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India, Rates, and Markets · Bloomberg Intelligence

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Speaker 1: Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney, alongside
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Speaker 1: my co host Matt Miller. Every business day, we bring
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Speaker 1: you interviews from CEOs, market pros, and Bloomberg experts, along
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Speaker 1: with essential market moving news. Find the Bloomberg Markets Podcast
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Speaker 1: on Apple Podcasts or wherever you listen to podcasts, and
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Speaker 1: at Bloomberg dot com slash podcast. You know, one of
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Speaker 1: the stories that I've been hearing more and more about
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Speaker 1: over last year or so is you know, as China
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Speaker 1: turns more inward, if you will, and they continue to
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Speaker 1: deal with COVID zero, however they're going to proceed from here.
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Speaker 1: Maybe one of the best growth emerging markets out there
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Speaker 1: is India. Uh And that's kind of what I've been
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Speaker 1: hearing more and more. And it's a rural opportunity. It's
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Speaker 1: always been a growth story, but maybe even a little
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Speaker 1: bit better here. Josina Krishnan joins US. Managing partner at
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Speaker 1: l of Our Equity UM joins us from India. Joson,
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Speaker 1: I thanks so much for joining us here. I'd love
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Speaker 1: to get a sense of what you folks at l
0:54
Speaker 1: of Our Equity are doing. How are your approaching India
0:57
Speaker 1: these days? Thanks for having me on the show. And
1:01
Speaker 1: it's music to my years and the recognition for India
1:04
Speaker 1: as a market and it's really emerging these days. Uh
1:08
Speaker 1: Elva has a unique personality type, if I may call it.
1:11
Speaker 1: So we're a cross breed between venture capital and private equity.
1:15
Speaker 1: We typically form a highly concentrated portfolio by a venture standards,
1:19
Speaker 1: we have very low lost ratios and yet we go
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Speaker 1: on right at the beginning at early stages, very often
1:25
Speaker 1: being the first and suitial capital. And part of the
1:28
Speaker 1: reason is that we have a very strong thesis around
1:31
Speaker 1: the end market as to what the customers are willing
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Speaker 1: to buy UM in the sense that the product market
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Speaker 1: fit is known to us before we make an investment,
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Speaker 1: even at that early stage. So callus p P callers.
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Speaker 1: We see which our way. So where do you see
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Speaker 1: the most opportunity for growth in India? I mean, is
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Speaker 1: it UM in manufacturing products for export or is there
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Speaker 1: a domestic opportunity there? What? What's front and center? So
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Speaker 1: our thesis is fairly unique in the sense we're not
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Speaker 1: sectoral and how we think about it, but we have
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Speaker 1: customer centric which means we underwrite the wallet of an
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Speaker 1: end massive market population which is maybe about half a
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Speaker 1: billion people um. These are people who are aspiring for
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Speaker 1: quality and growth and have not yet been addressed by
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Speaker 1: large scale corporate entities. What is fascinated about this customer
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Speaker 1: segment is that the non linear growth potential comes from
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Speaker 1: intergenerational growth ambitions in the sense previous generations in these
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Speaker 1: markets have probably figured out survival, but the current generation
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Speaker 1: is aspirational for a better quality life. They're focused on quality,
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Speaker 1: they want better lives for themselves and their children. And
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Speaker 1: it triggers a very interesting twin fly wheel effect in
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Speaker 1: the sense that businesses start growing because their customers start growing,
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Speaker 1: and that's fascinating to watch. So we we see very
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Speaker 1: clear and fascinating trends across sectors because of this customer dynamic.
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Speaker 1: So give us, Josina, maybe some in examples of some
3:01
Speaker 1: types of deals that you've invested in. You know, it
3:04
Speaker 1: give us a sense of kind of how you think
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Speaker 1: about your market. Yeah, so if you if you think
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Speaker 1: about the foundation that was laid by let's say micro
3:12
Speaker 1: finance in these markets, you see this customer now getting
3:15
Speaker 1: aspirational in terms of the quality of financial services product.
3:18
Speaker 1: They're ready for more sophisticated products based on business loans,
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Speaker 1: based on underwriting, the robustness of cash flows so working
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Speaker 1: capital needs, asset backed lending. All of those are emerging
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Speaker 1: trends within financial services for a market that banks did
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Speaker 1: not address all these years. Uh. There are two three
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Speaker 1: other trends which I find fascinating. For example, the investment
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Speaker 1: mindset in this market. They're looking to upgrade the quality
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Speaker 1: of life and are often willing to pay interesting sums
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Speaker 1: of amount to see that shift. So they're willing to
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Speaker 1: invest in small businesses that are launched at their end,
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Speaker 1: so you can work with them on a lot of
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Speaker 1: these opportunities. And small business services, for example, those that
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Speaker 1: take shopify down another segment to and even smaller business
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Speaker 1: would be fascinating themes you're looking at um. Similarly, you
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Speaker 1: look at the affinity to course solutions as against just
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Speaker 1: products are transactions. And just to take an example there,
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Speaker 1: if you think about courting classes, that's still a single product.
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Speaker 1: But if you look at in the entire case world
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Speaker 1: of education that gives the child better chances of employability,
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Speaker 1: that's a core solution. Right. Think about farmer information services,
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Speaker 1: that's the transactional service where you think about market linkages
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Speaker 1: and working capital solutions bundled together. That's a core solution.
