2019 Global Outlook - Does the Run End?

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  • 56 mins 33 secs
Despite strong economic fundamentals – solid employment, rising wages and robust GDP growth – volatility continues to rock the markets. What’s the endgame for the U.S. and China trade dispute? Will the Fed maintain an aggressive agenda in the face of a moderating global growth profile? Have corporate earnings reached their peak?

Listen to get the Ivy Investments team 2019 New Year Outlook.

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December Ivy Live


Sanders, Scott, Hamilton, Beischel


Jeff: Good afternoon and welcome to Ivy Live coming into 2018 Global markets were on a roll. But of course that didn't last a correction that began in February ended the celebration quickly as we saw the global economy turned from a period of synchronized growth and asset appreciation to a more bifurcated state with the US growth story drawing most of the attention one by one Global Equity markets corrected EM Europe and finally the u.s. Global risk assets. Whether that's Industrial Metals Energy Credit all seem to be telling us the same thing and major slowdown is on the way our markets painting the correct picture is a global recession imminent or we heading for a soft Landing Street opinions are mixed. What are our views on growth in asset prices as we head into the new year. Let's find out.

Joining us today is CEO CIO Phil Sanders Global Economist, Derek Hamilton director of research Gil Scott and Mark Beischel are head of a fixed income.

Let's get to the elephant the room Derek. We had a fomc meeting yesterday. I think the results of the meeting were as we expected, but obviously not with the market expected. Can you tell us what they talked about yesterday?

Derek: Right? So the FED hiked 25 basis points, like you said as we expected they would they took their rate to two and a half percent. I think a lot of the market angst was around the press conference. So chairman Powell essentially talked about, you know, it's getting we're getting closer to neutral. We need to be more careful on rate increases going forward, but he didn't explicitly come out and say we're pausing and I think that's one thing that the market was looking for. We do think that they will be pausing just given the growth trajectory that we're expecting. We think that you know will probably get one hike next year they project to but I think equally important he was asked a couple of questions about the balance sheet run ons and he basically said over and over that that is a set in stone policy right that it's on a preset course. We're not going to adjust it. No matter what happens and I think the market has really been focused on the FED is raising rates at the same time that they're drawing down their balance sheet and that's kind of a double tightening of liquidity. If you will and the fact that he wasn't more receptive to that. I think caused the market angst.

Jeff: It was kind of funny that he they didn't talk about the balance sheet because two meetings ago they were talking about we're going to start thinking about this and we may have to make some adjustments in the future and then they just dropped it.

Derek: Right. Yeah. It's really interesting because even if this is on a preset course, like they think currently the balance sheets just over four trillion a lot of people think that the stopping point in terms of what it will take for the number of reserves that the banking system needs to stopping point will be somewhere between three and three and a half trillion. They run off 50 billion a month. So, you know, potentially you're there by the end of the year if not early next year. So it would have been very natural. I think for him to say well, yes, you know, we continue to wind down the balance sheet, but we can see in the future that were probably going to come to a stopping point and would have given markets some more Assurance but for whatever reason he chose not to say that I think that as the months progress will start to hear that story again and probably give some comfort to markets.

Jeff: And our expectations for rate moves in 2019?

Derek: Yeah, again, we think they say 2 we think probably one if growth is weaker than what we say. They could be on hold the whole year but we think that the progression of growth will allow them to hike maybe once in the middle of the year and then pause again.

Jeff: okay now Phil the market started selling off yesterday when I think Powell mentioned that the balance sheet was on, you know just kind of cruise control going forward is it is the market just having a tantrum because of withdrawal of liquidity. I mean is it just

Phil: Yeah, it is interesting. I think the FED I think kind of pivoted heading into the meeting and people thought they were going to be more dovish. And in fact, they were relative to how they were a few months ago. But I think it seemed to me like in the last couple weeks heading into the meeting the people were expecting the odds of maybe no hike or even more dovish NE started to seep into the market and obviously that didn't play out. That way. I think there's this expectation or fear that they're kind of blind to the underlying fundamentals and facts of what people are seeing in Corporate America and that type of thing but you know, I don't know I think it's always a little bit challenging for the market at times of transition or policy and inflection points and that type of thing so, you know as I step back it is a little bit frustrating and I think there's a case to be made that, you know, they didn't thread the needle like the market wanted but it's also these types of things that I think we'll look back on this in a few months’ time and say this is probably a little bit of an overreaction in an opportunity as Derek said they did mention data dependency. They just didn't highlight it and focus and maybe as aggressively as people wanted but I do believe that if the underlying fundamentals change in the facts change, they do have the opportunity to adjust policy. It wasn't that long ago where people were some you know, big Market commentators were saying that the Fed was behind the curve and we were going to have inflation problems and they were too slow and so just as they've adjusted their I mean people sentiment can change so I think it's a little bit of an overreaction but you know at the end of the day the fundamentals will sort out.

Jeff: Okay, Mark has the bond market analyst. I think it's a little bit of flattening this morning.

