COVID-19: Special Edition Market Insights

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  • 14 mins 28 secs
In this roundtable, MFS leaders deconstruct the economic, company fundamentals and business disruptions resulting from the Coronavirus outbreak.

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Market Insights COVID-19 Video update

Title: COVID-19: Special Edition Market Insights Video

Jon Hubbard:

We're recording this special edition of market insights in response to recent market volatility across both the equity and fixed income markets as they react to increase news flow around the coronavirus and it spread across the globe. As with any healthcare crisis, our first concern is the human toll this takes and we know that healthcare organizations and policymakers are working hard to address this issue. What is different from this outbreak compared to others in recent years is the lack of containment and how quickly it spread across the globe. And this has real implications on global economic growth and financial markets. So I'd like to ask you first had a CIO of a global investment manager, how do you protect our primary asset, which is our people? And what steps does MFS taken during this time?

Ted Maloney:

Sure, as you say, our primary focus is and always will be on our clients, but we can't deliver for our clients unless we take care of our people. And we built an investment culture that really focuses on taking care of each other in order to take care of our clients. So that is our primary focus is making sure that our people are safe and then in the best position to deliver on behalf of clients through any market. But certainly a market that's been as volatile as it has been. One thing that's really helpful to us is as a global firm, we're structured in a way that allows us to be nimble in environments like this because we're working really 24 hours a day with each other to communicate around the world. And in order to do that, you need to have flexible work environments. So we've been working on this for years as a way to just be better global investors. It does have the benefit of if you need to have people outside of a specific office or move to a different region, we can do that in a somewhat nimble way in terms of how we deliver for our clients.

Jon Hubbard:

And you know, now that we have a global footprint in terms of our global research offices and our client offices, uh, how does that communication happen and how do you make sure that there's continuity and fluidity in times of crisis?

Ted Maloney:

It's interesting. Again, it happens in roughly the same way it happens through the course of normal business. We are constantly on video conferences with our folks around the world, whether they're sitting in conference rooms like this in one of our nine major investment offices, or they're sitting in their home office, um, because it's late at night, early in the morning or in this case because it's deemed to be unsafe to be in the region of our offices. So that's the day to day communication collaboration that we do. But then we're also working on emails. Uh, we're working on the old school telephone, um, doing, doing what we do to make sure that we're in touch with each other and make sure that everyone's safe and everyone's in a position to deliver for clients and then analyzing the risks that are presenting themselves and importantly the opportunities that are presented themselves in the market.

Jon Hubbard:

Yeah, for sure. So I'd like to go to Eric here and ask a question specifically about some of the global economic implications here. So, uh, many are describing, uh, the recent spread of the coronavirus as both a supply shock where a company is going to face disruption in their supply chains as well as the demand shock where social distancing travel restrictions we could demand, particularly amongst the service sectors like hotels, restaurants and airlines. Um, it could be a drag further drag on global economies. Um, how do you think polymath policymakers are going to be able to address this type of shock?

Eric Weisman:

So the great thing about this is we get to go back to our macro economics one Oh one book and we can look at curves, supply and demand curves. And I think there are other instructive here you have a supply curve that's shifting and you have a demand curve that's shifting in an unambiguously, you're going to have quantity that's lower. That's basically our way of saying that real GDP is likely to be hit. What happens to prices is somewhat ambiguous, although the market right now is seemingly telling us with narrower inflation break even spreads and inflation swaps that are lower that so far. Uh, this is disinflationary policymakers. I think, uh, we'll be challenged here. When you have a supply shock, it is not easy to address. Monetary policy can be most nimble and we'll see central banks that will cut rates for sure. That's not going to help on the supply side that much. So if you cannot get an input to your production, uh, having lower interest rates is not going to help that very much. On the demand side though, it could help to boost economic activity around those areas that are getting hit the most. So it may allow companies, uh, to be able to create a bridge to the other side of this. And again, while that doesn't help the supply side that much, uh, it could help us to get where we need to be as hopefully this is resolved sooner rather than later.