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Speaker 1: Tele consultation tele medicine is transactional, but a full stack
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Speaker 1: primary healthcare solution is a core solution. And the minute
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Speaker 1: you see this market gravitating towards core solutions, you know
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Speaker 1: that you have them. For the long run, your cost
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Speaker 1: of acquisition is lower, the customers tend to grow their
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Speaker 1: business with you, and you end up having a loyal, growing,
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Speaker 1: massive customer base. Can you tell us about just give
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Speaker 1: us a sense of kind of how Indian affair through
5:01
Speaker 1: the pandemic, Where are you now? How did that maybe
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Speaker 1: impact your business and some of the clients you you
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Speaker 1: deal with. Yeah, that's a very interesting question, to be honest.
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Speaker 1: The first couple of months of the pandemic, we were like,
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Speaker 1: God knows how this segment is going to come out,
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Speaker 1: because the external perception at some level is that it's
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Speaker 1: a vulnerable segment. However, our thesis, of course, over the
5:24
Speaker 1: last fifteen years of investing has been that there's a
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Speaker 1: lot of resilience, And in a way, I'm kind of
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Speaker 1: happy the last two or three years panned out because
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Speaker 1: everybody is now seen that this market is super resilient.
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Speaker 1: The companies that were lending did have to provide somewhat
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Speaker 1: or initially, but that happened across the board globally. But
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Speaker 1: what we saw interestingly was that the end market was
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Speaker 1: very nimble in terms of adjusting. In fact, small businesses
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Speaker 1: in India did not really necessarily get wait for any
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Speaker 1: major subsidies or or support. They tend to innovate and
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Speaker 1: and trans asition into business models very very quickly in
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Speaker 1: emerging markets. In fact, we saw this both across India
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Speaker 1: and Latin America, and they came out beautifully at the
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Speaker 1: end of it, so that nimbleness makes them very resilient. Likewise,
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Speaker 1: for education, we saw a massive shift towards digital solutions,
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Speaker 1: both in healthcare and education, and that adoption definitely did
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Speaker 1: speed up through the pandemic. But again, extremely smart purchasing
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Speaker 1: decisions made by this market in a way that they
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Speaker 1: managed cash flows well through the pandemic and switched back
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Speaker 1: into growth and investment more the minute they could come
6:34
Speaker 1: out of it. In some sense, I see this market
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Speaker 1: is far more resilient than some of the larger or
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Speaker 1: or higher income customer segments that do business. I mean
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Speaker 1: it's just been phenomenal watching the resilience grow. The one
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Speaker 1: pieces that I think the world of capital probably took
6:50
Speaker 1: a little longer to recognize this resilience, So some of
6:53
Speaker 1: these businesses did take longer to raise funds. But it's
6:57
Speaker 1: great to see that that the core dn of these
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Speaker 1: companies as such that they weren't really as subject to
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Speaker 1: the liquidity ebbs and flows. Uh. They were building core, core,
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Speaker 1: profitable businesses. Um. It's it's perfectly fine for some of
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Speaker 1: our companies to raise money a year later than what
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Speaker 1: was planned and they still managed to generate capitals through
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Speaker 1: customer revenues. And that's been great alright, great stuff. Really
7:21
Speaker 1: appreciate getting your perspective. Their Drutson A. Krishnan, managing partner
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Speaker 1: l of our Equity. They are based in India, investing
7:28
Speaker 1: in India. Our Jersey covers all the rate stuff for
7:34
Speaker 1: Bloomberg Intelligence. He's in studio here, but as we all know,
7:38
Speaker 1: he is a soccer guru here in the US and
7:41
Speaker 1: Jonathan Tyson in studio he's usually based in London. He
7:45
Speaker 1: covers all the European banks force, but he's here in studio.
7:47
Speaker 1: And we were just lamenting the England side and lost
7:51
Speaker 1: to France. But let's start it off. And by the way,
7:53
Speaker 1: we should say we do have a deep dive into
7:57
Speaker 1: soccer slash football later on in the program. Am we do? Yeah,
8:01
Speaker 1: because we have Darren fantastic and nature of Van Tassel,
8:04
Speaker 1: the owners of the South Georgia torment to FC, and
8:07
Speaker 1: maybe maybe maybe I can come back for that. We'll see.
8:11
Speaker 1: I mean he's in the office. I mean that's in
8:12
Speaker 1: and of itself as a wonderful thing. Yeah, it's only
8:15
Speaker 1: a second time I've ever seen him in real life,
8:16
Speaker 1: and I've been working for twenty three years. I know
8:18
Speaker 1: it's this whole thing. I don't get it, but that's
8:19
Speaker 1: what the kids are doing these days. All right, your
8:22
Speaker 1: Feller Reserve meeting Wednesday. What are we going to hear?
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Speaker 1: What are you looking for? Yeah? So, so it's gonna
8:27
Speaker 1: be a fifty basis point hike. I think the reaction
8:29
Speaker 1: function and what Powell says during the post meeting press
8:33
Speaker 1: conference is going to be hyper important because will they
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Speaker 1: if they see reasonably high inflation print and inflation doesn't
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Speaker 1: come down as quickly as they want in January? Will
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Speaker 1: they then go fifty basis points again in February, and
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Speaker 1: I think that that's that's currently the question that is
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Speaker 1: in the minds of a lot of market participants. And
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Speaker 1: we're priced fifty fifty basically right now for that eventuality.
8:55
Speaker 1: So um, we do get new dots, we do get
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Speaker 1: a new summary of economic projections. You know, where where
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Speaker 1: does where do FED members see inflation going next year?
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Speaker 1: That's going to be another big focus right at two
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Speaker 1: o'clock when we get the when we get so right
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Speaker 1: now we're at four percent is the upper bound? Right?
