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UBS' Ryan Says Market Getting Comfortable With Fed Path (Audio) · Bloomberg Intelligence

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  Speaker 1: Bloomberg at fy Fort. I'm Catherine Cowdery. You're listening to
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  Speaker 1: Taking Stock with Bim Box and Kathleen Hayes on Bloomberg Radio.
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  Speaker 1: An investment in the SMP five hundred so far this
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  Speaker 1: year has offered a gain of one and a half percent. Currently,
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  Speaker 1: the SMP five hundred offers a yield of a little
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  Speaker 1: bit more than two percent. Can we expect similar returns
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  Speaker 1: for the remainder of Well, that's why we have Mike Ryan.
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  Speaker 1: He is the chief investment strategist for UBS Wealth Management
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  Speaker 1: America's Mike, thank you very much for being with us.
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  Speaker 1: So do we just have to adjust our expectations. I
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  Speaker 1: think we do. I don't. I'm not sure it's going
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  Speaker 1: to play out exactly it has in the in the
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  Speaker 1: first and a half months of this year. I remember
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  Speaker 1: this was an extraordinary period where you had an extraordinary
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  Speaker 1: draw down in markets, suffered you know, pretty big losses.
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  Speaker 1: Through mid February only to see this pretty impressive bounce back.
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  Speaker 1: So it's been a period of extraordinary volatility within equity markets.
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  Speaker 1: I think going forward what we're likely to see as
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  Speaker 1: the following I do think the markets are in the
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  Speaker 1: process right now of becoming more comfortable with the pathway
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  Speaker 1: the FED has set pre monetary policy. In other words,
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  Speaker 1: I do think we're going to see rate increases over
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  Speaker 1: the course of this year, but remember from they're gonna
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  Speaker 1: be a very gradual, very deliberate, very measured type of
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  Speaker 1: rate hike. So against the backup, we're starting to see
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  Speaker 1: more and more evidence that the economy is improving. I
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  Speaker 1: think that's going to create a favorable backdrop for risk assets,
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  Speaker 1: and therefore it's going to favor certainly equity markets. But again,
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  Speaker 1: I do think that the point you raised about the
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  Speaker 1: gains being more measured in terms of the equity markets,
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  Speaker 1: I think we're gonna be focused on trying to generate
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  Speaker 1: gains in the mid to high single digits rather than
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  Speaker 1: any gains in the double digits. It defend is moving
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  Speaker 1: slowly and gradually. Mike, Is this also not so bad
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  Speaker 1: for bonds, at least not when you get out to
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  Speaker 1: the longer end of the curve because they're not going
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  Speaker 1: to do that many boosts at the short end. Number
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  Speaker 1: one and number two, the Feds getting tighter to hold
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  Speaker 1: down inflation or with that, I mean they actually want
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  Speaker 1: inflation to rise, but doesn't openly hold down inflation. Doesn't
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  Speaker 1: it mean that the long end isn't such a bad
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  Speaker 1: place to be. I think you're right, Kathleen. I think
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  Speaker 1: what the what the bond market wants to see is
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  Speaker 1: that the FED is going to be in the process
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  Speaker 1: of slowly normalizing rates, but that they're not going to
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  Speaker 1: do it in in a pre ordained man In other words,
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  Speaker 1: they're not simply go out and rotally raise rates by
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  Speaker 1: you know, a quarter of a percentage point every quarter
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  Speaker 1: or the Hunter basis points, which is sort of the
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  Speaker 1: signaling they gave us earlier. There. Instead, I think the
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  Speaker 1: bond market appreciates the fact that the Fed is reflecting
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  Speaker 1: upon what we see in terms of the macroac now
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  Speaker 1: in developments. They're certainly sensitive to the financial market reactions
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  Speaker 1: to policy decisions, and therefore they're going to plot what
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  Speaker 1: I consider to be again a pragmatic course. So like
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  Speaker 1: it's that backdrop, it tells me then that the bondom
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  Speaker 1: market repricing is not going to be as extreme as
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  Speaker 1: we saw before the temper the Taper tantrum, when the
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  Speaker 1: markets overreacted to expectations about set rate hikes. So I
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  Speaker 1: do think it's an environment where rate increases will be
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  Speaker 1: more muted. And I also think you're right that the
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  Speaker 1: extent this is viewed as being a necessary step in
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  Speaker 1: making sure that we don't have any problems down the
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  Speaker 1: road with inflation. I think that does provide a more
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  Speaker 1: favorable backdrop for the back end of the curve as well.