Jon Hubbard:

Right. So you do think that this will be a drag on global economic growth without question. Okay. And I'd like to pass that over to, uh, to Rob to, to further unpack that a little bit. So, Rob, we've talked a lot over the past few months about uh, margins being fairly extended in the United States. Uh, valuations being quite extended as well. The S and P 500 was trading at about 22 times trailing 12 month earnings coming into 2020. Uh, and the continued growth in earnings, it's going to have to come from someplace. It's gotta be revenue growth. Right? Right. So if there's further economic weakness, how do companies navigate this environment?

Rob Almeida:

Well, I think if we simplify it and just break it down, the three things that matter, it's units, price and margin. And Eric talked about two out of those three. So if we have a supply shock that's going to affect units, if you have a demand shock, that's going to affect price, that combined is going to lead to lower margin. Assuming that companies can't continue to find areas to cut costs, can't continue to leverage the balance sheet by backstock can continue to enhance their working capital. So heading into this as we've talked about, not to revisit our narrative, we don't have time in the short podcast, but our belief has been go into this, you had risky assets on balance in the fourth or fifth quintile. And so you had elevated high, maybe not excessive, but high valuations on the backdrop of what was fairly, what we would argue, frail or weak fundamentals. So zero to one to 2% profit growth in 2019 and to your point, the street was expecting something more like eight, nine, 10%. I don't think we're going to see that. And I think the markets are recognizing that.

Jon Hubbard: 

Right, right. So Ted, let me ask you, so adverse unexpected shocks to the market and to individual companies are bound to happen regardless of the economic backdrop. So how is our investment team thinking about incorporating potential shocks into their overall fundamental analysis on a day to day basis?

Ted Maloney:

What Eric and Rob just talked about are things that we know for sure economic growth is going to slow down in the near term. That's going to lead to slower top line, negative top line. Um, decelerating margins, contracting margins, um, that's been pricing in the market and that gets priced into the market just about immediately. And so that, that's what you've seen over the last number of days and weeks. Um, our job is to think about the various scenarios that could come out of that. So how long will this period be? We don't have answers to that either. But what we do is we look at scenarios if it's, if it's this long and this deep, what does that mean for these stocks in these bonds? If it's this long and that deep, what does it mean for these stocks and these bonds? And then what, what probabilities do we sign to them?

Ted Maloney:

And we change those probabilities on a daily basis as we get new information and analyze it. And so, um, our job is always to look out beyond what the market is discounting. And so while we certainly don't enjoy the, the circumstances that led to the markets that we have today as a, as a firm, we are built to be able to benefit our clients as a function of volatility like this because the longterm fundamentals are a lot more stable than the markets are from, from day to day. So it change in a market price from a day to day basis. If we've got our longterm fundamental analysis, correct truly means a change in relative value on a day to day basis. And so we need to make sure that we're constantly assessing what that, what those long term fundamentals are and they do change and they do evolve. Um, but if we get those right more than we get them wrong, then the market prices that we are given are opportunities to either buy or sell securities for our clients. We try to maintain a culture of calm, rational analysis of that on a daily basis and take what the market gives us in order to benefit our clients. Right,

Jon Hubbard:

right. So it sounds like it's more important now than ever to really understand the inner workings of a company, of a security that you're gonna be buying. And to understand how their supply chains are structured, what their customer base looks like, how well diversified they are in terms of revenue stream. So how did the analyst teams come together to make that analysis and assessment?

Ted Maloney:

If you're doing that analysis now you're way too late. So our, our analyst teams have been working on this for years. Our entire global research platform has been working on this for years. It's our job to make sure that we understand how our companies work, how the global supply chains work, that they operate within in a crisis. Then we need to assess what could have changed within that. If you're starting from scratch and trying to figure out how this all works, you'll never be able to take advantage of what's happening with the market. Exactly right. So, but to answer question then, as as facts do change, we're communicating around the world, across the asset class structures that we have, um, to make sure that we're doing the scenario analysis, okay, maybe we got this wrong, maybe this is work turning out a little bit worse than we would've expected. How much worse can it get and what's being priced in it's to what's being priced in part. That's always key and sometimes gets lost in a lot of the hysteria that goes on in markets like we had today. Right, right. For sure. So, Eric,

Jon Hubbard:

um, if we think about looking at economic data and how it ties back to, um, impact from the coronavirus and implications, what data points will you be looking at? What data sets do you think are most important to assess how quickly this is spreading around the globe and how it's actually impacting economic growth?

