Latest / Bloomberg Intelligence / Emerging Markets Selloff Presents Buying Opportunities: Dennis

Transcript

Emerging Markets Selloff Presents Buying Opportunities: Dennis · Bloomberg Intelligence

• 0:05
  Speaker 1: Welcome to the Bloomberg p m L Podcast. I'm pim Fox.
• 0:08
  Speaker 1: Along with my co host Lisa Bramowitz. Each day we
• 0:11
  Speaker 1: bring you the most important, noteworthy, and useful interviews for
• 0:15
  Speaker 1: you and your money, whether you're at the grocery store
• 0:17
  Speaker 1: or the trading floor. Find the Bloomberg p m L
• 0:20
  Speaker 1: Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com. The
• 0:32
  Speaker 1: blood bath and emerging markets currencies has continued today. You
• 0:36
  Speaker 1: can look at the ms C I E M of
• 0:40
  Speaker 1: f X index and it is a continuing it's onward
• 0:44
  Speaker 1: decline for a fifth day. Here to talk about this,
• 0:48
  Speaker 1: this rapid fall of one of the darlings of this
• 0:51
  Speaker 1: year is Jeffrey Dennis. He has head of Global Emerging
• 0:53
  Speaker 1: Market Strategy for UBS Securities. So Jeff just weigh in here.
• 0:57
  Speaker 1: I mean, why are we seeing such severe declines kind
• 1:01
  Speaker 1: of escalate in the way that they are right now?
• 1:04
  Speaker 1: First of all, I think we have to keep all
• 1:06
  Speaker 1: this in perspective because actually some of the weaker brethren,
• 1:10
  Speaker 1: if you like, within the emerging markets that have that
• 1:13
  Speaker 1: are under pressure Brazil, Turkey, UM, India, UM, Indonesia to
• 1:19
  Speaker 1: a settings in Mexico. UM. They're coming off for sure,
• 1:23
  Speaker 1: but some of the better quality emerging markets, by you know,
• 1:28
  Speaker 1: in terms of fundamentals, like China and career in Taiwan
• 1:31
  Speaker 1: are hardly see any I have not seen any currency
• 1:34
  Speaker 1: decline at all, to speak out. So this is somewhat
• 1:36
  Speaker 1: isolated or somewhat localized. But it's happening because the dollar
• 1:41
  Speaker 1: itself is rising and that intern has got quite a
• 1:44
  Speaker 1: lot to do with the anticipation of more FED hikes
• 1:47
  Speaker 1: and also the rise of course in tenure bond yields
• 1:51
  Speaker 1: above three percent. But our view is this is all
• 1:55
  Speaker 1: happening because the global financial markets, in other words, not
• 1:58
  Speaker 1: because of anything going wrong within the emerging markets themselves.
• 2:01
  Speaker 1: All right. So Jeffrey Dennis having said that, and maybe
• 2:05
  Speaker 1: it is uh, maybe a time warned but but really
• 2:09
  Speaker 1: inaccurate way to look at investments by saying, all right,
• 2:11
  Speaker 1: we're going to look at this geographically, and we're looking
• 2:13
  Speaker 1: at emerging markets, so we look country by country. When
• 2:17
  Speaker 1: you've got companies that are doing business probably not only
• 2:21
  Speaker 1: in their home country but in other emerging markets, are
• 2:24
  Speaker 1: there specific companies that you would point investors to and say, look,
• 2:30
  Speaker 1: this is a great company that you want to own
• 2:33
  Speaker 1: for a long period of time, and here's an opportunity
• 2:37
  Speaker 1: to buy in when other people are too afraid. Well,
• 2:41
  Speaker 1: I'm not going to talk about specific companies, but the
• 2:44
  Speaker 1: way I would try to answer that is the following,
• 2:47
  Speaker 1: and that is the the danger sign will be to
• 2:50
  Speaker 1: what extent these currency declines in certain markets, as I say,
• 2:54
  Speaker 1: and the rise in inflation, which is partly coming through
• 2:58
  Speaker 1: because of higher all prices, does that at some point
• 3:02
  Speaker 1: cause the fundamental story within the emerging marks to deteriorate?
• 3:06
  Speaker 1: Does it lead to countries having to raise interest rates aggressively?