Mark: But yeah, the market reaction was as expected when you have that type of volatility in the equity Market it obviously had that, you know flight to Quality trade into the treasury market, but the treasury market has been kind of, you know, been seeing this slow down for a while.

We've basically gone from over three percent three and a quarter percent now, we're down to 75 on the 10 year. So it's been noticing an environment where the growth is starting to slow and then on the credit side, we definitely see some weakness. We haven't seen just I would say in the last maybe a week or two of the weaknesses been more pronounced but it has like in the IG sector you have seen, you know that widening occur and it's kind of rolled into the high-yield market and the high-yield market. You've seen more weakness in the loan sector than you have in the traditional Bond sector and I think that as we get into 2019, if as that slow down continues, you're going to see more volatility in the credit Market.

Jeff: Okay. Okay. Is there anything intermarket me or seeing any in each sector moves that are surprising given?

Gil: Yeah, there's a lot of others that there's a lot of movement in the market. That's taking place. And when you look back kind of like Canary in a coalmine type things, you know semiconductors were semi cabs. We're kind of on a leading indicator of how intense or severe this might be but to Phil's Point. What's really interesting is in the last couple months Semis are you know, not as Dire from a performance perspective relative to the market as they were earlier in the year. So yeah, they seem to buy it. They maybe we're not calling bottom but they can't I can't find would anybody like they're, you know finding a body they seem to be finding some footing. Yeah and similarly with Emerging Markets. They were the first one of the first asset classes to really roll over hard and those two might be, you know, finding a little bit of support here. Okay?

Jeff: Two three months ago Derrick, everything was beautiful as there been anything in the global economy or the political Arena that that set this off. What got us from June to October.

Derek: Yeah. I think there are a couple of things that people are really focused on one is obviously trade, you know, we talked several months ago about how the market consensus seems to be that this was more of a political issue. It's not going to be that big of a deal and we've seen President Trump continue to ratchet this up, right and on top of that you've started to see some of these forward-looking business indicators, you know, Capital spending plans overall business confidence starting to inflect lower. And so I thought it very high levels from a very high level. Yes, but I think it's the market coming to the realization that he was serious on trade and now it's going to have a market in or a an economic impact going forward that coupled with the

Fed, continuing to tighten policy in the face of increasing Market concern about growth going forward. I think that combination just really cause some some angst and it's interesting because it I think it all started just about the time where we hit Peak Global liquidity pal came out and said no, we're a ways away from you know, our star here and that's kind of where the sell-off started is. Do. We need the kind of liquidity in the system that we've enjoyed over the past 10 years to function or do we need? I don't know if that's necessarily the right question. I think the right question is how much has have different economies or different business whatever you want to look at become addicted to the ample liquidity zero rate policy right doing business that maybe shouldn't have been done and the first place so we have to go through this digestion period

As we all say normalize at least in the US and rationalize who really needs the credit who doesn't right looking afford it and who can't right and I think that's what we're going through right now. I mean in the end if you look at where rates are currently that in and of itself would not tell you that the FED is overly tight at this point. I think it's just this Confluence of events and caused. Okay Phil I asked you about the you know, the decision yesterday after surprised by the market reaction, but is there is there anything I mean, he just gave us an overview of work kind of economic conditions are is it surprising to you what the markets doing or is this just seemed like a kind of a typical correction that happens within a cycle?

Phil: Well, I think our first half the year we talked about there would be slowing earnings growth as we kind of lap the tax corporate tax reform and Global growth kind of moderate sin. The market was pretty persistently strong. So I think part of the market behavior in the second half the years been a little bit of an acknowledgement of that. I do think the volatility associated with the last few days is a little bit of an overreaction, but there are there are things to that the markets wrestling with its abroad, you know, it's the global slowdown. It's the FED policy and that of other Global central banks that the trade tensions that Derrick talked about have been have dragged on and are you know, we don't get some progress in the first part of 2019 that's going to be something that we're going to be facing for quite some time. And then I would also say just the political environment, you know in the US with the we're past the midterms, but we now have a divided Congress and the investigations and there's you know, what's really going to be done that's productive from a policy standpoint in the US and you and a global stage you have brexit and you know, the budget issues and Italy and protests in France and so political things. Typically the market is pretty resilient and kind of overlooks those as long as the underlying fundamentals are strong but when the fundamentals begin to weaken a lot of these things just add to the state of uncertainty. But so I think we have a little more volatility here recently than we've them we've typically seen but I think you know, what I would encourage people to think about is just step back and take the longer term perspective because with volatility usually becomes comes opportunity and we've had a pretty big powerful correction here in a lot of ways and and I think we're setting up for a much better 2019. Yeah, if I can just follow her with what Phil said with volatility equals opportunity, you know, we've been