Eric Weisman: 

So if you look globally, you know, we have these PMI measures that come out monthly and look at manufacturing, look at services, you know, unfortunately that happens with a little bit of a lag. And it's really just a sentiment indicator. It's asking you a question higher or lower or zero or one, did you see more activity? Did you see less activity? So it's not as straightforward as you might like, but we do get that from an awful lot of countries and it allows us to aggregate it and get a sense as to what's going on globally. Uh, you can look at, um, confidence measures as well. You know, usually those match up and Ryan pretty well with what consumers are going to do with their income. But just from a U S centric point of view, the best data series out there by far is initial jobless claims are weekly.

Eric Weisman:

They're almost never revised. Uh, you get them in a timely fashion. They're usually only a week behind the actual activity. And if we were to see those rise markedly from here, I think that's a very powerful signal. Of course, if that is the case, uh, we'll already be late. So the market's gonna react before that. This will validate perhaps a market view. Um, and it's usually the case that off of a bottom of the kind of a cyclical bottom, if you see initial claims rise 25, 30, 35,000 in a fairly short period of time, that may be a signal that you have to start your clock to thinking about job shedding, uh, income growth that's declining. And all of those things tend to precede a recession,

Jon Hubbard:

right? So there's a tie between those initial claims, race of unemployment, retail sales, consumer spending overall. And you know, once that starts to get incorporated into the economy, uh, then you start to see a real slow down. Right?

Eric Weisman:

Exactly. And to Ted's point, you know, what we're struggling with here in wrestling with are these different narratives, is this a V shape recovery? If it is, when does it start? Is it a U shape recovery? In which case we have a while to wait, but we're not going to necessarily fall further. It's just sort of moving sideways and meandering until we see a bounce back. Is that an L where you don't get the bounce and anL can probably only last so long or is a recession. So the narratives are changing daily. The narratives are changing based on a battle between the amount of stimulus that was already in the pipeline before the coronavirus became an issue. The stimulus that has been provided since the Corona virus has been an issue and then the weakness that we have seen as a result of economic activity having been hit. So is there enough in the pipeline to cushion the fall? Is there enough additional stimulus, both monetary and fiscal to cushion that weakness and will that then get us to the other side such that we see the other side of the you where the V or is it just not enough and the coronavirus and its ramifications are just so powerful that we wind up continuing to weaken and then fall into recession

Ted Maloney:

and then there's even questions that that STEM to the secular beyond that, which is what does this mean for the global supply chain over longterm? We've been in a multi decade trend of increased globalization. That has been a significant tailwind to growth globally while also being a headwind to inflation and being a really nice cocktail for asset prices. And so if that, if anything that's happened in the last couple of years, geopolitically combined with anything that's happening with the virus today, where to permanently reverse that, that's something that will have real indication for asset values that we need to think about even beyond the depth of a recession or the avoidance of one.

Eric Weisman:

And we've been talking about globalization. We spent a lot of last year talking about how globalization was not prepared for the rise of trade barriers, whether it's through terrorists or non tariff barriers. We've seen, you know, tariffs that have declined for the last 40 years. This is a global economy that's not made for rising trade barriers, but that's what we saw in 2019 we also now I think are much more sensitive to the idea that when you ship things around the world 12,000 miles, that it can be quite polluting. So we're trying to minimize that. We're trying to bring supply chains back home. There's also, I think this realization that as a result of global climate change, we may wind up seeing more weather events that hit ports where we'll see container ships that have to travel longer distances in order to avoid storms or whatever it is. So the number of items that we can now enumerate as to why globalization perhaps had gone too far in terms of goods a is now suggesting that perhaps we need to rethink that and these global supply chains need to be closer to home in order to address some of these concerns. As you bring that to the

Ted Maloney:

micro level, it has real implications for winners and losers in companies, in economies and otherwise. And so that again is what our job is, is to make sure that we're asking those questions, coming up with scenarios for what the answers can be and trying to value the results.