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  Speaker 1: All right, Mike, So let's say that you get a
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  Speaker 1: telephone call or an email from one of the investment
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  Speaker 1: strategists or analysts who are dealing directly with clients, and
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  Speaker 1: they say, you know, the clients keep calling and they
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  Speaker 1: cannot live on two percent. What is your recommendation if
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  Speaker 1: the time horizon is three to five years. I think
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  Speaker 1: it's gonna be a tough conversation because I think we
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  Speaker 1: have to understand that if we're going to try and
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  Speaker 1: generate returns or levels of income materially higher than that,
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  Speaker 1: we're gonna be willing to take on incremental risk. So
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  Speaker 1: that means either I'm going to take investment choices that
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  Speaker 1: have lower credit quality, move much much further out in
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  Speaker 1: mature respectrum that I have been accustomed to, or perhaps
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  Speaker 1: look at look for income in non traditional sources. Now
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  Speaker 1: we've certainly seen some folks have gravitated to reads and
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  Speaker 1: m LPs as a way of replacing you know, loft income,
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  Speaker 1: but we also have to understand their attendant risks with that.
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  Speaker 1: They're not fixed income securities. They don't have the safety
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  Speaker 1: and security of a guaranteed return of principle UM. So
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  Speaker 1: obviously there's a new a new set of risk to
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  Speaker 1: come with that. So what I would say is we
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  Speaker 1: have to strike the right balance. Strike the balance and
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  Speaker 1: trying to generate a level of income that's going to
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  Speaker 1: be acceptable for the clients given the level of risk
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  Speaker 1: that they're willing to assume. So for me, that includes
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  Speaker 1: not only getting it from traditional sources as we just
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  Speaker 1: talked about in terms of six income markets, but also
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  Speaker 1: looking at the non traditional places as we said MLPs
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  Speaker 1: and reads, but also let's look at it in a
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  Speaker 1: place where we haven't been searching for income for quite
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  Speaker 1: some time, and that's the equity market. Remember that the
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  Speaker 1: ability to throw a dividend over time is perhaps one
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  Speaker 1: of the best ways of replacing lost income. It's interesting though,
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  Speaker 1: that we were PAYM and I were speaking with Frank
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  Speaker 1: Laslo yesterday UH from B and Y Melon. We were
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  Speaker 1: out in Tucson, Arizona at a conference, and Frank made
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  Speaker 1: the same point about a low inflation, low return environment.
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  Speaker 1: A lot of investors are going to be looking at
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  Speaker 1: these we can call them alts, liquid alts, alternatives, etcetera.
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  Speaker 1: But the kinds of investments that they may take longer
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  Speaker 1: to bear fruit, but they may seem more less volatile
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  Speaker 1: and a little more promising than stocks at this point. Well,
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  Speaker 1: I look, I think there's a place for them in
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  Speaker 1: the portfolio. I certainly think that we have to look
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  Speaker 1: at a a broader, a broader set of investment opportunities
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  Speaker 1: if we want to capture the income and the returns
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  Speaker 1: that clients are looking for today. But I'd be careful
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  Speaker 1: not to look at UH certain asset classes as as
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  Speaker 1: precluding others. For example, I still think that equities needs
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  Speaker 1: to be a core holding within a fix, within an
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  Speaker 1: diversified portfolio. And by the way, I do think that
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  Speaker 1: we have to think differently about equities going forward, where
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  Speaker 1: we sort of during the eighties and nineties and even
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  Speaker 1: two thousand's we sort of looked at equities purely as
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  Speaker 1: a source of capital gains and we were going to
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  Speaker 1: get all of the yield of the income needs from
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  Speaker 1: fixed income. I think that has a change, Kathleen. I
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  Speaker 1: think we have to look more holistically at our entire
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  Speaker 1: portfolio and trying to figure out how we're going to
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  Speaker 1: get as much income out of the portfolio from all
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  Speaker 1: the sources of return across the holding base. Well, one
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  Speaker 1: of the sources of returns, at least in the past,
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  Speaker 1: have been variety of hedge fund strategies. Do you see
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  Speaker 1: that that will continue and will customers continue to pay
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  Speaker 1: two and twenty for performance that if it doesn't outpace
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  Speaker 1: the SMP certainly isn't delivering as they say alpha. Well, look,
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  Speaker 1: I I it's it's hard to me to come with
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  Speaker 1: them the know what what clients are willing to pay.