• 3:09
  Speaker 1: Doesn't mean the growth will slow down in some of
• 3:11
  Speaker 1: these countries because they have to react to a weaker
• 3:14
  Speaker 1: currency in higher inflation. That is when you would see
• 3:18
  Speaker 1: more of a risk coming through to the asset class.
• 3:21
  Speaker 1: If you've got, in other words, the this contained in
• 3:24
  Speaker 1: my view, currency weakness. Some does it start to contaminate
• 3:28
  Speaker 1: the fundamentals And we're and we're not frankly really seeing
• 3:31
  Speaker 1: that at this point. We've had a rate rise in Indonesia,
• 3:33
  Speaker 1: to be fair, but at this stage we think that
• 3:36
  Speaker 1: the basically the growth story in the global economy and
• 3:38
  Speaker 1: the growth story and the emerging marks is therefore intact
• 3:40
  Speaker 1: and so one a lot of your way to answer
• 3:42
  Speaker 1: your question would be would be to look at export
• 3:44
  Speaker 1: stocks that are that are coming out of these countries
• 3:47
  Speaker 1: with much weaker currencies because they will get some benefit
• 3:50
  Speaker 1: because the currencies are cheaper. And elsewhere in parts of
• 3:53
  Speaker 1: the world where things look more stable, we are not
• 3:56
  Speaker 1: seeing much declining currencies whatsoever. You got what you're gonna
• 3:59
  Speaker 1: find then, as some of the domestic stocks will do well. Um,
• 4:02
  Speaker 1: and in particular, we have a biggeravaging financials and emerging markets,
• 4:06
  Speaker 1: and that's an area we would be looking at. So
• 4:08
  Speaker 1: have you gotten a lot of calls from nervous clients recently?
• 4:11
  Speaker 1: We've had a lot of inquiries from nervous clients for sure,
• 4:14
  Speaker 1: and I think, um, it's inevitable when you get this
• 4:18
  Speaker 1: this amount of selling of certain currencies, including as you
• 4:22
  Speaker 1: said in your intro, some of the darlings of I
• 4:24
  Speaker 1: think last year rather than this year, such as Brazil.
• 4:27
  Speaker 1: There is there is a great concern about this. But
• 4:29
  Speaker 1: at the end of the day, um, you know, the
• 4:32
  Speaker 1: funds flow story is still pretty strong into the emerging markets.
• 4:36
  Speaker 1: We haven't seen much of the way of outflows now.
• 4:38
  Speaker 1: Of course that could happen, you know, on the back
• 4:40
  Speaker 1: of all of this, but we we think generally investors
• 4:44
  Speaker 1: are going to stay relatively calm and on our view
• 4:48
  Speaker 1: of a weaker dollar and lower bondial second half of
• 4:50
  Speaker 1: the year, I think this will prove to be a
• 4:52
  Speaker 1: very nice buying opportunity on a sort of six to
• 4:54
  Speaker 1: nine month view. So that's where I was going to
• 4:56
  Speaker 1: go with this, because you said, you know, this isn't
• 4:58
  Speaker 1: some something fundamental and emerging markets, it's something more of
• 5:01
  Speaker 1: a market driven kind of issue. But you could argue
• 5:05
  Speaker 1: that it was sort of a market driven issue that
• 5:07
  Speaker 1: there was such a flood of cash going into emerging
• 5:10
  Speaker 1: markets earlier through index funds UM so you know, what's
• 5:14
  Speaker 1: to say that it won't accelerate. To your point, you're
• 5:16
  Speaker 1: not seeing that yet, But how closely are you watching
• 5:19
  Speaker 1: those sort of passive passive funny fun We are certainly
• 5:23
  Speaker 1: watching watching that with any question. And one and one
• 5:26
  Speaker 1: argument people could make for being having a more negative
• 5:28
  Speaker 1: view going forward is the fact that a e M
• 5:30
  Speaker 1: equity funds about fifty three billion dollars of money coming
• 5:34
  Speaker 1: in so far this year, which is essentially a record
• 5:37
  Speaker 1: for this time of the year. We haven't seen any
• 5:39
  Speaker 1: significant We seen a slowdown those flows, but no real outflows.
