Why We’re Seeing the Rally in Global Stocks

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what do you think about this amazing rally I mean 45% from the bottom for the S&P 500 but we’ve seen big rallies here in Europe as well on the dax for example even as companies governments around the world intentionally shut down their own economies so many investors must have gotten this wrong good morning thanks ivy on your show and indeed this the question I get all the time a very legitimate one if we take a look at the macro picture let’s remember there’s a few things that at the moment at least a drive the demand for equities you’re writing saying we’ve seen an amazing rally both the stocks and the SNP trade on something other it’s like 25 times 20 20 so that this is pretty demanding pretty pretty pricey range keep in mind today that over a quarter of old that outstanding corporate and sovereign has negative yields if you’re a pension fund or major insurance company or an endowment you know you’re looking at a fixed income market even in the long end that that basically yields very little the World Bank is forecasting it 400 trillion dollar bends with global pension deficit in the next 30 years so where are you gonna find yield where you’re gonna find returns equity for once stands in pretty good stead so that that’s point one they’re definitely macro element that make equity more attractive even evaluations a high point number two is were looking at the big indices and the big indices essentially favor blue chips and and that’s the way it should be so when we look at the overall economy we see much more contrasted figure but if you look at the shape of intervention monetary you know government instruments they have privileged debt in general and bank debt in particular and we know that SMEs are a lot less avid for debt many of them already heavily indebted so the tools that have been used but for you know four means the public intervention and heavily-favored blue chips and what are analysts saying today they’re saying that the blue chips are probably going to make it of course some sectors are looking at difficulties you talk about retail talk about Airlines but in that area some companies have done very well there’s probably going to be some consolidation we’re already seeing some signs that the availability of cheap money and the protection given to some large companies gives them opportunities for consolidation so that that’s that’s part of a point number two and number three that’s obviously going to lead in some important areas to a concentration in market share as we always see as a result of regulatory or fiscal intervention in in fewer hands some companies that have the correct business model tacking particular are benefiting from this and I think because they’re such a important weight in the big industries the markets are reflecting that if you look at SMEs and I’ll be my concluding point on this on this question if you look at midsize and listed companies there the picture is much much tougher and I think the likelihood of a strong recovery because we’re looking for you know advanced economy probably four six percent downward GDP spirals this year the recovery of the SME sector is going to be very important to the recovery of the job market thank you in a labor intensive industry it is you’re not going to have too many problems you make a lot of good points there about why we’re seeing this rally in global stocks there’s a VA but what that I guess that doesn’t preclude we could still see waves of corporate insolvency do you see that coming is that something we’re storing up for the future I think that’s a good point I think it’s likely that we’re gonna see some potentially as we have already seen spectacular bankruptcies depending of course on the bankruptcy regime the u.s. regime is far more advantageous savers the recovery far more very fragmented european bankruptcy regime which according to almost everyone in the space needs reform but where it hasn’t been achieved so i think the legal framework is also very very important that we are going to see some of those let’s not forget that cheap money is available we’ve seen the recovery look at Hertz for example in others and that will support distress investing that will support large pools of capital that are looking at opportunities if management is able to articulate a good business plan but the underlying trend and this has been accelerated but not generated by co vid is that there are some business models there old there are some business model that can be replaced by new technologies and in that case we’re less likely to see recovery my primary focus right now in terms of bankruptcies if I were macroeconomic manager would be the SME sector because there’s going to be thousands if not more tens of thousands of bankruptcies that are not going to essentially attract the tension that are not going to be for example in your on your radar screen but that are going to impact employment of course so the lower cost of labour clearly is going to benefit some some businesses and I think this is what we’re seeing in the inner aliens I mean this is today notwithstanding of course the calculations are by the way what do you think you know Jeff Gundlach said a lot of things yesterday and he makes sometimes dramatic claims but he did warn about increased white-collar unemployment he said a lot more people with hundred thousand dollar-a-year jobs or more are gonna lose them and they’re gonna have to accept offers for much less pay what do you think about that I think that’s right I think the first way that in the focus and attention and economies