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Speaker 1: They're gonna bring it to four fifty on Wednesday, and
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Speaker 1: then the next meeting is February, February one, and it's likely,
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Speaker 1: I know that the pricing is split, but isn't the
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Speaker 1: the mood kind of an expectation of another fifty basis
9:26
Speaker 1: point hike while they can get it in Yeah, I
9:28
Speaker 1: think so. And we do think that they're going to
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Speaker 1: probably go to five and a quarter in the upper bound,
9:32
Speaker 1: So you know, even though they're that's your terminal rate expectations.
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Speaker 1: So after February, the next meeting will be only twenty
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Speaker 1: five basis points in March and then and then they're
9:41
Speaker 1: going to be completely in March see at some point,
9:45
Speaker 1: at some point, they were going to always have to
9:47
Speaker 1: downshift because they want to kind of tweak where that
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Speaker 1: terminal rate is and basically calibrate their their upper bound. Right,
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Speaker 1: So could they go to five and a quarter for example, Yes,
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Speaker 1: that's where we think they're going. Could they go to
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Speaker 1: five and al f in May if inflation still is
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Speaker 1: pretty high? Yes, but that gives them more optionality to
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Speaker 1: hike more if they're at twenty five bas point increments
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Speaker 1: instead of fifty. All right, Johnason Tyson, we've got you
10:09
Speaker 1: in studio here, a rare event, almost as rare as
10:12
Speaker 1: having Ivy here. Well, but in Jonathan's defense, that's because
10:16
Speaker 1: he lives in England. Okay, alright, I got it. Yeah,
10:18
Speaker 1: John Tyson is one of the top banks analysts in
10:21
Speaker 1: the city of London, been doing it for decades. So
10:24
Speaker 1: we got interest rates rising, Jonathan, what does that mean
10:26
Speaker 1: for the European banks that you follow? H right, Um, well,
10:30
Speaker 1: we've already seen an awful of the upgrades, no income upgrades,
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Speaker 1: margin upgrades. Take Lloyds, for example, it's going to make
10:36
Speaker 1: an extra two billion top line next year purely because
10:39
Speaker 1: the banks grades grades. But I think if you think
10:42
Speaker 1: about Europe in the US, it's quite clear that it
10:45
Speaker 1: has been aggressive. If you're the ECB, you don't have
10:48
Speaker 1: a straightforward decision to make because you've still got to
10:50
Speaker 1: think Italy. We all remember two thousand, twelve thirteen sovereign crisis,
10:55
Speaker 1: all of that. So while a lot of commentators would
10:58
Speaker 1: think in Europe behind the curve, you do have to
11:01
Speaker 1: understand that we have a very big Italian bank system
11:04
Speaker 1: that is still not that strong. Still well, I mean
11:07
Speaker 1: Mounti Passes, they just had another capital raised after twenty
11:11
Speaker 1: years of troubles. Um, And yes, the spreads have come
11:13
Speaker 1: back between Italy and Germany. But the e CP is
11:15
Speaker 1: very very aware that, yes, we could inflation, but we
11:17
Speaker 1: do not want to kick start some form of a
11:21
Speaker 1: sovereign fragmentation, which is what kicked off into Well. Well,
11:26
Speaker 1: you know, if the healthy banks are making more and
11:28
Speaker 1: more money with higher rates, are they going to be
11:30
Speaker 1: able to do a little m and a and maybe
11:32
Speaker 1: take out Amani Pasky. I mean they probably nobody wants
11:35
Speaker 1: that bank. But um, are we going to see cross
11:38
Speaker 1: finally see cross border m and a that the CEO
11:41
Speaker 1: is back. You know, over the past few years, I
11:43
Speaker 1: have said no, we can't do because of zero intrograte
11:44
Speaker 1: policy and because um the um EU rules aren't yet finished.
11:50
Speaker 1: In that regard that the rules are very big part
11:52
Speaker 1: of it. Um. If you look at b MP, they're
11:54
Speaker 1: selling the US business. They've got seven billions to reinvest
11:57
Speaker 1: next year. But even they have said we're not going
11:59
Speaker 1: to do a big we don't need to do a
12:01
Speaker 1: big deal. So we're two or three years away from
12:03
Speaker 1: a big cross border deal still because you've got liquidity concerns,
12:07
Speaker 1: it's not straightforward, and captors capital is strong. But we're
12:11
Speaker 1: now you're heading into a recession and we know that
12:13
Speaker 1: bad debts are going back up. So again you normally
12:16
Speaker 1: buy a smaller bank. How can you price a smaller
12:18
Speaker 1: bank when you're not quite sure what the environment looks like?
12:20
Speaker 1: How can What are the banks saying the European banks, Charnathan,
12:23
Speaker 1: what are they saying about a recession in Europe? I mean,
12:25
Speaker 1: plus you've got the added issue of the war in Ukraine.
12:28
Speaker 1: So what are the big European banks saying about the
12:31
Speaker 1: next twelve months? Actually very sanguine. I mean, we we
12:35
Speaker 1: saw them all over provision for COVID, so most of
12:38
Speaker 1: the banks have still got a pretty decent cushion that
12:39
Speaker 1: they're running down a couple, haven't um And because of
12:43
Speaker 1: all of this sort of it's four and a half
12:45
Speaker 1: trillion access liquidity, you've got retail deposits, you've got corporate deposits.
12:49
Speaker 1: The starting position for the man on the street is
12:52
Speaker 1: a lot better than it was. So they're still pretty
12:56
Speaker 1: sanguine and they've got a lot of room to play with.
