Name: Investor Roundtable 2021: Biggest risks and opportunities
Uploaded: 2020-11-19
Duration: 17 min 22 s
Description: The panelists look into their crystal ball.

 MATT HEIMER: I would like to actually go to that final question that I wanted to give each of you a chance to answer, which is, where do you see the biggest opportunities in the next 12 months and the biggest risks in the next 12 months? So if you don't mind, I'm going to go to you one at a time and tee up that question, if you're ready for it. And, Sarah, how about I start with you? Sarah, where do you see the greatest opportunities and the biggest risks over the year ahead? SARAH KETTERER: By far, the greatest opportunities should be in cyclical stocks, especially the high-quality ones run by great management, which is why you need active management to find those businesses. And as we've been talking about in this interview, so many of these companies have been using the pandemic to cut costs, increase operating leverage, and so they're ready for recovery revenues. Many of them will likely generate higher profit margins they did pre-pandemic. But what's really interesting is the catalyst behind all of this is not just vaccines and therapies and greater testing. It's $10 trillion globally of both monetary and fiscal support, and we've never seen anything like this. It's just four plus major central banks and all the others expanding money supply and government spending a ton of money. And this typically hits economies with a one-to-two year lag, so we haven't even seen the full impact of all of this spending. Every recession, whether it be the TMT bubble or the global financial crisis are all those that preceded those, it's the cyclicals. It's the material stocks, the consumer discretionary, the financials, the industrials. They are the ones that come roaring out of this, and that's how we are at Causeway. That's how we're positioning clients. MATT HEIMER: And how about the risk that worries you most? SARAH KETTERER: The risk that worries me most is US-China relations, given the rising importance of China. And we just opened our Shanghai office, and I want to make sure that we can continue to bring not only good ideas back to research central here in Los Angeles, but there's free movement, in terms of travel, of ideas, of knowledge. There's so much we can learn from especially private-sector companies in China and vise versa, and then at the academic level, universities sharing knowledge. If that's cut off, if we balkanize, the world is worse for it. MATT HEIMER: Thanks, Sarah. Dave, how about you? What do you see as the greatest opportunities and the biggest risks for the year ahead? DAVID J. EISWERT: Yeah. I think the trickiest part right now is this tension between path and destination, right? So we sort of now know there's a vaccine. There's going to be multiple vaccines. We're going to beat COVID, right? I feel pretty confident about that on a 12-month, 18-month basis. So it's sort of path and destination, and the path is going to be rocky. The path, I think, is getting worse, and we just really haven't had any leadership around it, at least in the United States. And so we're going to suffer in the near term, but I think we need to focus on the destination. And so I'd agree somewhat with Sarah that I think the COVID-off stocks, especially growth stocks, especially good, secular growth stocks. I think I'll just throw out MasterCard. We mentioned Amadeus earlier. I would put Charles Schwab in that, for example, too, which is a financial, which I know is kind of crazy. But these good companies and franchises that are going to benefit from COVID-off, you got to suffer the path in the near term so that you make money over the next two to three years. And I think we talk about being carefully contrarian. We're trying to be carefully contrarian and take advantage of that. Emerging markets I think is also a good opportunity. I think there's lot of good risks Sarah brought up. I think social unrest is a big risk. I don't understand our country. I don't understand beliefs that people have and how opposed they are. So I worry about that. I think it makes us vulnerable. And I worry about interest rates. So if we're really looking ahead two or three years, we live in zero-interest-rate land. Housing prices are off the hook. Mortgages are being refinanced. What is a 30-year mortgage, 2.5%? When that goes away, all asset prices are going to go down. And so when I look out two to three years, I'm not going to do anything about it now. I'm going to enjoy the cyclical recovery, as Sarah laid out, and the COVID-off stocks. But I think we really do have to worry, do we have an economy that can sustain with a 10-year that's 3%, right? Because that that's going to cause pain. MATT HEIMER: Thanks, Dave. Mallun, how about you? Where do you see the greatest opportunities and the biggest risks? MALLUN YEN: So I'll take a little bit of a different approach. So 1.1 million workers dropped out of the labor force in September. 80% of those were women. 