• 5:42
  Speaker 1: Were that to happen, obviously that would um you know
• 5:46
  Speaker 1: that that would be a concern. And but from a
• 5:50
  Speaker 1: from a fundamental point of view, if we're alsto alive
• 5:52
  Speaker 1: by the time we get there, you know, our highest
• 5:55
  Speaker 1: view here is that the pressure on bond yells and
• 5:58
  Speaker 1: the pressure on the upward pressure on the dollar will
• 6:00
  Speaker 1: fade in the second half of the year, as as
• 6:03
  Speaker 1: inflation in the US kind of rolls over and is
• 6:06
  Speaker 1: not seen to be the threat props it is at
• 6:08
  Speaker 1: the moment, and if the dollar were to go shall
• 6:10
  Speaker 1: be lower second half of the year, which is our view,
• 6:12
  Speaker 1: and bonnos come back a bit. I think that money
• 6:15
  Speaker 1: money is going to come back, and therefore we are
• 6:18
  Speaker 1: in the middle of a bit of a nasty storm
• 6:20
  Speaker 1: here and it may well go on for a few
• 6:22
  Speaker 1: more weeks, but I don't think it's going to lead
• 6:24
  Speaker 1: to a major bear market in emerging market equities at
• 6:27
  Speaker 1: this stage, Thank you very much. Jeffrey Dennis is head
• 6:30
  Speaker 1: of Global Emerging Market Strategy for UBS Securities. He's based
• 6:34
  Speaker 1: in Boston, of course, home the Bloomberg one or six
• 6:37
  Speaker 1: one Boston, Newburyport, in thirty in Metro West and the
• 6:41
  Speaker 1: South Shore, and he was talking about the dollar. Italy
• 6:57
  Speaker 1: could soon have a radical coal Asian government led by
• 7:01
  Speaker 1: the anti establishment Five Star Movement and the far right
• 7:05
  Speaker 1: League here to tell us more about Italy and it's uh. Well,
• 7:09
  Speaker 1: the economy and the reaction to financial markets to the
• 7:14
  Speaker 1: perhaps forming of a new government is uh for Aernando Giuliano.
• 7:18
  Speaker 1: He is a columns for Bloomberg Opinion based in Rome. Fernando,
• 7:23
  Speaker 1: thank you very much for being with us. Bring us
• 7:25
  Speaker 1: up to date on who are the various parties that
• 7:29
  Speaker 1: may come together to form a real government and what
• 7:32
  Speaker 1: is their platform or at least what's their platform today.
• 7:36
  Speaker 1: So we have two governments, two parties which did not
• 7:40
  Speaker 1: run together in the election, let's recall that. So that's
• 7:43
  Speaker 1: why they had to sit down and negotiate a new program.
• 7:45
  Speaker 1: On the one hand, we have the Five Star Movements,
• 7:48
  Speaker 1: which is a anti establishment party which rose to power
• 7:53
  Speaker 1: very quickly over the last few years, which was set
• 7:55
  Speaker 1: up initially by the comedian bet Pegrillo and has been
• 7:58
  Speaker 1: a little bit of a catch hole party, really grubbing
• 8:02
  Speaker 1: votes from less and right. And on the other hand,
• 8:05
  Speaker 1: we have the League, which is a hard right party
• 8:10
  Speaker 1: which in the past was taking positions to have the
• 8:13
  Speaker 1: North basically, you know, to separate the Italy into North
• 8:18
  Speaker 1: and South, but now it's taken more eurosceptic views. The
• 8:22
  Speaker 1: two of them are now combined to this turbocharged populist
• 8:26
  Speaker 1: government which has just produced its coalition agreement. It's a
• 8:31
  Speaker 1: list of spending commitments which total more than a hundred
• 8:35
  Speaker 1: billion euros and include some radical ideas, for example, a
• 8:41
  Speaker 1: speed cutting income taxes, uh an income support scheme, very
• 8:46
  Speaker 1: generous but which most importantly would set Italy on a
• 8:49
  Speaker 1: collision course with the rest of the Eurozone and the
• 8:53
  Speaker 1: European Union if they were to be enacted. You know,
• 8:56
  Speaker 1: the response has been notable in some of the Italian markets,
• 9:01
  Speaker 1: but in some ways it's sort of surprising that you
• 9:03
  Speaker 1: haven't seen a greater sell off. For example, Italian bonds.