12:59
Speaker 1: I I think your Federal Reserve should pause. I think
13:02
Speaker 1: they've been raising rates like crazy. Okay, Jonathan's European banks
13:06
Speaker 1: of benefiting, the US banks are benefiting. But you know
13:09
Speaker 1: we're going to get a CPI print tomorrow that's showing that, Yeah,
13:12
Speaker 1: not only is inflation peak, but it's coming down consistently.
13:16
Speaker 1: Why don't they pause? I might not considerably. I'm consistently
13:21
Speaker 1: right that the problem is we're just not seeing inflation
13:23
Speaker 1: reduced at the speed we thought it would be. Yeah,
13:26
Speaker 1: so let's say it comes to where the markets pricing
13:28
Speaker 1: it around seven point two percent. I think the consensus
13:30
Speaker 1: on the Bloomberg terminals telling me seven point three percent
13:33
Speaker 1: year on year CPI UM, So it's that's still relatively high,
13:37
Speaker 1: but but your point, Paul, you know, the month on
13:39
Speaker 1: month prints are much much lower than they were, right.
13:41
Speaker 1: So a lot of this is base effects and the
13:43
Speaker 1: fact that we had very high inflation early in the
13:45
Speaker 1: year UM, because at this point the FED promised that
13:49
Speaker 1: they were going higher right going to five. Powell even said,
13:53
Speaker 1: you know, even when he was dovish a couple of
13:55
Speaker 1: weeks ago at the Brookins Institution, he said, you know,
13:58
Speaker 1: we're going to be higher than last UM summary of
14:01
Speaker 1: economic projections was so, which was four and you know
14:05
Speaker 1: four sixty five. Basically, so if they're gonna be higher
14:08
Speaker 1: than that, they want to deliver on that promise. And
14:10
Speaker 1: and you know that the FED doesn't want to under deliver,
14:13
Speaker 1: particularly when inflation is such a problem in such a
14:15
Speaker 1: high priority globally. And if US inflation comes down, that
14:19
Speaker 1: probably will feed into other markets, that will feed into Europe,
14:22
Speaker 1: that will feed into the UK, that will feed into Japan. UM.
14:25
Speaker 1: So you know, we do want to get UM kind
14:27
Speaker 1: of demand and UM supply balance back into back into
14:31
Speaker 1: some semblance of normalcy. And the only way to do
14:34
Speaker 1: that really is too slow US demand. That the problem
14:36
Speaker 1: I think with US inflation in particular is that it's
14:39
Speaker 1: a lot of it's in the service sector, which isn't
14:41
Speaker 1: directly impacted as much by UM by interest rates because
14:45
Speaker 1: you don't you know, you don't buy you don't go
14:47
Speaker 1: into McDonald's and buy a big mac on credit usually. Well,
14:50
Speaker 1: and even if it is UM, isn't the lag like
14:54
Speaker 1: three to five quarters that policy lag. I mean, it
14:58
Speaker 1: was funny to hear you say they want to cow
15:00
Speaker 1: celebrate something. I mean they're working with a sledge hammer. Um.
15:04
Speaker 1: So this is not the kind of delicate scalpel work
15:10
Speaker 1: that um you would hope that monetary policy is. Yeah.
15:14
Speaker 1: So so generally speaking, monetary policy takes between six and
15:17
Speaker 1: eighteen months to flow through, so we're only starting to
15:20
Speaker 1: see the effects right now. Alright, great stuff, Iver Jersey,
15:24
Speaker 1: Bloomberg Intelligence rate analysts here in our Bloomberg and Actors
15:27
Speaker 1: broker studio and a rare treat. Jonathan Tyson, he covers
15:30
Speaker 1: European banks for Bloomberg Intelligence. He's based in London, So
15:33
Speaker 1: if you're ever in London, go to look up Jonathan Tyson.
15:35
Speaker 1: Bia pint. Megan Horneman, chief investment officer at Verden's Capital,
15:42
Speaker 1: joins us here. Megan, I'm gonna just you know, I've
15:44
Speaker 1: been telling Matt two, I'm done with It's it's so over.
15:48
Speaker 1: I'm looking at three. What's your outlook? What are you
15:52
Speaker 1: telling your clients? What are you penning in your year
15:54
Speaker 1: head kind of letter. But I think that we've seen
15:57
Speaker 1: a lot of the equity damage and and even the
16:00
Speaker 1: fixed income damage, but we're just starting to see the
16:05
Speaker 1: economic damage from whether it's the um you know, slow
16:09
Speaker 1: down in the economic growth or the tightening of the
16:12
Speaker 1: said policy. We're just starting to see that. So unfortunately,
16:15
Speaker 1: going into next year, uh, there's gonna be a lot
16:18
Speaker 1: of the same. When it comes to the economic situation.
16:21
Speaker 1: The economy is going to be weaker, Um, it's going
16:24
Speaker 1: to be quite volatile. We think the consumer is going
16:26
Speaker 1: to be um, the one thing that's going to give in.
16:30
Speaker 1: They've been very resilient this year as far as spending,
16:33
Speaker 1: and we'll get retail sales tomorrow as well. But I
16:37
Speaker 1: don't think it's sustainable when you look at the level
16:39
Speaker 1: of spending and then you look at how they're spending
16:41
Speaker 1: and that is basically turning to credit cards, which are
16:45
Speaker 1: growing at a double digit pace over an annual basis. Um,
16:49
Speaker 1: are you worried about the or are you watching the
16:52
Speaker 1: credit card legislation. I can't remember the name of the bill, um,
16:56
Speaker 1: but it's like the credit card competition bill or something
17:00
Speaker 1: that's apparently going to open up another pay rail and
17:03
Speaker 1: give retailers more of a choice. Um. No, I'm not
17:06
Speaker 1: following that so much as far as the what people
17:09
Speaker 1: are doing and taking out debt in any respect in
17:11
Speaker 1: the slowing economic economy is not something that consumers want
17:15
Speaker 1: to do. While balance shees are relatively healthy, we're still
17:19
Speaker 1: seeing savings and savings rates pretty much dwindled down. So um,
17:23
Speaker 1: I think turning to credit is not the right thing
17:26
Speaker 1: at Okay, I sorry, sorry, I misunderstood. I thought you
17:29
Speaker 1: were saying that you like the credit card companies here.