Eric Weisman:

Right. So, so Rob, I know we've also talked about, uh, how companies address this whole idea of being overlying on one country or region for their supply chain and

Jon Hubbard:

what they can do from a strategic standpoint to better navigate when they have either trade barriers or restrict your trade and travel. Um, so what do you see companies being able to do? What levers can they pull now? Um, if they want to either shorten that supply chain or change how they're dealing with their suppliers.

Rob Almeida:

This might not be a direct answer to your question, but if I listen to what Eric and Ted were just talking about, if we aggregate that up to a higher level, it's why it's so critical to look at the world and look at investing through multiple lenses, right? So if you look at it strictly through a top down or a macro economic lens like Eric described, you might be late. And as Ted described, if you're looking at it strictly through a micro or bottom up lens, it might be hard to see the forest from the trees, so to speak. And so it's so critical if you're talking to let's say leisure analysts, whether it's in credit space or equity space, I cover hotels and they're seeing lower rev par revenue per available room in their space. Does that align with what Eric is seeing at a macro economic level and what sort of signals do those sentences?

Rob Almeida:

So it's just so important, um, to collaborate in that regard because investing is hard. This is really, really, really hard to try to get a handle on what companies are doing, whether it's managing that supply chain, managing impacts from virus managing increased competition from online, whatever it might be. It's so critical because markets will send you false signals. We'll send you data that's really not indicative of truly what's going on. At the end of the day, what we're just trying to get to is what do companies do? How do they do it? Most importantly, can they keep doing it? Because that's what drives asset,

Jon Hubbard:

right? Really the sustainability of business models for sure. And, um, you know, as we think about some of these macro implications and the sustainability of business models, you know, we've also talked about zombie companies, companies that might not have good business models, but they've been sort of self-sustaining, um, by going to the debt markets. Uh, you know, when you have a market downdraft like this where there seemed to be a bit of an air pocket, at least market participants were treating it that way. Um, does that put these companies at risk for being able to go out and get new funding or be able to sustain their businesses for the long term?

Rob Almeida:

Good. We'll find out. I think if I think of the last 10 years, two major forces that have led to this. You've had obviously a, um, easy fungibility marketplace with low and negative interest rates in many places and you've had the growth of passive investing. So at argue there's two types of allocations of capital is indiscriminate allocation of capital where, uh, the entity that's allocating that capital isn't doing fundamental analysis and valuation agnostic. Then there's investing, which is underwriting fundamentals. And again, what does the company do? How do they do it and can they keep doing it? And am I getting appropriately compensated for the risks that I'm assuming, uh, with, with this asset? So I think about the last 10 years, the combination of these two things have distorted the natural selection and natural functioning process of markets in simpler times. 10 years ago, maybe farther back, we had a, a stock market where an investor would underwrite company's fundamentals. They would have a valuation lens. Now my valuation ones might be different than your valuation lens and your fundamental view might be different than mine, but we would meet in the middle. And that's where, uh, asset prices would clear. Today what we have is more of a market of stocks where baskets of securities are traded, um, in an indiscriminate fashion that I think has, um, perhaps unfortunately from our eyes allocated capital to those that otherwise they should not have. And these sorts of stress environments, um, should expose that.

Jon Hubbard:

Right? And, and in order to really invest in the manner of what you were speaking, you have to have a longterm investment horizon because you'll just get whipsawed around by this day to day market moves. So Ted, I want to ask you, uh, in times of market disruption, dislocation, how do you keep the investors within our organization focused on the long term and not have them chasing prices?