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  Speaker 1: I do know that that increasingly what you're seeing is
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  Speaker 1: is competition. UH is certainly something that all managers are
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  Speaker 1: being faced with. Clients are demanding better returns, they're certainly
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  Speaker 1: demanding accountability for outcomes. So I suspect there's gonna be
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  Speaker 1: fee pressure regardless of the type of investment vehicle people choose.
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  Speaker 1: So whether it's two and twenty or any other structure,
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  Speaker 1: I think people are certainly going to demand performance um
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  Speaker 1: for the fees that they're paying. That said, I do
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  Speaker 1: think that hedge funds and alternatives still have a place
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  Speaker 1: within the portfolio. UM. I think we we tend to,
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  Speaker 1: you know, you know, periodically we sort of um fall
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  Speaker 1: out of love or or we sort of um have
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  Speaker 1: our our our interest in certain types of asset classes,
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  Speaker 1: kind of Wax and Wayne. I do think though that
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  Speaker 1: there are a number of really strong managers in the space.
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  Speaker 1: There's something some really really prudence strategy that are being employed,
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  Speaker 1: and therefore I think it's still is a place that
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  Speaker 1: investors need to be looking at in terms of opportunities. Uh,
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  Speaker 1: let's just spend you down on the FED. You've been
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  Speaker 1: watching the FED along with me for many years, Mike Ryan.
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  Speaker 1: Uh so, what what's your best if you're if you're
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  Speaker 1: a trader on a desk and you have to put
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  Speaker 1: some money on this, what would you bet? June, July, September.
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  Speaker 1: I think it's most likely by July whether it's the
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  Speaker 1: June and July meeting is a little harder call to me.
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  Speaker 1: I think there's two things that work here. First of all,
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  Speaker 1: what would be in favor of holding off in June
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  Speaker 1: is simply that we're going to get the UK referendum
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  Speaker 1: on EU membership um just shortly after the meeting. And
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  Speaker 1: while the SET officials have said that, you know, certainly
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  Speaker 1: that's not going to be a primary determinant of a
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  Speaker 1: policy decision, I think the FED once clarity on anything
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  Speaker 1: that's going to have a potential impact on global growth dynamics,
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  Speaker 1: so that could be one of the things that tips
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  Speaker 1: of scale. The other hand, one of the problems about
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  Speaker 1: the July meeting is sort of an off cycle meeting,
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  Speaker 1: meaning it doesn't have the press conference attached to it,
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  Speaker 1: so it doesn't allow the FED to have a kind
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  Speaker 1: of communication they've tried to have around policy changes. So
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  Speaker 1: I still think though, if between the two, I think
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  Speaker 1: they actually opt to go in July and forego the
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  Speaker 1: press conference, because I think that's better timing their standpoint.
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  Speaker 1: My Brian, thank you so much for joining us. The
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  Speaker 1: chief investment strategists at UBS Wealth Management America's I'm Kathleen
• 11:06
  Speaker 1: Hayes along with Pim Fox, We're gonna take a look
• 11:08
  Speaker 1: at the movers and shakers at the clothes, Coming up
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  Speaker 1: now on Bloomberg Radio.