17:31
Speaker 1: Oh no, no, no, for sure, if if, if the
17:34
Speaker 1: consumer is taking is putting more and more money, more
17:37
Speaker 1: and more purchases on plastic, that's a problem, um. And
17:41
Speaker 1: that's the kind of the kind of sign that we've
17:43
Speaker 1: been looking for. What's your expectation for a recession in
17:46
Speaker 1: twenty three or some people have been saying maybe won't
17:48
Speaker 1: come till early now. I think I think it's highly likely.
17:52
Speaker 1: In ine, and I actually would lean more towards this
17:56
Speaker 1: the first half of three because we've had such a
18:00
Speaker 1: like I said, a resilient year from the consumer spending
18:03
Speaker 1: standpoint in I think after the holidays, after this spending
18:08
Speaker 1: has been done for this year, that people will sit
18:11
Speaker 1: back reassess. UM they're going to see the credit cards,
18:14
Speaker 1: not only their credit card bills, the actual number on
18:17
Speaker 1: the credit card build. But don't forget that credit card
18:20
Speaker 1: rates are rising just along with the rest of interest rates.
18:22
Speaker 1: So credit card interest rates right now are very high,
18:25
Speaker 1: and I think this is just going to be challenging
18:27
Speaker 1: for consumers. So I think from a UM spending standpoint,
18:30
Speaker 1: that's going to pull back. You have that at the
18:33
Speaker 1: same time where you have manufacturing that's now in contraction territory, UM,
18:37
Speaker 1: you have housing that continues to be challenged by higher
18:41
Speaker 1: interest rates and high costs. These three things could be
18:45
Speaker 1: UM could weigh on the economic scenario in the first
18:48
Speaker 1: half of next year. So Megan, you know, we we
18:52
Speaker 1: It seems like a lot of economists say we might
18:54
Speaker 1: have a you know, a tough or first half of
18:56
Speaker 1: but then maybe better second half. As you think about
18:59
Speaker 1: kind of where you want to position your portfolio, are
19:02
Speaker 1: you guys kind of constructive on the markets here or
19:06
Speaker 1: are you kind of wait and see a little bit
19:08
Speaker 1: as we get into next year. So we're long term investors,
19:11
Speaker 1: so we're always constructive on the market. But you know,
19:15
Speaker 1: right now, for for the near term, what we're trying
19:17
Speaker 1: to do is raise a little bit of cash going
19:19
Speaker 1: into the year at the end of the year, especially
19:20
Speaker 1: since we've had such a tremendous rebound um since that
19:24
Speaker 1: October twelfth low, so and take last week out of
19:27
Speaker 1: the equation, we still have had a pretty decent upside there.
19:30
Speaker 1: So there's some areas that we may want to just
19:32
Speaker 1: overall reduce some risk, increase that dry powder, get a
19:36
Speaker 1: little bit more cash because I do believe that in
19:38
Speaker 1: the first half of next year there's going to be
19:40
Speaker 1: a lot more opportunities to put more money into the
19:43
Speaker 1: equity markets for the long run. Tax loss harvesting is
19:47
Speaker 1: a phrase we've been hearing a lot. Is that what
19:49
Speaker 1: you're talking about? Yeah, So it's not just only tax
19:52
Speaker 1: loss harvesting, because remember, tax loss harvesting is um you know,
19:55
Speaker 1: you're you're taking the tax off and maybe implementing something
19:59
Speaker 1: as ah like an e t F or something that
20:02
Speaker 1: so you're staying participated. But this is an overall tactical
20:05
Speaker 1: move in the market where you want to reduce your
20:08
Speaker 1: overall risk in the portfolio. So take losses where you can,
20:11
Speaker 1: but also then look at maybe just reducing some of
20:15
Speaker 1: those areas of the market that have rallied so much
20:18
Speaker 1: here in the past six weeks. Megan, you know, as
20:21
Speaker 1: a long term investor, where does technology fit into your
20:25
Speaker 1: perfect just going to ask about the Fang stocks see
20:27
Speaker 1: a great minds think alike off front running a little bit.
20:30
Speaker 1: But again, the fang stocks have been so good to
20:32
Speaker 1: Matt and me and everybody else over the last dozen
20:35
Speaker 1: years or so, So we think about those types of names.
20:38
Speaker 1: Will they continue to be leaders in this market or
20:40
Speaker 1: is there time as a as a market leader passed?
20:43
Speaker 1: So there was like a three part questionnaire. The first
20:48
Speaker 1: one is, um, what do we think of technology in
20:50
Speaker 1: the long run? And then and then you had mentioned
20:53
Speaker 1: bangs and then um have they lost their leadership? And
20:56
Speaker 1: technology over the long run is a great investment? Um,
21:00
Speaker 1: good quality technology? The fangs. Um. The reason why they
21:04
Speaker 1: got that that you know, the Fang name to them
21:07
Speaker 1: is because um, they had their valuations had run up
21:10
Speaker 1: so far, so fast. Nobody had anticipated that any other
21:14
Speaker 1: company in the s and P five hundred, including technology,
21:18
Speaker 1: could actually produce the same types of earnings growth that
21:21
Speaker 1: those companies could. I think that those days are over. UM.