• 9:08
  Speaker 1: I mean, yes, yields are at the highest level since
• 9:10
  Speaker 1: July of last year, but still I mean, basically, they're
• 9:13
  Speaker 1: they're calling for a blow out of their deficit and
• 9:16
  Speaker 1: they're hoping that the Eurozone is going to help fund
• 9:19
  Speaker 1: their lavish promises, which they're not going to do. Well, absolutely,
• 9:22
  Speaker 1: I think the reaction has been there. I mean we've
• 9:25
  Speaker 1: seen it accelerating over the last couple of days. I've
• 9:29
  Speaker 1: since you know, it became clear that these two parties
• 9:32
  Speaker 1: were serious. But it's not been as uh, you know,
• 9:36
  Speaker 1: there could be more to come. I mean, I think
• 9:39
  Speaker 1: that the mitigating factors here are, first of all, the
• 9:42
  Speaker 1: European Central Bank scheme of quantitative easing, which is still
• 9:45
  Speaker 1: running and we'll run until the autumn, so there is
• 9:48
  Speaker 1: still a buyer of Italian debt and investors know that
• 9:52
  Speaker 1: in the form of a central bank. And on top
• 9:55
  Speaker 1: of that, we also have the idea that somehow these
• 9:58
  Speaker 1: proposals are non starters. I mean, they will need to
• 10:02
  Speaker 1: meet the President on Monday to discuss the program, and
• 10:05
  Speaker 1: the President has said he will want to play an
• 10:08
  Speaker 1: active role. And on top of that, you know, many
• 10:11
  Speaker 1: of these ideas will actually need to be implemented, and
• 10:14
  Speaker 1: you know, there will be some discussions with Euros and
• 10:17
  Speaker 1: partners who are going to be you know, quite unsupportive
• 10:21
  Speaker 1: to say the list. So I think there is you know,
• 10:24
  Speaker 1: there is more to come, for sure. But on the
• 10:26
  Speaker 1: other hand, I think the investors are looking at this,
• 10:29
  Speaker 1: you know, mitigating factors, which may explain why the reaction
• 10:32
  Speaker 1: is still relatively muted for the NANDO. I mean, just
• 10:35
  Speaker 1: to sort of put this in a perspective, I was
• 10:36
  Speaker 1: speaking to an analyst who said, basically, the market is betting,
• 10:39
  Speaker 1: for all intents and purposes, that the current government will
• 10:41
  Speaker 1: be completely ineffective and the tectocrats will continue to sort
• 10:44
  Speaker 1: of chart a more logical path forward for the nation.
• 10:48
  Speaker 1: Um is that a bank of the assumption? Well, I
• 10:52
  Speaker 1: think there are you know, several issues. First of all,
• 10:54
  Speaker 1: this is a coalition which has been you know, is
• 10:57
  Speaker 1: completely new. So one possibility is that they will start
• 11:01
  Speaker 1: squabbling once you know, reality kicks ince. So you know,
• 11:04
  Speaker 1: what do we prioritize between say the flat you know,
• 11:08
  Speaker 1: this kind of steep income tax reduction which the League
• 11:11
  Speaker 1: is very keen on, and the income supports scheme, which
• 11:14
  Speaker 1: the Five Star is keen on. So they may start
• 11:17
  Speaker 1: squabbling and so do very little. And then on top
• 11:20
  Speaker 1: of that, you know, there are a number of constraints.
• 11:22
  Speaker 1: For example, the Italian constitution has a close which says
• 11:25
  Speaker 1: that Italy has to balance the budget over the economic cycle.