On this for a long time, but it's also in the company's DNA. So from an 80-year history, I've learned from people before me and they're like volatility equals opportunity. So when everything is moving wildly this incredible Pockets to find individual stocks and that's what we do with our fundamental work. We're finding individual stocks because underneath all this turmoil. There are secular growth trends that we can take advantage of because when there's volatility everything's getting compressed at the same time commensurately and some of those opportunities are starting to surface. So, you know, you look at digital marketing that's going to be with us for a long time gene therapy that's going to be with us for a long time. There's opportunities and we have a great, you know analyst staff. That's what they're doing. And so we're using this opportunity to more differentiate ourselves just for me to add one more sure piece to that with

Guards to this environment that we're in we were anticipating this, you know throughout the year least on fixed income side. So we're position our portfolios already for moving into 2000 and of 2019 2020 for an environment that was going to be fairly volatile. So we were already extending duration. We were already moving up in credit quality so that when we got into this environment as the market starts looking for either liquidity or we're looking for some sort of a safe haven we participate on the duration side and then we've got fairly liquid assets that we can use monetize to capture other opportunities in the market. So, you know, as we're sitting here talking that we're in a kind of a volatile time. This should not be any surprise to anybody right we've been talking about this basically all year. So now is the time that we're in this market we got to actively manage through it and I think that that's where we were we add value to to the team right and since we're

Talking about volatility. Let's get into something that could cause some more volatility May It's Not Unusual Derek for when you hit Peak earnings growth and to have a bear Market follow that that's not an unusual occurrence. I think about half the time after a bear Market you have a recession. So as we go into 19 and 20 as a recession recession eminent your eyes, so we have a number of different indicators that we look at and I would say 99% of them say no. Okay, I would never sit here and say that it absolutely can't happen. I mean you can have policy mistakes you can have shocks to the market that would filter into confidence you could have geopolitical events that could happen. But looking at the fundamental economic backdrop and say, you know, where are the excesses that we have to pull back significantly looking at the cyclical parts of the economy saying have we over-invested or over Builder? You know, all of those traditional indicators are just not flashing a recession as in

But we are in a whole different environment as well. So we're in a kind of a testing time. And if you look at Past Times with a Fed has been a position where it has paused the next move is usually down. It's not up so as we're in this environment and I know we're trying to normalize but we've been normalizing for a while now and we're closer to the end than we are at the beginning. So as we're sitting there saying that the FED could potentially have one rate hike or maybe even pause. When you think of pause pause pause in March as pause in June pause and September, but any time you get to the point where they are they're moving into a very unknown area and things are deteriorating if that's a legitimate pause. The next move is usually down and if it is down then we're back to duration.

Twins and to Mark's point about we're in a new environment tying it to what you were asking earlier about the liquidity, right? We've never had a time where a central bank is actively shrinking its balance sheet, right? And so the whole Readjustment from this addiction to liquidity this addiction to zero rates and as that goes through the system, we don't know how that's going to play out. But again from the traditional standpoint, you don't see it. What is what is your outlook for 2019? Yeah. So we think that growth is going to slow obviously a globally not just in the u.s. So we're looking for Global GDP growth to slow to the lowest level and several years. We think the u.s. Is going to go from roughly three percent this year to two-and-a-half next year and we think the progression is going to weaken throughout the year. There's a lot of headwinds that we've already been talking about that's going to be behind that it's the, you know not having a repeat.

The fiscal stimulus it's the trade tensions. It's the lagged effect of Fed rate hikes. Remember that when the FED hikes it doesn't affect growth necessarily tomorrow. It does it in 9 to 12 months afterwards. And so that you know, they hike four times this year that's going to have an impact in 2019. So all of those things say that that growth is going to be weaker and I think we've been saying that for a little while if you look across the globe the key area that we're focused on is China, right you've seen in the last couple of months growth really dipped pretty hard and that's a Confluence of the trade tensions as well as they've had their own tightening cycle. So they've had a tremendous amount of leverage increase in the economy. They've been trying to ratchet some of that down and slow the growth and credit and it's caused some issues in their economy. And so one of the key focuses that we have for 2019 is Will China be able to stimulate enough to backstop the economy.

Put a floor under Global growth. We think the answer is yes, they are slow to do it because of this whole deleveraging process because they're trying to blend the long-term issues with the short term saqqaq ality of the market or of the economy, but in the end we think that they choose growth in the short term over the long-term issues. So we think that you know by call it the spring time. You see a lot more stimulus coming out of there that would put a backstop in China in the back half of the year and then allow the rest of the globe to put a floor in as well. Okay. So then from what you just said what I'm hearing and you spoke about Emi think maybe you did too Gil a little bit but so weaker us growth probably weaker dollar a lot of Chinese stimulus coming out of China. It sounds really good for you. Yeah, we've always had a very basic framework, I guess when you think about am and it's there's three things that drive it it's rates. It's the dollar

That's Global growth. And right now well over the last six months all of those have been moving in their face, right so people have been worried increasingly about slowing Global growth the FED continues to hike the dollars been strong as we progress into next year. China is very key in this and if they come back stop the outlook for a better second half If the Fed pauses like we think it will and if the dollar even just stops going up we think there's there's a chance a good chance that the dollar actually comes off a little bit but the Confluence of those three events should be pretty favorable. Once we get past these short-term issues including trade on top of that macro development. We've got Emerging Market team that is traveling all over the world corroborating this at the ground Derek actually just got back from China completely, you know instilling confidence in his perspective in this view. So we're you know, we have the overarching views bug.