21:26
Speaker 1: People are not going to pay outside valuations for companies
21:30
Speaker 1: just in the hopes for that future growth, and the
21:32
Speaker 1: main reason behind that is that the interest rate environment
21:35
Speaker 1: is completely changing going forward. UM. I think that there
21:39
Speaker 1: is room for good quality UM technology, even good quality growth,
21:44
Speaker 1: but I think that that's going to be a second
21:46
Speaker 1: half of the year next door UM second half of
21:49
Speaker 1: the year story UM for next year, because I think
21:52
Speaker 1: there's still is room from the valuation correction that we
21:55
Speaker 1: need to see. You're still looking at earnings that probably
21:58
Speaker 1: are slightly unrealistic at this point for some of these names,
22:02
Speaker 1: so we want to see that come down. Then you'll
22:04
Speaker 1: get a bit more of a better entry point into
22:07
Speaker 1: these areas. What are you looking for in terms of
22:09
Speaker 1: earnings across the SMP, I mean broader earnings and valuations
22:14
Speaker 1: next year. So next year, the multiple is the big unknown. UM.
22:19
Speaker 1: I do think that you're going to see some further
22:22
Speaker 1: pe multiple contract compression in the SMP five but it's
22:26
Speaker 1: primarily going to be led by technology. UM. Those fang names,
22:30
Speaker 1: as we've mentioned, those are the ones where we're going
22:33
Speaker 1: to see pe contraction and they make up the majority
22:35
Speaker 1: SMP five hundreds. UM. I think earnings growth has um
22:39
Speaker 1: it does need to be revised lower. I still think
22:42
Speaker 1: we can get somewhere around, you know, in the mid
22:45
Speaker 1: single digits of an earnings growth situation, but we do
22:48
Speaker 1: need to see earnings come down. And remember this market
22:51
Speaker 1: is almost very segmented right now. You have pockets of
22:56
Speaker 1: the market that have really good earnings potential next year,
22:59
Speaker 1: but and you have some areas of the market that
23:01
Speaker 1: I think you're gonna going to struggle next year as well.
23:04
Speaker 1: So you have to be very selective active management from
23:09
Speaker 1: not only your asset allocation exposure, but also I'm even
23:12
Speaker 1: looking from the your investment proposed, your investment exposure as
23:17
Speaker 1: far as managers, make sure that you selectivity is very
23:20
Speaker 1: important going into next year. All right, Megan, thank you
23:23
Speaker 1: so much for joining us. Good stuff there. We really
23:24
Speaker 1: appreciate Megan Horneman. She's a chief investment officer at Verden's
23:28
Speaker 1: Capital Management. Giving us your thoughts on these markets. I
23:33
Speaker 1: want to talk technology I want to talk technology. M
23:36
Speaker 1: n A Toma. Bravo's got a deal out there, buying
23:39
Speaker 1: some software company, and we'll get to that. But Microsoft
23:42
Speaker 1: buying four percent of the London Stock Exchange. I don't
23:44
Speaker 1: know what's going on with that one. So fortunately we
23:46
Speaker 1: got a software expert with us, Steve Kannying. He's managing
23:50
Speaker 1: director at SMBC Nico Securities America. Uh. He joins us
23:54
Speaker 1: over the phone. A Steve, can you tell me what
23:56
Speaker 1: Microsoft is doing buying you know, a small piece of
23:59
Speaker 1: the the stock exchange. I don't get it. Yeah, yeah, thanks,
24:04
Speaker 1: thanks to him. Great to be on with you, Thanks
24:05
Speaker 1: for having me. Uh yeah, you know it is um,
24:09
Speaker 1: it's it's just, you know, it's an indicator. It's a
24:12
Speaker 1: symptom of the fact that there is a lot of
24:14
Speaker 1: runway left for businesses in many industries, in this case
24:19
Speaker 1: financial services, to transform the way they the way they
24:23
Speaker 1: make decisions, the way they use data, and the way
24:25
Speaker 1: they operate in the cloud. And Microsoft being the number
24:29
Speaker 1: two cloud player with a zur Is is a real
24:32
Speaker 1: driver and and benefits from that migration to the cloud.
24:36
Speaker 1: And um, you know, there are a lot of there
24:38
Speaker 1: are a lot of ways to do it. In this case,
24:40
Speaker 1: this is this is really a vertical specific it's an
24:42
Speaker 1: industry specific initiative UM that Microsoft is undertaking UH which
24:48
Speaker 1: which which basically it's going to allow them to exploit
24:52
Speaker 1: the opportunity to provide financial data to you know, many
24:58
Speaker 1: of Thompson Ruyter's customer and UH and in doing so,
25:02
Speaker 1: they in signing to steal. They can help to transform
25:06
Speaker 1: Thompson Reuter's on offerings, to better integrate them with Excel,
25:09
Speaker 1: to better integrate with them, team with teams, Microsoft teams,
25:12
Speaker 1: it's collaboration software, and to really make the Thompson Reuters
25:15
Speaker 1: products work better. You know, honestly, I've used Thompson Reuters
25:18
Speaker 1: and I've used Bloomberg, and some of the Thompson's Reuter
25:21
Speaker 1: software could use a company like Microsoft to help them out,
25:24
Speaker 1: you know, speaking very frankly. Okay, got it all right, Matt.
