Key investment opportunities emerge from real estate downturn
PGIM Real Estate’s Australian head Steve Bulloch anticipates more challenges to come for some assets in the country’s commercial real estate market this year.
PGIM President and CEO, David Hunt, joins Scarlet Fu on Bloomberg Markets “The Close” to discuss the global economic implications of COVID-19, including the outlook for a U.S. economic recovery following the pandemic, the impact of the crisis on state and local budgets, and the need for IMF aid to emerging market economies.
[DESCRIPTION: Opening screen, featuring Scarlet Fu of Bloomberg Markets speaking to camera. Half of the background features the Bloomberg name appearing in different sized fonts, while the other half features a geometric wood design. At the bottom of the screen is written "Stocks Rise Despite Dismal Jobs Data". Scarlet Fu asks David Hunt, PGIM President and CEO, the following question.]
[AUDIO: Now, for more insight into the financial markets and the overall economy, I want to welcome David Hunt. He is CEO and President of PGIM, which has 1.3 trillion dollars in assets under management around the world. David, it's always great to speak with you, especially at this juncture. I want to start with the intersection of the economy and markets, because we talk about how important it is to get high frequency data on the economic fall-out from the crisis, and the weekly jobless claims really fits the bill. Yet, investors consistently look pass it, focusing on brighter days ahead. Is this decoupling between the real economy and the stock market going to keep widening, or does it get reconciled at some point?]
[DESCRIPTION: New screen. To the left is an image charting the S and P 500 daily performance. To the right is a headshot of David Hunt, below which appears his name and title, and above which is written "On The Phone". At the bottom of the screen is written "Stocks Rise Despite Dismal Jobs Data". David Hunt responds to the question.]
[AUDIO: Well, Scarlett, first of all, let me say it's a pleasure to be with you, even remotely. And I think you really put your finger on the key question of the month, and maybe no better day than today, when we have such a rally going on, despite continued very poor news, I would say, in the real economy. The short answer to your question is that we actually believe the equity markets are substantially over-valued, relative to what we think is going on in the real economy. In order to believe today's levels, you really need to believe we're going to have a sharp, V-shaped recovery in earnings, starting really in the third and fourth quarters of this year, and certainly for 2021.]
[DESCRIPTION: The S and P 500 daily performance chart is replaced by a Dow Jones Industrial Average chart. David Hunt continues his response.]
[AUDIO: We don't think that's going to happen. We think there's going to be a much longer path to recovery, and that's really for three reasons. First, we think consumption is actually going to stay low for a lot longer.]
[DESCRIPTION: At the bottom of the screen, the text "Stocks Rise Despite Dismal Jobs Data" is replaced by "Hunt: Equity Markets Are Substantially Overvalued". David Hunt continues his response.]
[AUDIO: Yes, businesses are going to open up, but it doesn't mean that they're going to do business at the same level that they did.]
[DESCRIPTION: The Dow Jones Industrial Average performance chart is replaced by a NASDAQ daily performance chart. David Hunt continues his response.]
[AUDIO: I often remind people that a great deal of consumer spending that happened in this country, is done by people 50 and over. And they are likely to be much more conservative about jumping on an airplane and getting back to daily life. Secondly, we think that unemployment is likely to stay, you know, quite worryingly high for a long time. And that's really because -- well, first, some companies are not going to make it through this at all and won't be rehiring. Others are going to do their rehiring in phases, and many are going to find that they don't need to hire all the employees back that they had. So, we actually think we will be stuck with a high unemployment rate for longer than people think.]
[DESCRIPTION: NASDAQ daily performance chart is replaced by a CBOE VIX Index daily performance chart. David Hunt continues his response.]
[AUDIO: And the last reason, Scarlett, is that we have not even started to see the next big problem, which is the fact that our states and cities and municipalities are going to have a huge hit to their tax base and their revenues. And yet, their expenses remain very high. And that is really the next crisis to come, which I think is going to, again, substantially affect economic recovery. So, for all those reasons, I think we remain believers that this is going to be a slow road back, and that the current markets are simply too rosy.]