Have like feet on the street and all these places corroborating these perspectives which is which is really helpful and gives us more confidence, especially in periods of turmoil and so currencies have been acting much better, you know currencies because if you just kind of think about that that thought is that you've already had a lot of asset prices deteriorate fairly significantly over the last year and a half. So in terms of the currency land if you think of the Argentine peso or even turkey or Rahzel Mexico just recently the the entry points are very compelling and even on the local side in the local rates. They've they've all had some serious deterioration. So in terms of the local currency markets are local Bond markets in their local currencies, I think that's a good opportunity for if we get a stability in the dollar and we don't have any major sell-off on the dollar and I think that's a good entry point.

Hey, I was just going to add I think you know, one of the things that 2018 is we enter 2018 early in the year. The US was really the The Oasis in the global economy huge differential in terms of growth rate profit Outlook, you know, it was the the economy was growing there was corporate tax reform huge earnings earnings growth relative to the rest of the world. And as we lap corporate tax reform the US economy moderates policies become more in sync the the differential between the u.s. Versus the rest of the of the global markets and given the outperformance maybe with the exception of the last few days of the US market versus the other Global markets. It's just a more balanced opportunity in 2019 than what we saw this year. Yeah, and relatively the u.s. Is still way ahead of other shirt for the year. So, yeah. So what?

Given Derek's going to Outlook going forward we won't talk about what fair value of the market is right here, but it seems like we're much lower than that with that type of GDP growth Outlook going forward and what are you expecting for earnings next year? Right? So obviously there are a range of outcomes and we're in this Mac this period of Maximum uncertainty. We don't know what will happen. We're at policy inflection points. There's a lot of uncertainty with respect to trade confidence is coming off high levels. I think we'll we'll learn a lot more in the next month when we hear fourth quarter earnings reports and management commentary, but but certainly there's a there's a ratcheting down of growth and expectations, but the market is anticipating that and talking about that if you think about in terms of context if if we don't go into a recession, which is what our view is and there's some modest level of earnings growth. We're trading around Fourteen and a half to 15 times.

Right, you know 14 and a half or so in the S&P 500 if we have so in that environment as I think about it, it skews the risk-reward skews positive in my mind. It wouldn't take much to have a much more positive outlook. If we get some type of I think we come at the fed and the markets expectations become more aligned they pause more explicitly and we get some progress in terms of trade negotiations and it's at becomes evident that the global economy is just in a sustained but you know, maybe slow growth path it and no recession. I think the market could rebound meaningfully. So, you know on our base case is that the market will will have positive returns and it wouldn't take much to get double digit returns from this setup. We've I think we're about 15 percent off the off the highs and some P the NASDAQ is down 20% or so as we speak today. So the expectations are for a lot of slow down and a lot of rain.

Mrs. I think and I'm in a much more difficult environment. And so that could happen certainly and if and if we do in a recession, then it's going to be tough sledding for a while. But our base case is that we won't have that environment Gil. You mentioned some I conductors earlier. But I mean there are some sectors. It's been absolutely crushed. And that's one of them week met you how are you thinking about, you know, looking looking within the market and the sectors that have been hit hardest and what what makes the least amount of sense to you when you look going forward. Oh, there's been some like Machinery is an area that has been absolutely obliterated. That's that's worse than week. Yeah, and so from that perspective there is still some organic demand. There's still some Global growth that some of these companies that can participate in and this is where it's almost been unilateral damage like independent of you know, there's some a companies and Innovation taking place.

No in every industry in every sector in this is I think going to be a better window for us to find some of these Pockets, you know from that perspective. That's a narrow space continues to be, you know, strong, you know within technology you have we just talked about semiconductors, but you know, you look at some of the software names and some of the the mid cap perspectives and some of those they've just been you know, the software as a service model very attractive recurring Revenue high-margin good visibility down, you know, 40 50 percent and you know with that window of high growth, you're not going to be at this slope. You're going to get this slope down 50. Okay, maybe there's an opportunity there. So there there's some Pockets where you know, you have some visibility into the future. It might not be at the slope you once thought it was but it's better than potentially where the stock prices and by the way some of those especially in software sectors with disability in the future of finally really get to be sold off. So maybe

Maybe that's the end of this we can hope well and you think about what they're offering they're offering more efficiency for companies. They're offering companies to become more productive and that's what they need because they're operating broadly Opera me operating margins are pretty high. And so this is an Avenue for them to maintain that so from that perspective. They're what they're offering is appealing to companies and necessary. Okay, we mentioned both the and developed markets as we look at both right now. Do you think there's an advantage of one or the other and I would ask them in bond markets to or developed International versus domestic or emm. I'm not sure I don't have high conviction that when I when I think about I think there's opportunities that are Brewing across the globe when I think about the u.s. We've already discussed some of the opportunity there and what people don't forget that corporate tax reform was real and the deregulatory initiatives that the

