's interesting. The impact
• 14:47
  Speaker 1: sector is a bit you know, government funds and so
• 14:51
  Speaker 1: I believe that rates will go up um on on
• 14:55
  Speaker 1: the debt side, just as as you would see in
• 14:57
  Speaker 1: in any financial market. However, there is a lot of
• 15:00
  Speaker 1: downward pressure from you know, philanthropic funds and and government
• 15:04
  Speaker 1: funds that might keep the cost of capital lower for
• 15:06
  Speaker 1: these impacts focused on entrepreneurs. Now, when you think about
• 15:09
  Speaker 1: kind of what's happening in the world and and the
• 15:12
  Speaker 1: fight over oil and the investment that might go into
• 15:15
  Speaker 1: energy into the United States, I mean, how does that
• 15:18
  Speaker 1: start to complicate a lot of the big E s
• 15:21
  Speaker 1: G investments that have been brewing for so long. Yeah, well,
• 15:27
  Speaker 1: you know, E s G is really just a framework,
• 15:29
  Speaker 1: and so what it does is it identifies risks up front.
• 15:33
  Speaker 1: It doesn't say that, you know, you should avoid it.
• 15:36
  Speaker 1: It means that the price should reflect the risk. Um.
• 15:39
  Speaker 1: But but I think you know, what's going on with
• 15:41
  Speaker 1: Russian oil right now really is a great moment for
• 15:43
  Speaker 1: green energy. And we've seen that Germany already has, you know,
• 15:48
  Speaker 1: UH moved up their target to five to get into
• 15:51
  Speaker 1: full green energy. So I'm hopeful that it'll just mean
• 15:53
  Speaker 1: a recommitment to getting towards those climate goals sooner. Difficult
• 15:57
  Speaker 1: though for the American consumer, for the everyday person here
• 16:01
  Speaker 1: right when you see gas prices at six seven dollars
• 16:05
  Speaker 1: of barrel, I have noticed that even I, UH as
• 16:09
  Speaker 1: as an incredible car lover, have thought, you know what,
• 16:11
  Speaker 1: maybe I should take the train. Um. That kind of
• 16:14
  Speaker 1: demand instruction is probably good for the transition, right. Yeah. Absolutely.
• 16:19
  Speaker 1: You know, I'm jealous of my neighbor down the streets
• 16:21
  Speaker 1: that bought a Tesla UM, and I think it will
• 16:24
  Speaker 1: just accelerate. Um. You know, the investment into UH into
• 16:28
  Speaker 1: electric cars, UM, the companies out there uponnding the pavement
• 16:31
  Speaker 1: to to raise new funds hopefully. UM. You know, the
• 16:34
  Speaker 1: more money they get, the quicker they can invest, the
• 16:36
  Speaker 1: more they can bring down costs on electric cars and
• 16:38
  Speaker 1: similar technologies that will hopefully show up in the hands
• 16:41
  Speaker 1: of consumers and into solar. Um. You know, because when
• 16:46
  Speaker 1: you have your neighbor probably doesn't want to be powering
• 16:49
  Speaker 1: his or her tesla with dirty coal electricity. Would be
• 16:54
  Speaker 1: much better to put solar panels on the roof and
• 16:56
  Speaker 1: charge it up that way. Is that something that you
• 16:58
  Speaker 1: think is going to pick up? Because it wasn't the
• 17:00
  Speaker 1: Open Road Alliance. Um, it wasn't that a big part
• 17:03
  Speaker 1: of the of the start of Open Road. Yeah. So
• 17:07
  Speaker 1: about half of our portfolio is in in renewable energy,
• 17:11
  Speaker 1: and UM, we just see more and more, you know,
• 17:13
  Speaker 1: funds being started to help accelerate that. Um. But when
• 17:17
  Speaker 1: you look at some states are kind of already ahead
• 17:19
  Speaker 1: of the curve. I think Washington State, Um, over the
• 17:23
  Speaker 1: energy produced is is via hyperpower. California, well over half
• 17:27
  Speaker 1: of the energy is solar. And so we should see that,
• 17:31
  Speaker 1: you know, reliance on oil coming down. Um. It just
• 17:34
  Speaker 1: depends on how much your state's invested in that technology
• 17:37
  Speaker 1: to date. On one hand, and we just have about
• 17:40
  Speaker 1: a minute left here. You say that it's inefficient sometimes
• 17:44
  Speaker 1: to invest this way, but I can really show up
• 17:46
  Speaker 1: in times of an emergency. How's that working now? Yeah?
• 17:51
  Speaker 1: You know, when we think about how these large climate
• 17:54
  Speaker 1: commitments are translated into impact. It's it's obvious that individual
• 17:57
  Speaker 1: companies must receive capital from those large commitments to get
• 18:01
  Speaker 1: their climate mitigating work started. You know, salaries must be paid,
• 18:03
  Speaker 1: inventory ordered, et cetera. And so the demand is higher
• 18:07
  Speaker 1: than ever for Open Road UM. You know, we are
• 18:09
  Speaker 1: providing our bridge loans at a at a breakneck pace,
• 18:11
  Speaker 1: trying to meet the demands of companies that are working
• 18:14
  Speaker 1: towards this climate transition. All right, really interesting stuff, Caroline,
• 18:18
  Speaker 1: Thanks so much for joining us, Caroline Brassan. They're managing
• 18:21
  Speaker 1: director of Open Road Alliance and Open Road Impact. Fun
• 18:26
  Speaker 1: talking to us about UM their business. Thanks for listening
• 18:32
  Speaker 1: to the Bloomberg Markets podcast. You can subscribe and listen
• 18:36
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• 18:40
  Speaker 1: I'm Matt Miller. I'm on Twitter at Matt Miller three
• 18:45
  Speaker 1: on false Sweeney I'm on Twitter at pt Sweeney. Before
• 18:47
  Speaker 1: the podcast, you can always catch us worldwide at Bloomberg Radio.