• 11:29
  Speaker 1: So there is a possibility that the president may veto
• 11:32
  Speaker 1: some of the you know, craziest spending bills because they
• 11:36
  Speaker 1: simply clash with the constitution. So I think there are
• 11:38
  Speaker 1: a number of, you know, reasons to be relatively sanguine
• 11:43
  Speaker 1: about the prospect, the spending prospect of this government. But
• 11:47
  Speaker 1: for sure, the document we have in front of us
• 11:49
  Speaker 1: is explosive from you know, a point of view of
• 11:52
  Speaker 1: the public finances. This is one of the biggest gambles
• 11:56
  Speaker 1: you've seen in a Eurozone country, be since the formation
• 12:01
  Speaker 1: of the currency Union. Frdando, thank you so much for
• 12:04
  Speaker 1: being with us, really interesting insights. I recommend everyone read
• 12:08
  Speaker 1: his columns. Ferdando Giuliano is columnist for Bloomberg Opinion, coming
• 12:12
  Speaker 1: to us from Rome, and you can find his columns
• 12:16
  Speaker 1: on Bloomberg dot com. You can just get a sense
• 12:18
  Speaker 1: of what they are about. One of the latest Italy
• 12:21
  Speaker 1: gets a taste of Boris Johnson's cake, talking about how
• 12:25
  Speaker 1: the league and five Stars dreamers want the years to
• 12:27
  Speaker 1: help fund their lavish promises, even though that will break
• 12:30
  Speaker 1: the rules that have already been established. A really interesting
• 12:33
  Speaker 1: issue in PAM. Frankly, I am surprised that we're not
• 12:35
  Speaker 1: seeing a bigger sell off. Is there some kind of
• 12:52
  Speaker 1: two hundred billion dollar trade deficit deal with China. Is
• 12:55
  Speaker 1: they're not different people saying different things. Here to clear
• 12:59
  Speaker 1: it all up for US is and Mask. He's economics
• 13:01
  Speaker 1: editor and columnist for Bloomberg Opinion, joining us here in
• 13:04
  Speaker 1: our eleven three our studios. So, Dana, what's going on
• 13:06
  Speaker 1: here and who's right? You know? The key is the
• 13:10
  Speaker 1: final clause in the Chinese Foreign Ministry spokesman's answer to
• 13:15
  Speaker 1: this question. When asked if a two hundred billion dollar
• 13:20
  Speaker 1: deal has been hatched, he said not to blah blah
• 13:26
  Speaker 1: blah blah comma to my knowledge. Now, that is absolutely key.
• 13:31
  Speaker 1: It was taken as a denial, but really it's a
• 13:34
  Speaker 1: non denial. This is important just to make sure that
• 13:36
  Speaker 1: people understand the context here. Uh. Some people were cited
• 13:41
  Speaker 1: anonymously as saying that the US was close to getting
• 13:44
  Speaker 1: China to reduce its trade deficit with the US by
• 13:48
  Speaker 1: two hundred billion dollars. Is that per year? That's unclear,
• 13:53
  Speaker 1: But if we assume that it is, and that was
• 13:56
  Speaker 1: the total the administration was looking for, that basedly takes
• 14:00
  Speaker 1: care of the bulk of it, so you'd essentially be
• 14:03
  Speaker 1: writing off the trade gap in one stroke of the pen,
• 14:08
  Speaker 1: which is why it seems like a big number and
• 14:10
  Speaker 1: on the face of it unlikely, but we'll even unlikely times.
• 14:15
  Speaker 1: You know, did I thought you were going to talk
• 14:16
  Speaker 1: about sorghum? Well that was going to be this. By
• 14:20
  Speaker 1: the way, it doesn't contain any gluten if you just
• 14:23
  Speaker 1: just see, you know, that was really the main question.
• 14:25
  Speaker 1: That was exactly my wife has Celia was important, so
• 14:31
  Speaker 1: they were really okay. So after this story was published,
• 14:38
  Speaker 1: including by Bloomberg last night New York Time, the focus
• 14:42
  Speaker 1: shifted to Chinese officials in Beijing. Was there a deal
• 14:46
  Speaker 1: for two billion? Was there not a deal? The Foreign
• 14:49
  Speaker 1: Ministry spokesman statement was taken as a denial. It wasn't really.
• 14:56
  Speaker 1: It was way more nuanced from a to my ledge,
• 15:00
  Speaker 1: and by the way, the Foreign Ministry does not have
• 15:02
  Speaker 1: responsibility for trade policy in China, so it's really a
• 15:06
  Speaker 1: non denial denial. The point that Pim makes is equally
• 15:09
  Speaker 1: critical when taken with the knot. To my knowledge, China's
• 15:13
  Speaker 1: suspension of an anti dumping investigation into US sorghum is
• 15:18
  Speaker 1: a way of saying, yeah, we're playing ball here. We're
• 15:21
  Speaker 1: playing ball here. This doesn't have to be a confrontational thing.
• 15:26
  Speaker 1: So while no one from China came out in Beijing
• 15:29
  Speaker 1: overnight and said, yeah, two hundred billion done, there were
• 15:32
  Speaker 1: signals that were headed toward some kind of something. What
• 15:37
  Speaker 1: is that? Some kind of something? That is the technical
• 15:39
  Speaker 1: term for it? Dan, Can you just put into perspective
• 15:42
  Speaker 1: zooming out the significance of reducing the tree deficit by
• 15:46
  Speaker 1: two hundred billion dollars? Is that feasible? I mean, just explain.