Current Administration is undertaken are real and so the long-term competitiveness of us corporations is greatly enhanced. And so that's a positive especially given the market pullback valuations are more attractive than they've been in some time. But but I think when I think of like developed International markets, I think that the the disparity of the growth rates that we touched on earlier has going to be narrowing and so the international markets have under perform significantly this year and now is their growth rates are a little bit more competitive and closer to the US. I think there's probably some opportunities there selectively and on the eem that probably in my mind has the most upside if a few things go right because that that sector are that asset class is really under perform significantly, although it's acting better more recently, but it also is relatively inexpensive in terms of valuation and on a longer term basis had probably has the highest upside in terms of long-term growth opportunities, but it's going

Have the highest Beta And if the world is, you know, people are really worried there that's going to take some time for those opportunities to develop but if a few things go, right that probably has the most upside. So as I think about it, I think there's opportunities really across the globe. Okay with the global bond market. Well, I like the we already talked about market in terms of local currency with regards to just US dollar credit, you know terms of credit overall. I'm more negative than I am positive. I still think we have some sloppiness in the market that we have to take care of. So, I'd look more domestically and if I'm thinking domestic, I'm looking more in the terms of what's insulated potentially from the global markets that could be municipal bonds. The technical factors behind many bonds are fairly favorable. If we don't roll into a recession, I think that Muni bonds should do well if you're thinking about with my neck.

Too biased towards credit you would be looking at maybe government security funds that may be longer duration. And then you know, my favorite point on the curve is that 2 to 4-year area and picking up investment grade type of credit. So if we're looking at maybe some of those intermediate, you know lower duration credit funds but on the global front, you know credit is credit and if it's US dollar based and I think that it's going to be a little sloppy here in the first quarter for sure. Okay. I've noticed everybody's been opening their their sentences with if we don't have a recession so it is all coming down on you during of course. Yes. Absolutely. We've got a few questions. I want to get to I don't want to run out of time without answering some of the questions, but then I'll start with probably your favorite one filled you I mean, we've talked a little bit about it and we would expect the SMP things go right through we hire an extra as there any level you're looking for or is it just well, I'm not

Enough to predict the market obviously, but I probably feel more especially given the sell-off at year-end from these levels. It just feels like the risk/reward is more positive than it's been in some time again all contingent upon Derek but I would say, you know at 14 and a half times earnings and positive earnings growth. That's a favorable environment, especially given the level of of rates that we see today and it really as I said earlier. I don't think it would really take much to get a more positive sentiment in terms of you know, I think trade is a big part of it and kind of Central Bank policy and that type of thing but I think it's, you know, a double-digit return for the S&P 500 in my opinion if we get if the our forecast holds is not out of the question, so I actually am more upbeat today going forward now, it could be a rough few months and The First beginning of the year is going to be tough, but

I've been doing this a long time like everybody here and to me it really pays sometimes to step back and just take a longer-term view. This is a great opportunity to reassess and rebalance and stick to your plan and and take a longer-term perspective the market commentary it's hard in this environment when your blasted with CNBC and the headlines and everybody is commenting on yesterday's news, but the real opportunity and money-making in the markets is when you step back and take a longer-term perspective and I think these opportunities this level of volatility, which is I think some we're going to have to get used to because we got spoiled it a long extended period of low vowel and I think we'll have to get used to this environment. But if we stick you take you know, do the fundamental work stick to your plan. I think they'll be real opportunities longer term. Okay, I'll gild we were so from the discussion on picking up that did you know we're kind of looking for maybe Mark is to find a base sometime in the spring.

And earnings estimates revisions to get wherever they're going and then we can kind of move forward from there. You know, this is kind of been we've been describing where we are is kind of late cycle. Do we get into like a more early cycle environment after that happens. Do you get the riskier assets start to move there to get to an early cycle? You got to finish this cycle and the finishing this psycho wouldn't matter what have to be wrong. It's like yeah. Yeah, I hear you. Yeah, you know as as we said there's some asset classes that seem to be finding a base and some of those are more cyclical in nature obviously energy is is independent of that given its own current Dynamics. But when you also look at what's going on with respect to December particularly, it's very acute pressure. And in this environment what the analysts are kind of excited about some the portfolio managers is you know through this other, you know coming into the year and through the year. There's some very high quality companies that were

Really expensive and really not worth the price. Let's say they've come down and so we have the window where we can get more recurring Revenue companies. We can get companies with secular growth drivers that met on the margin may have been a little bit more expensive for us today. Those are a lot more appealing and you know as we look potentially into our slower environment, they'll be of the sustain their multiple possibly better than others. Let's sectors are we looking at more positively than others, you know, as I mentioned software as a service is an area you have you know within Healthcare, you know, there's always Windows of opportunity with for drug Discovery and all the research that takes place but they're often binary events underneath that though. You have service companies you have instrument companies you have bio companies that are you know, providing the tools and services for that drug Discovery so you don't have the risk of