25:28
Speaker 1: We got another extremely over educated guest here. Our friend here,
25:32
Speaker 1: Steve has got his BS with distinction and mathematics from Stanford,
25:36
Speaker 1: boring Masters and engineering from Stanford, and then an NBA
25:40
Speaker 1: from Harvard. I'm not sure I'm talking to this guy
25:42
Speaker 1: at a cocktail party, but I think he knows what
25:44
Speaker 1: he's talking about when it comes to software. Paul is
25:47
Speaker 1: a little bit intimidated Steve when it comes to mass statistics,
25:51
Speaker 1: and he said that he's not a STEM guy's um hey,
25:55
Speaker 1: my job is to make it simple. So happy to
25:57
Speaker 1: happy to do that because so well, And that's that's
25:59
Speaker 1: an interesting explanation of the Microsoft deal. And I get that.
26:03
Speaker 1: And if you look at it a little more deeply, UM,
26:06
Speaker 1: there I can't tell if they're paying uh the Elmy
26:11
Speaker 1: or the Emmy's paying them, Like where's the balance? Because um,
26:14
Speaker 1: they're getting a lot of business in return, right, yeah, Yeah.
26:18
Speaker 1: My read of the terms and the deal is that
26:20
Speaker 1: they're they're buying a billion dollar equity stake and UM
26:24
Speaker 1: and there will be proceeds out of that UM that
26:28
Speaker 1: Thompson Reuters and and LC will use to expand the business,
26:32
Speaker 1: you know, the data analysis business and Thompson's Reuter's tools. UM.
26:36
Speaker 1: In return, Microsoft gets a UM minimum commitment. It's a
26:41
Speaker 1: ten year deal, so they get a minimum commitment of
26:43
Speaker 1: two point eight billion and guaranteed revenue from l C
26:47
Speaker 1: a UM for using a Zoor Microsoft thought service. Now,
26:51
Speaker 1: now a lot of that revenue was going to happen anyway,
26:53
Speaker 1: if not all of it, it's just a guarantee. But
26:56
Speaker 1: in addition, Microsoft expects to generate another you know, I
27:01
Speaker 1: would calculate two point two billion, because they calculate five
27:04
Speaker 1: billion in total that they're going to get in revenue
27:07
Speaker 1: from this deal over ten years. And in that additional
27:10
Speaker 1: revenue they're going to get, I think a lot of
27:12
Speaker 1: that is probably going to come from Thompson's Reuters customers.
27:15
Speaker 1: Is what Microsoft is hoping that they'll help build better
27:18
Speaker 1: tools for Thompson Reuters and that those tools can be
27:21
Speaker 1: sold to the you know, ten thousand customers that Thompson
27:24
Speaker 1: Reuters have. If they call that business for affinity, does
27:27
Speaker 1: that data analysis and tools business? All right? And we
27:29
Speaker 1: should note that Bloomberg LP competes with Thompson Reuters. Yeah,
27:36
Speaker 1: let's let's not worried. We invented the internet, invented it? Hey,
27:39
Speaker 1: all right? So right, yeah, exactly. So, Steve, we've got
27:45
Speaker 1: another M and a trade in your space here stock
27:48
Speaker 1: that you cover, Kopa going to be acquired by Toma Bravo.
27:52
Speaker 1: Is that Toma Bravo? Okay? What since when is private
27:56
Speaker 1: equity buy software companies? What's going on there. Yeah, well, um,
28:00
Speaker 1: private equity buys a lot of software companies. Uh, that's
28:03
Speaker 1: that's a trend that's been going on for a very
28:05
Speaker 1: long time. And um, you know the the I think
28:09
Speaker 1: in really in the last twelve months there there have
28:12
Speaker 1: been at least ten pretty large transactions of PE firms
28:16
Speaker 1: buying software. Um. The reason PE firms like software is
28:20
Speaker 1: that the revenues don't trip very easily. They don't go away.
28:24
Speaker 1: You know, once the company buys either package software, infrastructure
28:28
Speaker 1: software and integrates it into their business, you know, they
28:31
Speaker 1: become pretty dependent on that software. And maybe over time
28:34
Speaker 1: they might rip and replace it, but more generally they
28:37
Speaker 1: just add around it. And so you know, when you
28:39
Speaker 1: buy a software company, you're buying a revenue stream with
28:42
Speaker 1: a very long tail. Uh. And the other driver here
28:45
Speaker 1: is that, you know, some of these software businesses have
28:48
Speaker 1: not they have not learned how to be profitable yet,
28:51
Speaker 1: but they're very capable of being profitable because the revenue
28:54
Speaker 1: doesn't go away because there's low turn And so the
28:57
Speaker 1: private equity firms are are experts in being able to
29:01
Speaker 1: m create more disciplined cost control of these companies and
29:04
Speaker 1: generate a lot more cash when these companies go private
29:06
Speaker 1: and and that's what's happening here. You know, Cooper has
29:08
Speaker 1: pretty good cash flow, but um, you know, they've got
29:11
Speaker 1: tough competition in the markets with s A p uh
29:14
Speaker 1: they you know, we see them as the best to
29:15
Speaker 1: breed leader in this business spend management. Um. But I
29:18
Speaker 1: think the private equity firms, he's you know, they see
29:20
Speaker 1: an opportunity to create shareholder value here, especially with the
29:23
Speaker 1: stock having really been hit in the tech down turn
29:26
Speaker 1: this year. You know, I think they see an opportunity
29:28
Speaker 1: for you know, to add value and that you know,
29:30
Speaker 1: to ultimately take take Kopa either public again or have
29:33
Speaker 1: them acquired by a strates software strategic vendor at a
29:37
Speaker 1: higher price. All right, good stuff, Steve, good having you on.
29:40
Speaker 1: Steve Kanni, really smart dude on this whole software tech space.