• 15:50
  Speaker 1: This is sort of the number that people put out
• 15:53
  Speaker 1: there for how much basically we give to China. It's
• 15:56
  Speaker 1: not that simple explain here, Okay? Is it feasible? Sure,
• 16:01
  Speaker 1: it's feasible. Is it plausible as a sustainable thing? Yeah,
• 16:06
  Speaker 1: well that's a whole separate question. Look, how could you
• 16:09
  Speaker 1: want two hundred billion off? And let's say, for argument's sake,
• 16:13
  Speaker 1: the US trade deficit with China is about three d
• 16:16
  Speaker 1: meaning that we pay for we import three hundred and
• 16:20
  Speaker 1: fifty billion dollars more from China than they import from US. Correct,
• 16:25
  Speaker 1: that's a ballpark figure. Okay. So look, if Chinese airlines,
• 16:29
  Speaker 1: most of which are controlled by the state, stopped buying
• 16:32
  Speaker 1: air Bus and started using that cash to buy Boeing,
• 16:36
  Speaker 1: they imported a whole lot more US agriculture you could
• 16:40
  Speaker 1: get within Cooeye, within shouting distance of two hundred billion.
• 16:45
  Speaker 1: But does it really realistic to assume they're not going
• 16:47
  Speaker 1: to buy any more air buses, for example, and that
• 16:50
  Speaker 1: the US is the only source for agricultural and oil
• 16:54
  Speaker 1: now that the US is an oil exporter, there's that
• 16:57
  Speaker 1: as well. The important thing to remember, which it's lost
• 17:00
  Speaker 1: in a lot of this, is a large chunk of
• 17:03
  Speaker 1: what the US quote unquote bias from China is stuff
• 17:08
  Speaker 1: that's assembled in China by subsidiaries of US multinationals and
• 17:14
  Speaker 1: shipped back here for consumption in the domestic market. Look,
• 17:19
  Speaker 1: the global supply chains are really important here, and the
• 17:23
  Speaker 1: vast majority of those global supply chains are anchored by
• 17:27
  Speaker 1: US headquartered companies. Look, iPhones are assembled by a subsidiary
• 17:33
  Speaker 1: in China of a Taiwanese company and sent back here.
• 17:37
  Speaker 1: That this phone Lisa in front of you right now,
• 17:41
  Speaker 1: Where was it? Where was it? Okay, Korean company? This
• 17:46
  Speaker 1: iPhone is now holding? Seriously, this thing has wound its
• 17:50
  Speaker 1: way around the globe half a dozen times before it
• 17:54
  Speaker 1: appeared at the A T and T store in Montague
• 17:56
  Speaker 1: Street in Brooklyn. So when we talk about things that
• 18:02
  Speaker 1: America buys from China and how it's so much more
• 18:06
  Speaker 1: than China buys from America, you know we need to
• 18:08
  Speaker 1: be careful. Uh, Dan, can I just ask you in
• 18:13
  Speaker 1: maybe twenty seconds, isn't it interesting that we are now
• 18:16
  Speaker 1: even talking about bilateral trade negotiations when maybe two years
• 18:20
  Speaker 1: ago we were talking about multilateral trade negotiations and this
• 18:23
  Speaker 1: is turning out to be normal. Part of the doctrine,
• 18:31
  Speaker 1: if you can even call it that, of Team Trump
• 18:34
  Speaker 1: is that it's a big conspiracy and everyone everywhere is
• 18:37
  Speaker 1: out to get the US because we're so noble. Okay,
• 18:42
  Speaker 1: if the US negotiates with a wide variety of parties simultaneously,
• 18:49
  Speaker 1: the US doesn't have the same leverage as if it
• 18:52
  Speaker 1: engages in one on one negotiations. That's part of the
• 18:57
  Speaker 1: foundational idea. Again, I don't want to glorify it with
• 19:00
  Speaker 1: you sort of intellectual scaffolding, but you get the picture.
• 19:02
  Speaker 1: Thank you very much. Dan Moss, economics editor, columnist for
• 19:06
  Speaker 1: Bloomberg Opinion, talking about the US China trade conversations, confrontations
• 19:13
  Speaker 1: and denials, but not really denials. Right now, I want
• 19:32
  Speaker 1: to shift gears a bid and go to Aaron Brown.