33.4 million Americans have kids under the age of 18. And I've been lucky enough to be a dual-income relationship where both parents work with kids who were trying to figure out how to get online in class, et cetera. There's lots of reasons why 80% of the 1.1 million who dropped out of the workforce, including the fact that a lot of the supports that we were able to have in place, like your traditional childcare and your original school, went away. Some of us are fortunate to have jobs that we can work at home, but others of us can't. So I think that's a really real risk, which is, how do we figure out this childcare situation, and how do we make sure that 80% of this workforce that we worked so hard to get into equal footing is now not wiped out, so that you can continue to have the Sonias and Elises the world and have the next generation going forward. So that, I think, is very troubling to me, and I don't have the answers to it. And then that also tends towards, though, a partial answer, which is the opportunity, which it is very hard for working parents, single working moms, et cetera to fit into the rigid corporate structure of having to commute in, having to work from 8:00 to 5:00, having to do this, climb the corporate ladder. So I'm very encouraged by the fact that now that people have gotten used to the fact that hey, you don't have to fit into that rigid, traditional, corporate construct, we can work a little bit more flexibly. I happened to shift my hours because I work from 6:00 till 9:00 until the kids have to get on then I take a break to make sure they get a little bit of food, right? So we can do these things now. And with these additional tools and a lot of these startups that are addressing more efficient ways of doing things, I'm very optimistic that corporations, big and small, are going to realize, we can get access to this incredible talent, have them stay in the workforce, have them succeed, work their way up the ladder, and it doesn't have to be in the traditional way. So I'm very optimistic about that opportunity. MATT HEIMER: Thanks, Mallun. Savita, how about you? What do you see as the biggest opportunities and biggest risks over the next year? SAVITA SUBRAMANIAN: Yeah, a lot of them have been mentioned. And think it's interesting to see that the rates scenario is pretty precarious right now. Because I think the value opportunity for US stocks has been that their income potential dramatically eclipses that of most fixed-income offerings. But when rates get back to a certain level, that value proposition no longer is as compelling. I think the other risk for the S&P 500, in particular, which is the index we all watch as a barometer of the health of the world, I think that index has started acting really weird. And we're seeing eight standard-deviation events happen every other day now. These are supposed to happen every 100 years. So I think that this just sort of underscores the fact that liquidity is really trigger happy, and maybe this is because of Robinhood or democratization of the market, which is good. But then it's also because of the ability to express a bet very quickly and sort of roil the market. So I think that is a risk, but it also translates into a really interesting opportunity because one of the things that we're noticing is that the most contrarian investment theme right now is fundamental investing for the long term. And I think that is the way you can make money today. Nobody is doing that. Nobody is thinking about a buy-and-hold stock strategy where you look for depressed multiples. I think this is really where stock-picking comes to the fore and where active management can actually shine. And the fact that active has shrunk to being less than half of assets in the US, I think, speaks to the fact that fundamental, long-term investing is actually one of the most scarce themes out there, and buying and holding could actually be the recipe for success. So I think, for the S&P 500 in particular, one of the things that's really interesting to me is if you look at the probability of losing money by buying and selling the market on a one-day basis, your chance of making money is a little bit better than a coin flip. But if you extend that time horizon to 10 years, your probability of losing money by buying and holding stocks is less than 5%, at least going back over time and looking at returns. So I think the idea of just thinking about the market from more of an old-school, stock-picking mentality, from a fundamental-investment mentality and not necessarily trading as aggressively might be the biggest opportunity right now to make money. SARAH KETTERER: Thanks, Savita. And Josh, over to you-- what do you see as the greatest opportunities and the biggest risks of the coming year? JOSH BROWN: So I'll give you one very big risk. We'll start with that, and then I'll give you two opportunities. The big risk, I think is-- and I think a bunch of people have already mentioned it-- not just the fact of where rates are, but what that's leading people to do. And I can't imagine the next big risk-off moment. I can't tell you what's going to cause it, just like I couldn't have told you there would be a pandemic this year. But I do very much feel that bonds will be an epicenter of the crisis because of the way that they're being used and leveraged and employed. And I think there's a lot of complacency in this idea that you're definitely getting your money back, no matter what. What the Fed did this year was probably essential, but it may have set a really bad precedent. So we said, we have to freeze the economy. Normally, in a recession of the magnitude that we've had, we would have already been in the midst of a wave of corporate bankruptcies. And in fact, there are no bankruptcies. And we did that, of course, so that they would keep their workers and the wheels wouldn't fall off. But not only were they all able to stay solvent, they were all