Particular event, but you're you know supplying you're providing the picks and shovels to the gold diggers. And so you don't have to worry about whether or not that mind hit you got your money for the pic. And so there's some of those that are taking place underneath that have come down pressure on those are global global type opportunities as well. Okay. I've got a question from Dennis. It's going to push back on you a little bit Derek as the economy really that fragile that just because fed pulls the punch bowl away from the party we go into a bear market. So what is the what is the influence of drawing liquidity out of the system and how does that pretend of the market? And so I would point to two things one is obviously as liquidity draws down. There's more credit rattle rationalization, right? And so again going back to what I was saying earlier some companies that that were dependent upon the Easy Flow of money start to struggle. The second thing would be

As the FED has hiked the yield curve is flattened. And that is the primary driver of the yield curve in my opinion. And so the yield curve today is Tuesday tens is 10 basis points. Right? And so that creates a tremendous amount of angst in the market that are we going to invert because if we invert then it's going to cause problems and you know, so that whole dynamic I think is another factor that we think about from the FED as well from a more near term macro standpoint. You've seen a clear slowing in the housing market because of rate hikes and the fact that the flash to Bang from, you know rates going up a little bit to mortgage rates hit and now you've seen housing starts new home sales just be quite weak I think is a testament to the

The easy money going away and how that influences different parts of the economy. If you will, I would just add I think that question is a common One In A lot of people are asking it as I think about it. I think it's really less about the 25 basis points in that tips the economy. I think it's more about the the inference and the implications in other words. We've been height they've been hiking and trying to normalize for a period of time that like we talked about the economy is already slowing. We know there's a lag defect with previous hikes. So why one more when you're already slowing and in so I think the market looks at that and says that's a that is on the verge of misinterpretation of policy or policy mistakes. So it's more about the messaging. I think than the absolute level of a 25 basis point hike if that makes sense perfect sense, you know a question about politics, you know, we haven't really talked about geopolitics today and in

But we've had quite a few elections around the world recently some maybe not so favorable. Can you talk about the biggest geopolitical events and how they're going to shape investing going for and I think probably that the biggest case there's Mexico Mexico. So we had em low be elected one of the first things he did was he held we'll just call it a referendum. If you will the very small number of people and they're building the second airport in Mexico City said I'll do what the people say. They say. We don't like it which he the referendum itself was kind of bias towards who they were asking. So he says we're canceling the airport which everybody said, we'll wait a second, you know, it's a

Multi billion dollar infrastructure plan that's already partially built but he spun it as its corrupt and what have you which its Mexico right some but then he says we are going to have another number of these referendums that are going to deal with different areas and all of a sudden everyone is worried about how far left is this guy? Because he has been in politics in Mexico for decades. Yeah and has always been mayor of Mexico City has always been very leftist in his views and the fact that he's now running the country people are worried, you know, is he going to nationalize different parts of the country and we had the energy auctions for oil that had taken place is going to pull those back. He says no, but you know, who knows at some point in the future. So we're we're very worried about growth in Mexico because of the implications for business investment because in that environment when it's so uncertain where you have someone that

Can pick and choose which Industries are going to be part of the government or which ones we favor? That's just not a good investment environment. Right? So we think growth is going to slow a lot because of capex. The other geopolitical event that I would point to that. It was not necessarily an election right now is brexit, right? So brexit, there's a lot of fears on that. We think that getting from here to a brexit resolution is going to be a very messy, but in the end there's going to be something in our opinion something done that says that we don't have what's called A Hard brexit, which means they just fall out of the European Union with no agreement causes a major recession. So on and so forth. The reason that is is because if you look at the the UK Parliament the majority of parliamentary members are actually pro-eu and so the last thing they want is a hard break from the European Union. So we think in the end when it comes to crunch time and they say

Do we leave the European Union completely and have a catastrophic event or do we you know put aside our differences and do what's better for the country itself. They come together, but again getting from here to there is probably going to be difficult. Okay in the question that Drew me to to that question I asked you was about the extension of the budget President Trump says may not sign that now wondering if they're going to be implications to the economy and markets because of the yeah, very small. So they've already passed 80% of the budget for next year. So you're talking if we have a government shutdown. It's going to be very small pieces of the government, you know.

In the end we've had shutdowns before hasn't had an economic impact. This is more political saber-rattling trying to get his way. So we don't think it's an economic impact whatsoever. Okay, Gil. We've got a question and it's a good question because we haven't touched on it and it's one that you know, it seems like most people on the street have been very positive on the banking sector for a very long time and it's one of those sectors that has been pummeled here recently. What do we thinks going on? There was our Outlook there. Well, you had the real, you know, they went up on as Phil mentioned to regulatory Improvement and yield curve expectations. And then when those kind of turned around it's made it very difficult in the you juxtapose credit questions. It's particularly challenging underneath that though you have, you know fintech spending.