has been on you know lower skill layers in terms of the the unemployment that has resulted from from lock down of the economies but we not only colonies have been locked down so I’m sure look at Taiwan for example of done prevail without without a lockdown but that’s another debate but I think it’s right to focus now on a lot of these more skilled job and that essentially were buoyed by the previous you know economic economic growth but not necessarily like jobs of tomorrow that the pace technological change is hastening and that I think is likely to have greater consequences in terms of consumption in terms of social stability adding to unemployment in lower skilled area I think that is a concern I think companies are going to be looking who whose business model perhaps was not already profiled for the future they’re going to be looking at this particular set of circumstances to recalibrate their employment it will take I think many years for the economic impact in terms of employment you know to to be to be felt and and and to reach a full recovery and one thing for sure is areas that use technology are very sensitive to technology are going to change very very profoundly that is indeed a worry I concur with that analysis Zephie a I’ve spoken to you a number of times in the past about well hosts of subjects including brexit and I wanted to get an update from you on that subject we see we’re in the transition of course and we see negotiations to a new relationship or not taking place you’ve in the past said that thousands of jobs could be lost from the city if we don’t get any kind of future trading arrangements do you still think that or has the the virus changed your assessment or what’s your latest thinking on this yeah you know I think this issue is not resolved the the comments I’d made in the past were based on independent studies one I think was Ernst and Young who looked particularly at the potential impact of clearing is clearing were to leave the UK and I think that was the basis of the study how many thousands in nine cases a couple hundred thousand jobs would be impacted so obviously this was theoretical but the threat is still real and this still is a significant political desire in Europe for example in the area of clearing to repatriate the the clearing particularly of euro denominated instruments to European financial centers so these issues haven’t been resolved and business has been already I think making decisions I have seen statistics out there I think in terms of jobs you want to look at the ones that have left but also the ones that have that would have and never have been created we still don’t know if we’re going to have a deal or not I think the next few months will be critical but I think in the event of no deal I think some businesses in particular have already articulated that this would have an impact so yes I continue to be worried about that and keeping in mind as far as financial services that London’s reputation London’s success has really being to attract global efficiencies capital formation in risk management in clearing and asset management it’s essential that London retain passport access or whatever you whichever way you describe it to the eurozone because it’s not just services to euro denominated financial users but it’s a combination of euro dollars yen and other Global’s currencies let me ask you about something Italian before we let you go as a VA there have been reports in the Italian press about the government possibly eyeing borsa italiana do you think that that is something that will develop from here with the LSE be interested in selling its it’s Italian assets do you think it’s hard for me to speculate think the question we’d better be asked yeah LSE representatives I can’t speculate on what they would want to do and it may or may not come out of the competition the review what I do know certainly is in the last decade or so the Italian assets within the have been extremely well developed very very well managed and have made a great contribution to the bottom line of the LOC and in fact have enabled the funding of acquisitions across the spectrum you know ten years ago LSE group didn’t have any clearing didn’t have any indices and many other businesses and and part of the retooling and improvements and upgrade of many systems and many products we had in Italy I’ve paid for some of these acquisitions I think you know if we if we speculate here in my own humble opinion if both Italian I were to leave for whatever reason the Elysee group I don’t think that would be a good thing for Italian financial markets in the long run because ultimately having access to a global world-class financial infrastructure company is really important and we don’t talk enough about this for the corporate sector at the end of the day it’s for issuers more companies midsize companies global companies for example at the elite a program that was created out of Versailles italiana for the LSE group which is a global program for the equity funding of small unlisted companies these are sort of innovation that matter and I do think it’s really is benefited substantially from access to global finance provided by the group so I hope they can find a solution I can’t speculate as to whether it would happen or not but in my view it would not be a good thing neither for the LSE nor for Italian financial markets if if that merger that that transaction which initially in the early years was very difficult but has been substantially optimized over the years if for some reason it were to that that alliance that Union we’re to be broken up

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