able to refinance at drastically lower levels. So we had a recession without having a recession, and I don't think that we have fully mentally processed that. And here is the problem, we'll have another recession. It might be in three years. It might be in 12 years. I don't know. But the pressure on policymakers will be on to simply repeat what we just did, right? They'll say, wait a minute, I don't understand. Last time, you just gave everybody money. Last time you wired money to people making less than $100,000. You did federal unemployment benefits. You did all that. Why wouldn't you do it this time? Well, that was a pandemic. Oh, well, this time, it's an alien invasion. I feel like that's just as bad. Pull the trigger. Send the money. Send the checks. So we now know that we could have durable goods sales rise in a recession. How do we know? Well, we just did it. It's insanity, but Whirlpool sold more bathtubs than in an expansion in a recession, and look at GM's earnings and look at Ford. So it's bananas. And how are we going to avoid doing this again? And here's the thing, every time we do it, it's more. Debt goes up more, deficit is bigger every time. There's no way to do it smaller. So we've always been in this trap, but now we're really in this trap. So that's a big risk. Sorry to bring everybody down. I don't have a good answer for it either. MATT HEIMER: I feel really bad about the car I bought, so that's on me. JOSH BROWN: Right. It's insane, but we just did that. And I don't think we've processed it. On what I was saying with international stocks, I was not making the point not to own international stocks. In fact, I think it's one of the opportunities. I think we all agree, Biden is not going to be big on tariffs and calling Mexicans rapists and starting fights with Angela Merkel. I don't think that that's going to continue. So now, we're going to have a lot more policy certainty. You may not like the policies, but you're not going to wake up in the morning thinking there's going to be a tweet that changes them 180 degrees. So I think what that leads to is a resumption of international cooperation. And I think the beneficiaries are international stocks, more so than US stocks, in terms of their share prices. So emerging markets, 14.5 times earnings, IFA 16 times earnings, USA 20 times earnings. Yes, I understand USA gets a premium because we invented the internet. OK, that's great, but it won't always be that way. There are technology companies in Latin America, in Europe, in Asia. They are asserting themselves. And so I think you can own international stocks without owning a bunch of banks and utilities. So that was what I was trying to say earlier. So that's one. The other one, even more profound and I think will entirely up-end a lot of very, very large companies in our industry may not all play out in '21, but pay close attention to me as somebody who's on the forefront of dealing with clients and asset management firms. I'm right in the middle. Direct indexing is going to change our industry in massive, fundamental ways. And we began migrating ETF-only model portfolio households over the direct indexing, and I cannot tell you the degree of advisor satisfaction, client satisfaction, performance improvement, tax-loss harvesting, the ability to remove companies that are not highly ranked on gender equality, remove gun manufacturers, pull out companies that are oil companies but not trying to improve their environmental impact, et cetera. It's being able to do that in a quantitative, algorithmic way in real time plus individualized tax-loss harvesting. And I want to leave you guys with one example of how profound this is going to be. All of the wealth in the United States is now being generated in Silicon Valley. All the new wealth, that's where it's coming from. It may not be specifically geographically there. Redmond, Washington, Palo Alto-- you get the point. The people with high net worths who are now coming to wealth managers. They look and feel and speak and act and think way differently than the boomer generation. They're multiracial. They're multicultural. They're multi-ethnic. But what they all have in common is they come to wealth managers like me with $10 million net worths and $8 million of it is in Facebook stock. And I can't say to that person, let's buy the triple Qs because all I'm doing is upping their concentration risk in Facebook stock and then ditto for Apple, Salesforce, Google, Microsoft. Go down the list. So direct indexing is allowing us to give them the NASDAQ minus Facebook or minus web-advertising companies. And we're not chin-scratching and trying to analyze 5,000 stocks. We're doing this with software. So BlackRock and Vanguard have both given us trials of what they're trying to do in that area or have told us about their plans. Every major asset manager is thinking this way because they know that the ETF is now becoming the new mutual fund. The ETF is now a 1990s technology in a 2020 world. So I think the implications to that are very big, and everyone should be thinking about that this year, how unbelievable this technology has become. MATT HEIMER: Thank you all so much for giving us and our viewers and our readers so much to think about. And thank you so much for being part of Fortune Investor Roundtable. I'm Matt Heimer. Thanks for being here and hopefully see a bunch of you in 2021. 

Investor Roundtable 2021: Biggest risks and opportunities

The panelists look into their crystal ball.