Name: Retraining Today's Workforce May Jump Start the Economy
Uploaded: 2016-11-30
Duration: 14 min 26 s
Description: According to our experts

[ SOUND ] [ BLANK_AUDIO ] Heather, when we were talking the other day you mentioned a term that I was not familiar with is, soft infrastructure. You said that was in form a lot of your thinking, can you tell me a little bit more about that? So look, this brings together actually a lot of this conversation. We talked about monetary policy potentially coming to it's useful end. And I do think that you are gonna start to see globally the botan passing from monetary policy to fiscal policy .>> And when you say monetary policy you're talking about keeping legislative law through the Federal reserve .>> Exactly. Exactly. And then fiscal policy of course can be done through spending or can be done through tax cut and as we look at spending I do think That you're seeing the outlines of a pretty significant infrastructure plan that can benefit a number of hard assets. So thinking about builders, thinking about owners of hard assets, thinking about financiers of hard assets. But, I think, we're also quite hopeful That infrastructure and fiscal spending will include programs for softer infrastructure. And so thinking about re- educating, under Employed or an unemployed folks back into the new economy. Mm- hm. Thinking about cyber security as a very important investment that we need in the United States and globally. And so we absolutely see the value of Hard asset infrastructure and think, you know, if you think about airports and tunnels. If you think about energy as it relates to utilities and renewables, water and waste management. If we actually get a sizable infrastructure program Many of those things will benefit. But ultimately if we can also get soft infrastructure investment that can drive higher productivity and ultimately drive greater output and reinforce monetary policy, That's gonna have the best output in growth impact with economy. Christine, you've talked about concerns about proactivity in general being a challenge and a barrier to the growth of not just the US economy but the global economy. Where do you see things turning in that direction? Can something like what Heather's talking about help to maybe get us out of our rut? Certainly, but I think at the end of the day the driver of productivity growth is really investments. And over the since the financial crisis, the raid off investment in develop market for sure and to some extent in none kind of state own still company type investments in emerging markets also. Has gone down, or at least the rate has gone down. And I think if the Trump trade, or if the expectation that growth rates are going to be higher than what we had assumed, In the doom and gloom, then that pace of investment picks up. And if the pace of investment picks up, productivity certainly can pick up. 2016 may end up being in a really optimistic scenario, the bottom of the productivity cycle. Uh- huh. And we probably mark it up substantially The other key point to remember is, from a longer- term perspective, there are going to be substantial industries and themes that work out irrespective of a Donald Trump or someone else in power. And what do I mean by that? For our international and global strategies we focus on an acronym called MANTRA. So it's short for mass affluence in emerging markets, people are getting richer and they'll spend more. And that has implications for certain industries. New technology, the sort of things that the analyst is talking about. Restructuring, so restructuring specific companies that have gotten, or let's say the oil patch, if oil prices remain low for an extended period of time, there'll be opportunities that get created by restructuring. And the final is aging. Demographics is a destination, it's inevitable. And that has implications with respect to glasses manufacturer and orthopedic appliances manufacturer. Headphone manufacturer. These are themes that are going to be with us for a long period of time and focusing on those certainly gives you some clues as to which way you should be going. Mantra is, pretty catchy mantra. [ LAUGH ] [ LAUGH ] To stick with you. But those concepts, but that very much dovetails with what you were talking about, Sarah, with I mean, I'm hearing echoes of the transitions of banks feeling fear to lend as inflationary cycles kick in. Yeah, yeah. Certainly We're all thinking about new technology across all of our disciplines. Is there any place where sort of that concept overlaps with some of the things that you're seeing in the stocks that you look at? I do want to get to this idea that Krista mentioned of emerging market growth. We would agree, as value managers, we're not looking to own value traps. It's really important to understand the distinction. We want companies that are mispriced, meaning the share price is below Below the fair value, where the stock should be trading. Something's typically gone wrong and we think that many of these, most of them are engaged in some sort of self help. If they've got an earnings dip they have to do something to push the earnings back up again. But some of the most interesting companies that we're following, especially in that industrials category For example, capital goods. They have a significant amount of sales in the emerging markets, and / or in financials, a lot of emerging market sales. An example I would give is Prudential UK. This is a life insurer listed in the UK market, so the baby was thrown out with the bath water with. Brexit. The referendum vote last June meant that UK stocks were considered just the worst place to be. Of course, we couldn't get enough of them. And yet here's a company with 70 % of its earnings in Asia, in not just Hong Kong, Singapore, but really rapidly growing places like Indonesia, Vietnam, Thailand, where they are the number one or number two in life insurance. So we can buy that cheaply at Somewhere near book value, and get a good dividend yield with it, and there's growth. That is about as good as it gets. Mm- hm. Ann is it tricky for American tech companies of the kind you were talking about earlier, the big data arms merchants, I know that sometimes Their efforts to expand into Asia and Europe hit political resistance, hit local competition, hit sort of cultural problems crossing borders. But I mean of the companies that you watch, which are the ones that are taking the best advantage maybe of this kind of pent- up growth, or are poised to take best advantage of this sort of pent- up