[DESCRIPTION: The headshot of David Hunt fades out and is replaced by a Bloomberg reporter, not Scarlet Fu, who asks the following question. Additionally, at the bottom of the screen, the following text appears: "Hunt: People 50 And Over Will Be Much More Conservative With Their Spending", and the CBOE VIX Index performance image is replaced with a Bloomberg U.S. Dollar daily performance chart.]
[AUDIO: So, David, can you expand on that last point you made, particularly with the increased burdens at a lot of states and municipalities are going to have? Does this then translate -- and even at the federal level, to a certain extent as well -- does this translate then into something where we need to start anticipating a potentially higher tax base, and if so, how does that then affect things like consumer spending and the sort?]
[DESCRIPTION: The headshot of David Hunt returns to screen. David Hunt responds to the question.]
[AUDIO: No, I think it's a great point. I think that there's no question that we will be looking at higher tax rates, both federal and state. We can talk longer term about the deficit. I think that's going to be part of the answer there. But my concern is actually more just over the next 18 months, of getting a number of these groups through. As you know, many states can't declare bankruptcy. They must, in fact, keep a balanced budget, and that means they're going to have to have very substantial cuts to their services, which is the last thing that we can afford at the moment.]
[DESCRIPTION: The Bloomberg U.S. Dollar daily performance chart is replaced by a U.S. Two-Year Yield daily performance chart. David Hunt continues his response.]
[AUDIO: Personally, I believe that leaving -- I know it's a bit of political third rail. But just from a practical, economic point of view, I do believe that we're going to need a program from the federal government, to actually help out states, and particularly cities, as we go through the next 18 months.]
[DESCRIPTION: David Hunt's headshot fades out and is replaced with a live image of Scarlet Fu speaking to camera, asking the following question.]
[AUDIO: What will that look like, and what will each side have to give up to get that done? Because right now, it feels like the Democrats and the Republicans are on complete opposite sides. Mitch McConnell even going so far as to suggest that certain states should perhaps even file for bankruptcy.]
[DESCRIPTION: David Hunt's headshot returns to screen. The U.S. Two-Year Yield daily performance chart is replaced by a U.S. Ten-Year Yield daily performance chart. David Hunt responds to Scarlet Fu's latest question.]
[AUDIO: Yes, you're right. I think the politics of this are very difficult, and in fact, may be ultimately not-solvable. But I think the economic consequences of not being able to find a middle ground, are really very difficult to imagine. I mean, remember, so much of our education system, our hospital systems, our emergency responders, our fire departments, that is all state and local government. And their revenues are going down, and their expenses are not. And we'll need to find a way to inject some cash, at least for a period of time, into that, to keep the whole thing running.]
[DESCRIPTION: David Hunt's headshot fades out and is replaced with a live image of the unnamed Bloomberg Markets reporter, speaking to camera, who asks the following question.]
[AUDIO: All right, David. I want to expand a little bit beyond the U.S. borders here, because when we talk about the performance of the U.S. market here, and the expectations for economic recovery that seem to be being priced in here. I'm wondering how we reconcile this with some of the expectations for growth outside the U.S., particularly in some of the emerging market nations. The expectation that some of those nations may lag the U.S. by a tremendous amount. There may be a wide gap there, and I'm wondering how we factor that all into growth prospects globally.]
[DESCRIPTION: The U.S. Ten-Year Yield daily performance chart is briefly replaced by an MSCI Emerging Markets Index daily performance chart, which is then replaced by a Euro-to-United States Dollar daily performance chart. David Hunt's headshot returns to screen. David Hunt responds to the question.]
[AUDIO: I think it's a really good point, and I think this is the crisis that is also yet to really unfold. Many emerging economies have taken on substantial debt over the last decade.]
[DESCRIPTION: The Euro-to-United States Dollar daily performance chart is replaced by an MSCI Emerging Markets Index daily performance chart. David Hunt continues his response.]