Ted Maloney:

Just like when we're talking about understanding the supply chains in, in times of stress like this, if you're dusting off your playbook to try to figure out what the supply chains look like, you're way too late. Um, if you're trying to get your team focused on taking advantage of short term volatility for longterm benefit to clients during that volatility, you're way too late. So we operate at all times to build a culture that is focused completely on the longterm risk adjusted returns for our clients. That goes through our evaluation and compensation system for all of our investment professionals are evaluated and compensated on the longest term time horizon that we think is appropriate for their asset class in their mandate. Um, which tend to be measured, which are always measured in years, uh, and, and in some cases, many, many years. And we also evaluate our investors based on how they work with each other.

Ted Maloney:

And a subtle benefit to that in times of crisis is that we want to build and we believe we have built an investment culture where in times of crisis people support each other, get each other's backs, and that allows you to be longterm. If you're worried that you're going to get screamed and yelled at or you're not going to get paid that year because something went wrong for a month or two or a year or two even, you're going to always be short term, you're going to revert to the, your human instinct to run away from the blinking lights on your screen. What we want to do is have a culture whereby you're supported to take advantage of those, of that volatility to invest for your clients. And if you're not doing that ahead of a time of crisis, you're never going to be able to do it during a crisis.

Jon Hubbard:

And that allows them to maintain that longer term focus. Exactly. Right. And staying on that theme of longterm focus, Eric, you've had a thesis for quite some time now that in the rates market we were going to see rates lower for longer. Right. Um, can you talk us through that a little bit and see how

Eric Weisman:

that's played out? Well, we got here a lot faster than I thought we were going to. So I've been saying for years that I thought that by the time we got into the next recession and we probably have it yet another jobless recovery, that we would wind up seeing 10 year yields that would eclipse the lows that we saw in the middle of 2016 which are around one 31 35 and we have done that a, this wasn't how I envisioned that it would happen. And one then has to ask the question, what might yields look like if this is not the recession? If we do get a veer, are you recovery here? And we see yields that rise higher, uh, but not high. What will they look like when we do hit that next recession? And I think there's sort of this window and now that's been open.

Eric Weisman:

So we've hit yields that are around 1%. So that will now be in everyone's mind. Oh, when there's turmoil, I guess yields can go to 1% and when there's great, great turmoil, perhaps they can go to even lower than 1%. And then we asked the question, how do we generate nominal economic activity? So how do we generate inflation? Uh, apparently we don't, uh, how do we generate, generate real growth? Well, you need bodies to do that. You need productivity. Demographics would argue that the bodies won't be easy to find and the productivity has been weak. This cycle, we'll see whether or not next cycle it's a little bit higher. And then there's this funny thing that we call the term premium, which is really our way of saying we don't know. Uh, but it's all the stuff we can't account for. But the term premium to the extent we understand it at all seems to marry up with these ideas of excess savings versus investment. And I think that theme isn't going away. All of this suggests relatively weak inflation, relatively weak growth, relatively low term premia and all of that has managed to get us here. And again, this is without us believing or the market believing that we're headed to recession.

Jon Hubbard:

Right, right. And if we, if we move from the rates market over to the credit market, um, you know, how do you think about credit availability in this type of a period of market disruption? So, you know, during the global financial crisis, liquidity was a real problem. Um, we've seen the fed come into the market in prior months, um, to provide additional liquidity in the short term basis. So how do you think about liquidity and the ability for companies similar to this question around zombie companies, but for companies to fund themselves and make their way through a period of economic downturn? Yeah, yeah,

Eric Weisman:

it's really, really hard. And so, you know, every market cycle is different, has different characteristics. And what gets over bought and where resources get misallocated and, but what we saw in Oh seven was excessive leverage amongst financial institutions. Um, and that has shifted towards leverage

Rob Almeida:

amongst corporations. And so we have the same thing, but different. You have leverage, um, and companies unable to fund themselves, uh, will companies unable to fund themselves with service,

Jon Hubbard:

right? Right. And a lot of these companies have, um, even though debt service has stayed low, they've sort of termed out their debt, right? So, um, what happens if we do hit a period of decreased liquidity and they're no longer able to either roll over short term debt or to term out, um, their midterm debt when they get to a period when it's due?