29:44
Speaker 1: We need those kinds of voices here, SMBC Nico Securities
29:48
Speaker 1: to cover software there. We appreciate getting a few minutes
29:50
Speaker 1: of his time. It's pretty go to West Kasova. Now
29:56
Speaker 1: he's a host of Bloomberg's Big Take podcast. A Big
29:59
Speaker 1: Take some of the best reported stories coming out of
30:02
Speaker 1: Bloomberg News. And so therefore you give a podcast because
30:05
Speaker 1: that's what the kids are doing today, mouth doing the podcastings.
30:07
Speaker 1: It's actually big business advertisers like it. West. Thanks much
30:11
Speaker 1: for joining us here. What do you guys have on
30:13
Speaker 1: your Big Take podcast today? Today we're telling the story
30:18
Speaker 1: actually our second installment on TikTok, you know, the who
30:21
Speaker 1: was placed on the internet. UH investigative reporter Olivia carverl
30:25
Speaker 1: did a story for UH Bloomberg a couple of weeks
30:29
Speaker 1: ago about kids who were accidentally killing themselves trying to
30:34
Speaker 1: copy these dangerous challenges that appear in some of the
30:36
Speaker 1: videos on TikTok, like the blackout challenge, where people try
30:40
Speaker 1: to you know, black themselves out and get that rush
30:42
Speaker 1: when they wake back up. Well, kids, unfortunately who are
30:46
Speaker 1: really younger doing it, and several of them have died.
30:49
Speaker 1: In her second story, which we feature on the podcast today,
30:52
Speaker 1: she's talking about something a little bit different but in
30:55
Speaker 1: a little bit harder to track, which is what she
30:59
Speaker 1: calls key TikTok, and that's kids who have these accounts
31:02
Speaker 1: are teenagers, um, and sometimes they're a little bit provocative
31:07
Speaker 1: on their accounts. A lot of them are teenage girls.
31:11
Speaker 1: They're wearing kind of skimpy outfits, they're dancing provocatively. The
31:15
Speaker 1: lyrics of the songs are very suggestive. And there's this
31:18
Speaker 1: big tension between kids doing things on the platform whether
31:24
Speaker 1: that platform should allow it on and a lot of
31:27
Speaker 1: parents and other people are saying that it's inappropriate, it's
31:30
Speaker 1: influencing their kids, and they wind it off the platform.
31:33
Speaker 1: I mean, it sounds more like a parents problem than
31:35
Speaker 1: a platform problem. To me, Why would welcome to the
31:39
Speaker 1: Why would parents allow their kids to go on this?
31:41
Speaker 1: Chinese who have and raised teenagers, it is it is
31:45
Speaker 1: the number one issue. It's funny we have police officers
31:48
Speaker 1: would come into school about drugs and alcohol. That's not
31:51
Speaker 1: the issue anymore. I mean that is something that parents
31:54
Speaker 1: they kind of have a hold on. The problem with
31:56
Speaker 1: the internet is parents buy and large don't know what
32:00
Speaker 1: they don't know. It is brutally difficult to do with
32:03
Speaker 1: their software out there. But having raised four teenagers, I
32:07
Speaker 1: can take you, well, let me let me ask you
32:08
Speaker 1: this West how I mean, even if we decide as
32:11
Speaker 1: as Americans that something that TikTok should be regulated differently,
32:16
Speaker 1: how much control over that we have since it's a
32:18
Speaker 1: Chinese company. But you know, it's not so much that's
32:22
Speaker 1: a Chinese company. When it comes to the control as
32:25
Speaker 1: it is um this idea of how do you police
32:29
Speaker 1: a platform that has tens of billions of videos every year,
32:33
Speaker 1: Olivia writes, in the first half of the year, TikTok removed.
32:39
Speaker 1: I believe it was something like, uh, two hundred million
32:44
Speaker 1: videos from the site that we deemed to be inappropriate.
32:46
Speaker 1: But in that time there were twenty billion videos that
32:50
Speaker 1: were downloaded. And you make a good point about the parents.
32:53
Speaker 1: You know, it used to be you'd have a computer
32:55
Speaker 1: on the desktop and you could have a white list
32:57
Speaker 1: on the computer of sites where your kids could go
32:59
Speaker 1: or not. And now it's on phones and they create
33:01
Speaker 1: a counting different names. Their parents don't know about the accounts.
33:05
Speaker 1: In the podcast, Olivia talks about this one girl whose
33:10
Speaker 1: name her her name on the platform is Jenny Papaci.
33:13
Speaker 1: She's sixteen years old, and she's become one of the
33:16
Speaker 1: most popular and one of the most controversial people on
33:19
Speaker 1: the platform because of the way she dances, and she
33:22
Speaker 1: has seven million followers. She has brand deals because she's
33:27
Speaker 1: so popular that people want to, you know, have her future.
33:29
Speaker 1: Their quote, Yeah, it's it's uh, it is the wild
33:32
Speaker 1: West in so many ways West Kasova. He's a host
33:35
Speaker 1: of Bloomberg Is the Big Take podcast all those well
33:38
Speaker 1: reported stories. Thanks for listening to the Bloomberg Markets podcast.
33:41
Speaker 1: You can subscribe and listen to interviews with Apple Podcasts
33:45
Speaker 1: or whatever podcast platform you prefer. I'm Matt Miller. I'm
33:49
Speaker 1: on Twitter at Matt Miller N seventy three p On
33:52
Speaker 1: Fall Sweeney, I'm on Twitter at pt Sweeney. Before the podcast.
33:55
Speaker 1: You can always catch us worldwide at Bloomberg Radio