growth in say either Europe or Asia? Yeah I think all of these fastcraft companies look to expand to every possible market. And they're looking to partner with innovators in other markets. That partnership between Indians and Silicon Valley is extremely strong. China has come here and planted you know Alibaba teams in Silicon Valley, so there really is. Everything's now about what the opportunities are and what the challenges are. The challenges aren't going away, and the opportunities are getting bigger, is how I would over simplify it. We do see on back to the growth issue and productivity, some real talent shortages. And we are graduating not more STEM majors here in the United States under a rising cost of education. It is really hard to re- tool people into these speciality skills rapidly. So we do depend upon a global talent base to really grow these companies. That's probably the biggest challenge and risk going ahead. Given immigration issues that might happen. And for Silicon Valley, that's especially true. Yeah, I feel like this panel is somewhat bullish following the recent developments, and I didn't picture myself as the most bearish person on the Panel, but some aspects of the Trump trade might be over done. I wanna re- emphasise that. And don't underestimate the impact of a hawkish Fed and of rates going up on potentially putting a lid on growth So I think this is a really important point that we probably haven't touched on yet, but valuations particularly for U. S equities are full and at this valuation levels history tell us that you can really only generate Made single digits going forward. So you have a lower return environment than what you've had in the last 5 years and you have higher volatility and that requires a psychological shift of investor mindset and it requires an adoption because the reality is you're getting paid less For each unit of risk that you're taking in your portfolio. And I do think that's an important takeaway. So we're neutral between stocks and bonds in the asset allocation group. And valuation's fairly high, fairly rich in equities. But boy are they rich in bonds, right? [ UNKNOWN ] gonna ask have we really reached the end of the 30 year bull market in bonds? Bonds have been getting expensive and more expensive, and more expensive. In fact over the last ten years, I've heard many, many times, all bonds are outrageously expensive. And the negative rates abroad for a while, that was crazy. A third of the global government debt stock is a negative nominal yield territory. The global aggregate, post election. Is at 1. 5 % yield, this is extremely low. And the other thing that is going on is that as yields go down, the duration of the bonds, their sensitivity to interest rate keeps going up. So this goes back to the volatility and bonds. The volatility and bonds is such that nowadays small moves in rates up are gonna lead to big drops in bond price. So we're comfortable at neutral. I think the point about volatility in bonds increasing is a good one. That is if the conversation changes meaningfully from disinflation or deflation to potentially inflation at least in the largest economy in the world. Bond volatility should definitely go up. Having said that, I think we have to pause and kind of try to analyze why were rates so negative to begin with in different parts of the world? Mm- hm You know? What are those people thinking when they go out and pay money to people to borrow from them, what are they thinking :? They can't be crazy. So, i think the answer is, the savings that you have available in the rest of the world are away from the US, in Asia primarily, the amount of savings that is slashing around, is significant, worse significant course the financial crisis and is equally significant today. People in China save roughly 48 %. It has come down from 52, but it is still 48. Most of Asia is in that territory and that hasn't really gone down. As long as the world has that high a savings rate, and not an ability to absorb all those savings on a global basis. Rates are going to remain low doesnt mean that they will be at one thirty for US ten years note, But that doesnt mean that they will be at 6 % any time soon to solve our problem. If you take a step back what the world want more than anything else It's a good well- paying but, that you know, income and sources of income if you go around, ask investors, is still the biggest challenge that they face. And as long as that is the case, I think the rates are going to remain low. What the question we are to ask ourselves is that if you are an income- oriented investor, What should you do? What's the best opportunity? Earlier, one could say buy long bonds because they provide you the highest amount of yield. Today that has to change because of the rise in volatility and risks. In our view The best opportunity really is in seeing the flooring loans, because those have basically no interest rate risk and they give you 5 % coupon. So, even if rate rise the prices on those. Loans don't come down and you continue to earn a decent income. And Heather I know, forgive me Sebastian, but Heather I know you have been concerned about figuring out how to get more income out of a portfolio. And are loans part of your strategy as well? What is it in there? Look, I think bank loans make sense in a rising interest rate environment. To the point that was just made, they give you Interest rate protection. The way that we talk to clients about an income portfolio is about building a diversified income portfolio, right? Because single asset classes may have risks, credit risks, other considerations. So we build a diversified income portfolio. We start with a core equity allocation. Higher dividend- paying stocks, typically the second quartile. We don't wanna buy the highest dividend- paying, because you worry. [ LAUGH ] That's right. You worry about the sustainability, potentially, of those dividends. We add higher yielding fixed income, High- yield debt, emerging market debt, we add bond proxies in terms of MLPs and [ UNKNOWN ] in the right size. And we overlay a buy right strategy which essentially allows you to own Own the equity market outright, and then sell call premiums to generate income for the portfolio. So that type of diversified portfolio approach can get you to 4 % annual income, which is almost what we're. Expecting for the equity markets at two thirds the volatility. And for many income- oriented investors who want that sound portfolio construction, we think that approach has long term staying power. [ SOUND ]