Rob Almeida:

Well, it gets back to what Eric was talking about earlier, uh, on the supply shock, but really on the demand side. So if ultimately you're selling widgets and you're selling widgets at X price, so if you have something that's disrupting how many widgets you're selling and, or disrupting, and how much you're selling those widgets for, there's less cashflow coming to the business. So we can argue that the debt service levels are low, well in relative space, low and absolute space, but it there's detrimentally or incrementally fewer dollars coming in the door and that ability to service that debt goes away. They're going to be out of business. So it's just so important, at least from our perspective, again, getting back to what does a company do that's idiosyncratic, that's differentiated, where their units perhaps aren't dependent on the global economy or really things that we can't handicap or foresee, but they have something that's truly differentiated that people are still going to pay for. Those companies can afford some level of leverage. Other ones that are dependent on things outside of their control, it makes for a tricky investment problem.

Ted Maloney:

It also comes back to time horizons again. So we talked about the time horizons for our investment professionals, but at the time horizons that we're looking at, management teams evaluate are critical to, and you've seen a number of management teams over the last number of years. Take advantage of both of very low interest rates, end of off balance sheet structures to take on a meaningful amount of leverage in order to do short term things, which could include buying back stock at an inappropriate rate. We have no problem at the right price in the right pace, buying back stock as a way to deliver returns for your shareholders. But you've seen companies try to game it on the short term in order in at the detriment of the longterm. And those companies will on average be exposed as well.

Eric Weisman:

And we should also make the distinction between, you know, the small companies that are going to fly below the radar. Medium size, large, large companies probably have more inventories, probably have more cash. You know, when you ask how many months can they suffer, it will be many months and perhaps it will even be years. It's the small companies, which in aggregate still wind up employing a third of the labor force, some more depending on how you want to define that. And then we about banks, banks are going to become more and more selective in this sort of environment. They're going to look at their favorites and will be perfectly happy to lend large companies whatever they want. They're going to be much less happy to lend smaller and medium size companies that perhaps are perceived as being of greater risk. And then that feeds back into this idea of, well when we see small and medium sized companies be forced to shed some labor and then we'll see it in the initial claims.

Eric Weisman:

So all of this stuff sort of ties back together. You want to be looking in a lots of different places. You want to look at lots of different data series at the micro level, at the macro level so that you can create a narrative that you hope mimics reality as closely as possible. Right. And in terms of the supply chain disruptions, will that hit the smaller companies or the larger companies the most? Or does it depend? Idiosyncratic. I think visibly we'll see the large companies, they're going to tell us they're going to have their calls and we'll get a sense of that. What we won't see as easily is how it hits those small companies. And that's where you look perhaps at the aggregate data and you do look at again, initial claims or things that are more likely to hit those small and medium size enterprises.

Eric Weisman:

So you won't understand exactly why it's happening, but you'll see the outcome of it happening. Right. And does it get important to look at things like, um, you know, the, the, the Knippa versus other macro metrics so that you incorporate some of those smaller companies and um, their successes or failures into account? That's right. So again, if you're focusing mostly on the S and P 500, you know, you're now focusing on an awful lot of the rest of the world, which you may or may not want to do. You're focusing on those large companies. You're going to miss out on a good chunk of, uh, you know, global profits or national profits or cash flow or whatever it is. You know, you'll have a lens that'll be tilted much too much towards large companies, which may be able to get through this quite a bit more easily. And then in our [inaudible]

Ted Maloney:

continued focus on extending our time horizon, looking beyond what the market is currently pricing in the scenario Eric just painted, where you've got a bunch of smaller companies laying off, lower paid workers leading to economic troubles and a bunch of larger companies getting bigger and stronger and better. What are the regulatory and geopolitical responses to that and what can that mean for all of the, all of the factors that we need to put into our models to try to value these assets.