• 19:36
  Speaker 1: He's former managing director and head of financial market Research
• 19:38
  Speaker 1: at a q R Capital Management, also a Bloomberg opinion columnist. Aaron,
• 19:43
  Speaker 1: thank you so much for being with us. You wrote
• 19:46
  Speaker 1: a column that really caught my attention this month where
• 19:49
  Speaker 1: you were talking about buying and holding the market through
• 19:52
  Speaker 1: index funds and the pitfalls that can ensue. Can you
• 19:55
  Speaker 1: just give us a sense of what you were talking about,
• 19:58
  Speaker 1: what the general thesis is it is for this column. Um, sure,
• 20:03
  Speaker 1: buying and holding the market is clearly the dominant strategy
• 20:07
  Speaker 1: for most UH retail investors. It's a solid, low cost,
• 20:12
  Speaker 1: tax efficient, well diversified way to get your stock exposure.
• 20:16
  Speaker 1: But it's not so obvious how to do it. UH.
• 20:19
  Speaker 1: The usual way people do it is by an SMP
• 20:21
  Speaker 1: five indext fun which is a perfectly good idea. It's
• 20:25
  Speaker 1: low cost, it's the traditional way. It's worked well for
• 20:28
  Speaker 1: many decades. But there's no particular reason to do it,
• 20:32
  Speaker 1: and and it kind of looked at in a number
• 20:35
  Speaker 1: of ways. You're overweighting UH the tech companies, financial companies,
• 20:40
  Speaker 1: healthcare companies. You're really missing out on a lot of sectors.
• 20:44
  Speaker 1: You've got one of your investment in just ten companies UM,
• 20:49
  Speaker 1: and there's a lot of reason to think about moving
• 20:52
  Speaker 1: to more diversified versions of it. For example, and equally waited,
• 20:56
  Speaker 1: a kind of fund that puts the same amount of
• 20:59
  Speaker 1: dollars in each five SMP funds. There are other other
• 21:04
  Speaker 1: schemes people use as well. Before we before you go
• 21:08
  Speaker 1: onto the other schemes, I just want to drill into
• 21:11
  Speaker 1: some of the points that you made because they're really
• 21:13
  Speaker 1: interesting to me. In part. For example, when people get
• 21:16
  Speaker 1: back their dividends or other kinds of payments, UM, it
• 21:21
  Speaker 1: just gets funneled into stocks that are by nature the
• 21:25
  Speaker 1: most expensive. Yes, and and the most expensive which can
• 21:30
  Speaker 1: mean the best in some cases, but also can mean
• 21:32
  Speaker 1: the most overvalued. Uh. There are a lot of neglected
• 21:35
  Speaker 1: stocks that are very good. Uh. You know, near the
• 21:38
  Speaker 1: bottom of the SMP, the last two stocks and the
• 21:41
  Speaker 1: sp F hundred. There are some bad stocks in there
• 21:44
  Speaker 1: as well. I mean, when you do an index fund,
• 21:46
  Speaker 1: agree to take the good with the bad because you're
• 21:48
  Speaker 1: going for average. But do you want the average of
• 21:51
  Speaker 1: the best, you know, the highest price ten companies, or
• 21:54
  Speaker 1: do you want the average of the five biggest companies? Uh?
• 21:58
  Speaker 1: Aaron wondering if you could just give people an example
• 22:02
  Speaker 1: so that we understand that there is a difference between indexes.
• 22:07
  Speaker 1: Because when you say buying the market, that makes sense.
• 22:09
  Speaker 1: But then you drill down one step and you go,
• 22:11
  Speaker 1: all right, so what really is the market? And I
• 22:14
  Speaker 1: think your point about when you own the SMP five
• 22:17
  Speaker 1: in an index fund, the top whatever it is ten
• 22:22
  Speaker 1: holdings of fifteen holdings, and that that's like of the
• 22:26
  Speaker 1: entire fund. So you're not really invested in the sm
• 22:30
  Speaker 1: P five hundred companies in an equal way. You are
• 22:34
  Speaker 1: really lopsided, as you just described, by buying companies like Apple, Microsoft, Berkshire, Hathaway, Johnson, Johnson, uh, Intel, Chevron,
• 22:43
  Speaker 1: and so on exactly. And and and those are very
• 22:46
  Speaker 1: good companies. And and you know, I'm not telling anyone
• 22:49
  Speaker 1: that's a bad investment to do it. Um it's not
• 22:52
  Speaker 1: as diversified as it could be. And and those companies
• 22:55
  Speaker 1: have similarities. They they they're obviously they're all big companies.