You know all your you we are going to engage in more Commerce online. So there's still pockets of opportunity to participate within the financial sector without owning a bank per se but you're absolutely right. Those have been particularly challenging in the in the view until we get clarity is possibly going to still be kind of money. Okay. I was just going to say the regulatory environment is going to be a lot different to under the new Congress, right? So what was a lot less regulation could we call it ours little more laissez-faire? I think it's going to be from listening to some of the commentary from the Maxine Waters chairwoman. It's going to be more stringent. Yeah. Yeah, it's good point oil any comments on oil. I mean, it's another thing. I mean when you look at Global risk assets, it's one of those is just saying there's nothing good ahead of us. Not much with Supply demand problem. What are your thoughts there? Well, I think it's hard to say. There's nothing we could head of us. That's I think an

Tation of where the price is but you also need to look at what's the there's been incredible Innovation within the energy industry and the cost of break even used to be at a deep water break even in the Gulf of Mexico or deeper. Now, it's the cost of Break Even in Texas, you know, so you've had like almost a having of the break-even price. So it's hard to completely interpret the price of oil to a demand issue the the ease at which Supply can be changed today at at a much lower cost I think is kind of change the equation and so I think the markets really trying to figure out where that balance is. How much is demand how much is Supply and obviously it hasn't worked out yet. It's still trying to find a base where that's not going to continue. Okay, I would just yeah, so it's cost efficiencies on the technology and production side that the whole build out of the Shale oil, too.

Rustic place. So the u.s. Is now the biggest producer and Opex influence on the price of oil is just a lot less today than it than it used to be and I think without a stronger global economic growth Outlook. I mean, it's part parts supply issues, but it's also part demand. That's what the market worries about. And I think we need a stronger global economic Outlook to probably put up more sustainable positive spin on the price of oil. What's the price of oil having the effect? There's a very high correlation with oil and high yield spreads. Yeah and the high-yield market on the energy side is definitely been hurt by this decline in the commodity itself, but the high-yield market is actually hung in there a lot better than what the equity markets have. And I mean we have we have seen weakness, but you would have thought we would see in the lot more weakness in the aisle the market and the high-yield market is just recently starting to show that weakness.

But I think primarily a lot of that is because most of the issues that we have seen in the high-yield market in the last year year and a half is in the leveraged loan side. The man hasn't been in your traditional cash pay, you know term loans or coupon bearing Securities, but we have started to see some weakness in the leveraged loans. I mean wands that were trading at par, you know part and a half 101 or now at a discount which doesn't seem like a lot but it is a lot in in that part of the capital structure. So that weakness has now started to spread into the Cash coupon bearing security so might like I said my expectation is that we're gonna have a very sloppy first quarter of next year in the credit markets because we have not seen the type of weakness we have on the rate market and we have seen the tenure come down fairly significantly, but just in terms of credit spreads, you would think that it would be a lot wider than what it is.

And I think with the question about loyal and high yield, I think people look back a few years ago and see what the effect that the companies are a whole different financial situation. Like he's already talking about breakevens, but just the leverage that we're on some of these high yield. Yeah companies that are participating. So when you had oil go from one tandel 240, that's a huge Delta and if they're built on if their balance sheet was built on $60 oil then, you know the right it was going to be ugly and it was and that and that actually did affect the whole high-yield Market because it didn't it did spread it to the other Industries and we really haven't seen that yet. Okay. I got a question. I'll stay with you mark. What kind of events are you looking for? That will lead to a calming down in credit markets?

Well, obviously, I think if you get a comment on the in the on the equity side that would calm down the credit markets as well.

You know, we've got to see this. I guess this Chinese spring I guess is what's going to was how you going to label that but

You know, it's going to be right now. We're playing for liquidity. It's like is there going to be a demand? We haven't seen a lot of withdrawals out of the investment grade high yield markets. We see in some withdrawals of the ETF markets. But if we do get a demand on credit, I mean if we get people taking money out of the markets, then it's going to continue if we have people look as this an opportunity and put money in there. Then that should suppress some of the concerns, you know, traditionally january/february is a very high new issuance market. So we're going to get a lot of issue coming down. So we're going to have to digest that in a market that I think is going to be fairly volatile and you'll high yield spreads a to me and might not be true. But they seem like they've just been unusually tight for the economic conditions that we have and part of that maybe QE or whatever but there's a well where I'm from relative spreads or know. I we talked about this I think back in June but it was a technical basis is

So the new issuance was coming in the loan Market because there was a demand for floating rate Securities because you thought the Fed was going to continue to raise rates you want to get something where you would you know, continue to participate in that and as the FED raises rates your coupon and increase so there was that Adam and there's a lot of CeeLo being made and so that that issuance took away from your traditional coupon bearing security. So there was actually a kind of a scarcity value for those and so that's why you had spreads maintain where they were or at least didn't have that volatility that you just started to recently see. So in terms of the fundamentals or whatever, I think it was more of a technical basis than it was a farmer. I mean the fundamentals are still good back a year ago. I mean, we're still going pretty good. We still had good economically the tax cuts were just were starting to come through. So from a fundamental basis, I think we're OK from a from a technical technical standard. I think we