Eric Weisman:

Yeah. And how do you, how do you get the investment team, you know, if someone's covering a small cap company that might be part of a larger cap companies supply chain, or perhaps there's a high yield issuer that's not in the public equity markets, how do those pieces come together?

Ted Maloney:

Yeah, I mean, it gets back to our culture of collaboration, global collaboration across asset class. So we have tools in place to incentivize that. But bigger picture, everyone knows that they're part of a culture whereby if you are helping your colleagues answer questions that you know that they need to answer, um, that you'll be rewarded for that. But that also you'll be rewarded for it in the form of a flywheel where you're going to get the information back. So we, because we have a culture where everyone is incentivized to help each other, we do have this flywheel where, where we can think, answer those questions faster and more effectively than the average market.

Eric Weisman:

A participant. Right. Okay. So that in our connectivity, that collaboration, allowing that communication across asset class, across the capital structure. Great. So, uh, Eric, you know, you talked about monetary policy, that's sort of the quickest and easiest fix here if things continue to, um, to be challenged from a global economic growth standpoint. So maybe if both you and Rob could address, um, if we have to bring fiscal into the picture, uh, maybe not just the U S but in Europe for example, or Asia, um, that could be a potential fix, but what other fixes are there from a, um, a global macro standpoint? Yeah, you've pretty much exhausted. That's a short list. Yes. The menu of options really. I mean, you can try and despoil your currency perhaps, but everybody else will do the same. So you could have currency Wars that's not going to help, you know, it is.

Eric Weisman:

You could try and put forward regulatory policy that helps to free up resources. No one's ever good at doing that during times of turmoil. So you're really left with monetary and fiscal and there's just not too many bullets left on the monetary side. And you know, we're always in search of the pristine balance sheet. And certainly the public sector, uh, does not have pristine balance sheet. So there are a few countries that have some room. Germany might be one of them. But if you look at debt to GDP levels, whether it's in Japan or the U S or much of the Eurozone, UK, there doesn't seem to be a lot of room. My guess is that the market's not going to punish these countries if they do issue more debt here, especially given that interest rates are so low and there is a demand for safe assets. Uh, and demographically there is a demand for the these safe assets will, that will probably persist for many years to come. Uh, but at some point there has to be an end game and one would think that you can't have a thousand percent debt to GDP on your sovereign balance sheet, but maybe you can. Yeah, we'll see. Right.

Rob Almeida:

And one thing too that, you know, Eric and I were traveling together in Canada a few weeks ago and we were sharing this with clients. Hypothetically. What if there was no stock market? What if there was no liquid capital market mechanism? How would institutions, companies governs municipalities advertise their quote unquote project and uh, entertain, um, your capital availability and your willingness to invest. And the things that would be discussed would be the viability of the project, the competition, the costs of capital, all those sorts of quote unquote fundamental metrics. Yet when we aggregate the up, we tend to under emphasize those things and we tend to overemphasize things like covert 19, uh, fiscal policy monitor and these things matter. I'm not dismissing them, but ultimately fundamental Trek cash flows, cash flows, drive asset prices. What does a company do? How do they do it? You get those right and you'll end up in a good place.

Jon Hubbard:

You're in a good spot for sure. And I know that you just came back from Australia, so as, as long as we're taking a trip around the globe here, um, you interacted with a lot of clients while you were on the road and you had a lot of discussions with asset owners and institutional investors. Can you share a little bit about what they're concerned about? What's keeping them up at night?

Rob Almeida:

The exact same thing. I spoke at a conference, very first question, what's the fed going to do in response and what do you think about it? So I, at least my limited observations, whether it's in Asia or Europe or in North and South America, all tend to be the same. Uh, they emphasize these macro externalities and they're important and I understand that. Uh, however, um, financial markets and economics can be two different things. They tend to go hand in hand, but 30% of the time or one third of the time they do not. So we saw a pretty significant financial market pain in 1987 as investors. Dot. They were Delta hedging their portfolios wrong, uh, without a recession. And then in 91 ish, you saw our in economic recession without financial market pain. So I'm not suggesting that they're mutually exclusive and they are linked, but I think at times we tend to emphasize really what's, what matters is profits and what drives profits. Obviously it's the cost of capital, it's fiscal policy, these things matter. But really when it comes down to it is what does a company do? Can they keep doing it? How sustainable are those cash flows and how much are you paying for that? Right? And that's what we focus on.