• 22:58
  Speaker 1: For one thing, Uh, they tend to have high valuation ratios.
• 23:02
  Speaker 1: So you're not getting a lot of assets, you're not
• 23:04
  Speaker 1: getting a lot of earnings for your dollar. You go
• 23:06
  Speaker 1: lower down in the SMP five hundred, and you can
• 23:08
  Speaker 1: find a lot more value stocks UM, which which you
• 23:13
  Speaker 1: know many people like, in which have historically have performed.
• 23:17
  Speaker 1: But I want to be very careful here. Some people
• 23:20
  Speaker 1: go for a waiting scheme because it's giving them some
• 23:23
  Speaker 1: particular investment thesis, and you go too far in that direction.
• 23:26
  Speaker 1: You're back to asset management to get active management, and
• 23:29
  Speaker 1: you're paying forty fifty sixty basis points. I'm only talking
• 23:33
  Speaker 1: about waiting schemes that can be done for twenty basis
• 23:36
  Speaker 1: points are so very inexpensive. SMP five hundred you get
• 23:40
  Speaker 1: for four or five basis points if you do it
• 23:43
  Speaker 1: with market weights, But you can get very similar and
• 23:47
  Speaker 1: you get the same stocks waited differently. You pay a
• 23:50
  Speaker 1: little bit more, you pay ten to twenty basis points UM,
• 23:53
  Speaker 1: but you do get more diversification, you do get more
• 23:57
  Speaker 1: of the broad economy. Can you visit a saron of
• 24:00
  Speaker 1: just how much better some of these funds that you
• 24:02
  Speaker 1: prefer have performed? Well, Okay, I don't like to use
• 24:07
  Speaker 1: that as a reason. UM, it is true that equal
• 24:10
  Speaker 1: weight SMP five hundred has outperformed the market cap weight
• 24:14
  Speaker 1: by about two point two over the last twenty years.
• 24:17
  Speaker 1: It's one thirteen of the last twenty one years. But
• 24:21
  Speaker 1: I don't think you should buy it on that basis.
• 24:25
  Speaker 1: I think you should say, Look, there's no strong reasonably
• 24:28
  Speaker 1: that it's going to outperform or underperform. In the long run.
• 24:31
  Speaker 1: We'll probably going to be about the same. I'm just
• 24:32
  Speaker 1: getting more diversification. I'm getting the average return, but I'm
• 24:36
  Speaker 1: getting the average return on a much broader base of companies.
• 24:39
  Speaker 1: And therefore, uh, in some sense, I think you're reducing
• 24:44
  Speaker 1: your risk. I think it could easily be true that
• 24:47
  Speaker 1: it underperforms over the next ten years. We don't really know, uh,
• 24:50
  Speaker 1: but it is. It strikes me as a more solid investment.
• 24:54
  Speaker 1: And you could also just go out and buy an
• 24:55
  Speaker 1: equal dollar amount of all the stocks in the sp
• 25:00
  Speaker 1: if you have an awful lot of money. Yes, right,
• 25:04
  Speaker 1: Uh here, Aaron Brown, thank you so much for being
• 25:08
  Speaker 1: with us. We'll have to have you back. You have
• 25:10
  Speaker 1: a really broad range from uh, some of these interesting
• 25:14
  Speaker 1: strategies to also cryptocurrencies. So Aaron Brown, thank you so
• 25:18
  Speaker 1: much for being with us. A fascinating column. The title
• 25:22
  Speaker 1: is buying and holding. The market has many pitfalls here
• 25:25
  Speaker 1: I just mentioned he's also the author of a great
• 25:27
  Speaker 1: book called The Poker Face of Wall Street. Thanks for
• 25:34
  Speaker 1: listening to the Bloomberg P and L podcast. You can
• 25:37
  Speaker 1: subscribe and listen to interviews at Apple Podcasts, SoundCloud, or
• 25:41
  Speaker 1: whatever podcast platform you prefer. I'm pim Fox. I'm on
• 25:44
  Speaker 1: Twitter at pim Fox. I'm on Twitter at Lisa abramowits
• 25:48
  Speaker 1: one before the podcast. You can always catch us worldwide
• 25:51
  Speaker 1: on Bloomberg Radio.