We’ve got an excellent range of podcast topics this week. One covers how machines are replacing humans in banks and with it, bankers’ bonuses. Blackrock talks about its pivot towards sustainability and its new passive sustainability index. We also wrote an Exclusive on the challenges of investing for sustainability, so it’s worth a read alongside the podcast.
We have a pessimistic take on US growth and US yields by CIO of Alhambra Investments, Jeff Snider. Our fourth is on China where academics discuss the country’s long-term outlook and the impact of urbanisation and the ageing population. Finally, on markets we feature a discussion with four PMs focusing on long-term equity investing.
Machines Are Replacing Wall Street’s Bonus Culture (P&L – Bloomberg Markets, 25 min listen)
• Wall Street’s bonus culture is slowly disappearing with big market wins often now made by algorithms not humans. Equities and FX markets are hit the hardest but fixed income isn’t safe either. Industry might struggle to attract, motivate and reward top talent as it used to.
• Rick Helfenbein, former Chairman, President & CEO of the American Apparel & Footwear Association gives a pessimistic view on the Phase 1 trade pact between US and China. It remains negative for the retail sector – which accounts for two-thirds of the US economy – and it might take 3 to 5 years for any tangible Phase 2 talks to gain traction.
• Kristina Hooper, Chief Market Strategist at Invesco, predicts modest 2020 returns for US equities, given the strong 2019 run-up driven by highly accommodative monetary policy. She also sees a potential move away from the dollar as the save haven and reserve currency – with gold and the Japanese yen the beneficiaries.
Why does this matter? Don’t let the Phase 1 headlines fool you – the progress seems minuscule and in parts, keeps the status quo. The administration agreed not to impose tariffs on some $160bn in mostly consumer goods imports from China and reduced tariffs on another $112bn worth of goods from 15% to 7.5%. But the average tariff rate remains significantly higher than before the trade war and the impact on the US economy is widespread.
Sustainability. Our New Standard (The Bid – BlackRock, 20 min listen) Blackrock’s Head of Multi-Asset Strategies, Rich Kushel, sets out the firms sustainability approach:
• Climate risk is investment risk. It will impact more than the environment and is causing both physical risks and a large-scale reallocation of capital towards sustainability-focused investments.
• The impact on valuations is profound and BlackRock has started to exit investments that pose ESG risks, such as thermal coal businesses
• Although long-term trends are clear, there is still a significant chunk of investors who still haven’t converted to low carbon investment allocations, leaving themselves exposed to mispriced risks
• Blackrock is setting up new ESG investments, including a sustainability-based passive index.
• They also require firms that they invest in to adopt the standards set by the Sustainability Accounting Standards Board (SASB) and the Task Force on Climate-Related Financial Disclosure (TCFD)
Why does this matter? The sustainability movement is about investments that are not solely intended for increasing profits, at least in the short term. That’s why it marks a major shift in firms’ behaviour. According to Rich Kushel, in 10 years from now the word “investment” will not even need sustainable next to it, it will be implied by default.
Jeff Snider: The Fed Is Avoiding The Real Issue Driving Divergences In Their Models (MACRO Voices, 30 min listen) CIO of Alhambra Investments, Jeff Snider, talks on the real causes of slack in the US economy and its underperformance against potential. He cites a global shortage of dollars and broken financial system as the main problem.
• The current low in US unemployment is not the sign of strength it is often made out to be as it no longer aligns with other economic variables. And despite the current expansion officially the longest on record, Snider argues current growth feels like a contraction since it is below the long-term average (around 5%).
• Snider points to potential growth estimates from the congressional budget office (CBO), which since 2016 show growth dropping below its long-term average. Overlaid with a chart on 10-year treasury yields, falling rates tell us that tight monetary conditions are constraining growth.
• Multiple rounds of QE failed to bring back growth to its long-term average leaving some to conclude that if QE didn’t work the economy is broken. But the main reason is that monetary conditions have not been normalized.
• The bond market reminds us of this global dollar shortage and resulting tight monetary conditions. The clear indicators are falling Treasury yields and the spike in repo rates.
Why does this matter? A broken financial system and global dollar shortage is negative for global growth. Although bullish for the dollar any resumption of Fed cuts and shift back to QE in the long end bring this to an end.
China 2049: Economic Challenges Of A Rising Global Power (Brookings, 150 Mins Listen)
• A panel of Chinese and American scholars discuss the China’s economy in a long-term perspective. China aims be labelled a ‘rich’ country by 2049 and reach 45% of US GDP per capita (currently 27%). GDP growth is predicted to drop to 3% by then.
• China’s population is ageing rapidly and by 2049, a quarter of the population will be over 65. This ageing working force is compounded by a falling birth rate. The government plans to raise the retirement age and improve education and training of the elderly people to keep them productive.
• Rising household consumption and rapid urbanisation is contributing to rising pollution and pressure on China to de-carbonise. The Belt and Road Initiative makes this worse with a number of coal-emission plants planned.
• Financial openness is discussed with Nomura and J.P. Morgan recently granted securities licenses, as well as PayPal and AMEX.
• Finally, they believe that the renminbi has potential to become a major payments and reserve currency. But China needs much stronger transparency and rule of law.
Why does this matter? China’s ambitious plans to become a developed global superpower and catch-up with the US should not be dismissed, even if exact targets are missed. The economy is increasing richer and a slowdown in growth is a natural consequence. But the government is facing increasing scrutiny over governance. A lengthy investigation into all those issues is summarised into a new book with the title of the podcast.
Picking Stocks for the Long Run: 4 Portfolio Managers Share Their Thoughts (Morningstar, 38 min listen) Drew Carter hosts four PMs (Michael Corty¸ George Metrou, Matthew Coffina and John Owens) to discuss views on evaluating and selecting stocks
• The PMs present their respective strategies, varying from all cap equities, focus on high-quality businesses as well as income-oriented and growth-oriented strategies.
• For long term investing, cash flows, sustainability and competitive advantage for the next 5/10 years are all key. Looking at the long term can eliminate noise within the market, especially when focusing on the intrinsic value of the firm.
• The main purpose for LT investors is buy and hold, not monetize from continuous buying and selling of the stock. Any selling should be based on a downgrade to the intrinsic value. But this intrinsic value isn’t static. A company may seem expensive today, but future growth matters.
• For an investor looking for a PM to invest their money choose one that is like-minded and where the strategy will fit their financial goals. The mistake of many investors is that they select a strategy primarily based on near-term returns.
Why does this matter? Predictions for fresh all-time highs in the S&P this year are at odds with a slowing US economy and recent signs of weakness in the labour market. A buoyant equity market will also become centre stage for Trump’s re-election bid.
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