Jon Hubbard:

Right. And you know, this whole idea of, um, being able to neutralize your portfolio for macro events. Ted, I know you've thought about it from the investor standpoint as we're putting together equity portfolios, how do you neutralize it? Cause you know, the macro events are going to happen. Um, but you don't want it to cloud the judgment. As you think about creating a target price for security for example, how do you get folks to think about a macro neutral approach?

Ted Maloney:

We have, we're, we're under no false impression that we can neutralize macro factors. What we do think we do quite well as manage risk around, um, ranges of outcomes. And so, uh, we, I personally sit through risk review for every one of our strategies across equity and fixed income twice a year where we sit down with the portfolio management teams and go through, uh, some cases, 40 page document to slice and dice risk in as many levels as we can. And the the point is not to neutralize risk. The point is to manage it and all of the scenarios that we're talking about here today and some in some environments you get the opportunity to take, to take more risk at what you think will lead to better reward and where you think the odds are in your favor. And so we're not looking to neutralize risk.

Ted Maloney:

Where we do want to neutralize risk as much as possible is where we don't think we've got a proverbial fat pitch. So, uh, which has a lot of, to Rob's point, which is the case in a lot of macro factors, we're going to look at it in most periods of time and say we don't have a great view on that in periods of time where we do have a better view on it. We'll allocate the appropriate risk budget on behalf of our clients to get the returns that they need and deserve through a cycle. Um, but otherwise what we're trying to do is really focus on where we think we can add the most value and, and big picture speaking particularly in the equity markets, but also in the fixed income markets. Um, the closer you get to micro analysis, the more confidence we have in our, in our ability to generate alpha. Um, and so we want to just make sure that we're measuring and managing the risk across that spectrum so that we're not taking too much risk it in buckets where we don't think we have as much control.

Jon Hubbard:

So it's about risk identification and making sure that you're managing it appropriate to that mandate. Exactly. Right. Okay, great. Thank you. So, Eric, what really keeps you up at night?

Eric Weisman:

That's the circus of my imagination keeps me up at night. But, uh, I think the big question really is the role of capitalism. I think anyone who's in this business believes in the idea that capitalism is, capitalism is the best way to allocate scarce resources. So we spent a good chunk of the second half of the 20th century opposing a worldview that said that the state controls the levers of allocating capital. And what we have seen here in the last 10 years or so is monetary policy makers that are buying sovereign debt. And when that's not enough, they're buying corporate debt. And for some places they are buying equity ETFs. And when we go into the next recession, they seem to believe that the tools that they have can be extended and that they will do more of that. So they'll buy more sovereign debt, they'll own 100% of their sovereign debt, they'll own all the corporate debt, they're going to own all the equity, they're going to buy your house, they'll buy this building, they'll buy your automobile, they're going to be searching for things to buy. And the next thing you know, you'll have the government that owns the means of production. So who will have one who gets the last laugh? You know, Lennon may be in bombed, but he'll be laughing in his proverbial grave and that we will have appended the system that seemingly provided the globe with so many benefits in the second half of the 20th century, only to undo them in the first part of the 21st century.

Jon Hubbard:

Right, right. Eric, Ted, Rob, thank you very much for joining us and thank you to all the listeners for joining us as well. We hope you found this information helpful and provided some insight as you continue to look at the equity, fixed income and global economic markets, I would encourage you all to reach out to your MFS relationship manager or to visit mfs.com for the latest information. Thank you again.

The views expressed are those of the speaker and are subject to change at any time. These views are for informational purposes only and should not be relied upon as a recommendation to purchase any security or as a solicitation or investment advice from the Advisor.

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