[AUDIO: Much of that debt is denominated in dollars. They've seen their currencies be pretty badly hit. Many of them are dependent on oil, which has obviously taken a real hit, as well. And so, we now find ourselves where more than 100 countries have actually approached the IMF, looking for some kind of bail-out or restructuring. And they're going to need it. In order to be able to do that, the IMF is going to need the support of the major developed countries, including the United States. They're going to have to expand their SDRs, in order to be able to meet the needs of those countries. And I think we're going to have to step up to the leadership of that. Many of these were formed on the leadership of the U.S., and I think it's very important, that right now, that they be utilized to the maximum, to try to make sure that these countries can deal with the real consequences to their economies, which hasn't really even been felt in much of the emerging markets yet. Our expectation is that we'll have a real bifurcation in the emerging markets, particularly for those that are dependent on oil, suffering a really difficult time, and others coming back a bit more quickly.]
[DESCRIPTION: David Hunt's headshot fades out and is replaced by a live image of Scarlet Fu speaking to camera. The MSCI Emerging Markets Index daily performance chart is replaced by a Bloomberg U.S. Dollar daily performance chart. At the bottom of the screen the following text appears: "Hunt: IMF Will Need Support From Countries Like The U.S." Scarlet Fu asks the following question.]
[AUDIO: Yeah, you're talking about public debt. What about private debt? George Soros and Chris Canavan had written in Bloomberg Opinion, earlier this spring, about the need to consider a comprehensive debt standstill for at least one year, from both official creditors and private creditors that -- and they would both need to be onboard with this idea. Is something like that even feasible in an era where far more flows come from bond markets, rather than banks?]
[DESCRIPTION: David Hunt's headshot returns to screen. David Hunt responds to Scarlet Fu's latest question.]
[AUDIO: So, at the moment, it would be very difficult to pull off. You're absolutely right, to point out that over the last decade, actually the banking system has gotten less and less important, in the flow of capital, particularly to developed economies. And the securities market, particularly the bond market, has become much, much more important. But that doesn't mean that nothing can be done. So, I think if the major countries -- and they took some step forward, the G20, to do this for public debt, and I do think that it would be possible to get together some at least of the major bondholding institutions, and begin to talk about some level of forbearance for the debt. So, I think Soros's comments was a good starting point. I think it would have to be modified, but we will need something like that, to avoid a lot of pain.]
[DESCRIPTION: David Hunt's headshot fades out and is replaced with a live image of the unnamed Bloomberg Markets reporter, speaking to camera, who asks the following question. The Bloomberg U.S. Dollar daily performance chart is replaced by a U.S. Two-Year Yield daily performance chart.]
[AUDIO: David, we have to ask you about what we've been seeing in the rates market, particularly today, with the two year yield hitting a record low and fed funds future is starting to price in the likelihood, in investor's minds, that we could see negative rates here, nominal rates here, in the U.S. I just want to get your thoughts on that, and what that could mean for markets?]
[DESCRIPTION: David Hunt's headshot returns to screen. David Hunt responds to the latest question.]
[AUDIO: It's a really interesting time to really kind of examine a lot of these issues, particularly with the bigger context in mind. I mean, we're now starting to see the kinds of new issuance that's going to be required by the Treasury, to meet all of these new requirements. We also see the introduction, which we were very much in favor of, of the 20 year, and we saw really a steepening over the last week, as people began to recognize this. At the same time, as you point out, people are also starting to contemplate the move to negative rates. And so, the short-term implication of that has been a real steepening of the yield curve. We don't think that's going to last. We think that will gradually begin to flatten, over time. But certainly for a while, we'll probably live with a steeper curve.]
[DESCRIPTION: Switch to full screen image of unnamed Bloomberg report speaking live to camera. In the background to the left is a plant and some books. To the right is a panel with "Bloomberg" written in various-sized fonts.]
[AUDIO: All right. David, so great to have you on. Thank you for your time today. That's David Hunt, he's the President and CEO of PGIM.]
[DESCRIPTION: Video ends.]
PGIM Real Estate’s Australian head Steve Bulloch anticipates more challenges to come for some assets in the country’s commercial real estate market this year.
David Hunt, President & CEO of PGIM, joined Bloomberg Surveillance for a conversation about the wide range of opportunities and challenges in financial markets.
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