Really good, and then it's a domestic market. So all the deterioration that we've been witnessing out in the global area. We weren't quite seen it yet in in the domestic market. So it was kind of best of all worlds right there. You have an outlook for high yield for 19. You say you're not real possible. I think I still have that positive on credit right now. No, I still think that what we're seeing in the equity markets really has not translated into the credit markets as much as I would have thought so I'm defensive and I've been defensive for a while, which is fine. I still think that you would want to be up moving up in quality for sure and I still think that you want to be extending duration, which is exactly what we've been doing over the last six months. Okay?

Derek pal indicated that they look at the statistic only to do with the USA. Do you think they should also be looking at world GDP statistics and I think he mentioned that what was going on and around the globe was was an important factor in what they're doing today, right? So the FED primarily focuses on what's happening in the u.s. Obviously, but they do pay attention to the rest of the world. And if the slowdown in the rest of the world is significant enough to cycle back into growth and inflation expectations here in the US then they start to worry about that. And I think that's one of the things that he is talking about right? It's a it's a more uncertain global environment that is causing more uncertainty here in the US as well. And then therefore we need to pause, okay.

The next year that's fifth credit gets more expensive but a lot of them in a recently. I've seen any numbers put out for projections yet, but I think it's obviously gonna be a lot more challenging with where the credit markets could potentially be. But you know, I'm I wouldn't take it off the table. I mean, there's definitely an incentive there for some people to get it done. Yeah. I mean what the pricing in loans and going doing what they've done for the past couple of months is I mean, would you expect that to hurt m&a to? Yeah. I mean it'll hurt the economics of it. And yeah, they'll do it until it doesn't work. So that's the way that I don't think we've priced it totally out of the market. Okay with respect to the equity Market, there might be more ma from the perspective of the credit might be a little bit tougher to get but prices are cheaper growth will be tougher to sustain and

Way to sustain your margins potentially. So on that side, you might actually see more are there any sectors that you that you were looking at the maybe we see more opportunity for an m&a than in others or

it's hard to predict. I'm an a from the perspective and it's never a thesis driver for an individual company. But when you look at there could be continued opportunities within biotechnology from the standpoint of some of the big farmers or cash-rich not a huge pipeline ahead of themselves and they might you know find pockets of opportunity underneath them at a reasonable price more. So today than in the past. Okay? Okay get one final throught thought from you Phil.

Given where we are given What markets have done lately and kind of this Outlook that we've given today? What is your stance on being a little bit more defensively in your portfolio or or should you be shifting now to be a little bit more on the offensive side given where we are. Yeah, I think it's a good opportunity to think gradually think more offensive. Ly so I think there's an opportunity. I don't think you need to be in a rush, but I think if you take a longer-term view, this is really the these are the times where presents opportunities, you know, Mark mentioned quality within the fixed income space. I think you can you can think that way with inequities as well. So there's a difference between high and low quality within the equity space. So there are high quality companies that are getting brought down with the market but their longer-term Outlook is very stable very strong. There are a lot less economically sensitive than than

With their stock prices are behaving they've looked expensive most of the time because they have attractive growth or you know, so those are the in people haven't felt comfortable owning them. So those are the opportunities that begin to present themselves. So I actually think you know, I don't know one smart enough to predict the timing and when it happens, but I'm actually a little bit more optimistic than I've been in some time in terms of opportunities. So I think it's a time to start gradually thinking more offensively, but you can do that in a way that's very measured and pragmatic and consistent with your long-term plans and rebalancing and that type of stuff and you can also do it by looking at higher quality issues versus lower quality. So I think it's an opportunity. I think these are the these are the markets that present longer-term opportunities for sure great and with that we're out of time. Thank you all we had a lot of great information today. I appreciate it.



Several technical terms and acronyms were used throughout the recording. EM stands for emerging markets. FOMC stands for Federal Open Market Committee which the monetary policy is making body of the Federal Reserve System, the central banking system of the United States of America. NASDAQ is an American stock exchange. Beta indicates whether the investment is more or less volatile than the market as a whole. S&P 500 is an American stock market index based on the market capitalization of 500 large companies having common stock listed on the NYSE or NASDAQ. Fintech are computer programs and other technology used to support or enable banking and financial services. QE stands for Quantitative easing, also known as large-scale asset purchases, is an expansionary monetary policy whereby a central bank buys predetermined amounts of government bonds or other financial assets in order to stimulate the economy and increase liquidity. Delta is a ratio comparing the change in the price of an asset. GDP commonly known as gross domestic product is a monetary measure of the market value of all the final goods and services produced in a period of time, often annually or quarterly. M&A known as mergers and acquisitions is the area of corporate finances, management and strategy dealing with purchasing and/or joining with other companies.

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