FTSE Russell Convenes | Episode 1, Season 3

Finding opportunities in a challenging macro-outlook

August 07, 2023

In our first episode of Series three of FTSE Russell Convenes, Elizabeth Burton joins Jamie MacDonald to talk about the challenges and opportunities in the current market environment.

During the interview she dives into the US and inflation outlook, drawing upon lessons learnt from the past, factors likely to impact a rate hike and the one piece of information she feels is ‘going to have a lot to do with where we see the Fed’.  Elizabeth also provides her opinions on why she feels it’s an over-simplistic view to regard commercial real estate as a bad actor, the reopening of China, the commodities investment story and whether asset allocators are thinking seriously about digital assets.

Watch the video

- If I had to make one strong view,I would say when everyone's fleeing an asset classor everyone says it's not a great place to be,wait two yearsand it'll probably start to look more interestingbecause the capital flooded out, right?It's like watching the tides.And so you might wanna be there.So I think eventually,it'll become a good place to search for alphabecause it'll be a drain of capital.(upbeat music)- Elizabeth, thank you very muchfor joining us for this conversation.It's great to have you here.- It's great to be here.Thanks for having me.- Let me start with this,your job that you were just telling me aboutis a little bit nuanced.So what if you could go into a bit more detailabout your exact role at Goldman?- Oh, sure.So it is a new role for Goldman Sachs, I believe.I have spent my career as an institutional allocatorbefore then I was in private markets,but I just spent four years in Hawaiias chief investment officer thereand two years at Maryland in a risk and hedge fund role.So one of the reasons I joined Goldmanis that I've allocated capital.I've also been in private markets.So I can kind of bridge the dividebetween what they're seeing and what our largest clientsin the institutional space are seeing as well.And also kind of help them with their asset allocationin these challenging sorts of environmentswe've been having over the last decade or so.- Well, challenging environmentsis exactly what I'd like to talk about next,that some brilliant market investors.I was watching the interviewwith Stan Druckenmiller recently.He said after 45 years,he feels that this year is the hardest yearto have any kind of insight into the macro outlook.Is that something that you agree with?- That's an interesting thing to say.I always think it's challenging in hindsight.It's always really interesting-- [Jamie] Yeah.- To know what the trends were.I wouldn't say this is the hardest year.I think there are the most opportunities.And so in arrears we'll probably look backand say we missed somethingthat we could have capitalized on.It's almost like post-credit crisiswhen you're interviewing managers these days and saying,"Well, did you take advantage of traps?"And they said, "No, but we did this other thing."And you're like, "Well, why didn't you see that?"But at the time it's not always immediately obvious.So I think there's a lot of opportunities.What is challenging in the macro pictureare the diverging central bank policieswe're probably gonna seeand how countries gonna start differentiatingbecause they've kind of been in lockstepfor a little bit of time post COVID.So going forward, it should be a little more challengingto figure out the picture.At the same time,that means there's different thingshappening in different places in instead of this decadeof just up and up and up and up.So I think it means there's more asset allocation choicesthat we can be made, which hopefully leads to better alphaand better opportunities.- Well, that's interesting what we just saidabout central banks because I agree with you.I mean, almost ever since the financial crisis,there's been a a general easing of lower ratesand then obviously a rate height cycle,which we've just experienced.So when you look at the U.S.,what's your sense about the inflation outlook?Do you feel that the Fedis gonna stay around this level for a while?Do you see that there's further hikes to come even?Or do you see like the bond market's telling usthat we've got easing come?It feels like equities and bondsare telling us different stories.Equities are saying we're gonna keep rates hereor maybe even go higher,and bonds are telling us that rates are coming down.So where do you sit?- It's challenging when folks saythat equities and bonds are telling these different storiesbecause there's so many variables that could explain.- It's not as simple as that.- It's never that simple, right?It's really easy to say X-Y-Z is the one reason,so inflation is the one reasonwhy things are behaving this way.But really, things have changed so muchin the last 20 years.The advent of quantitative trading,the change in rates outlook,that where bond yields have gone.So there's a lot going on in the macro picturethat makes it really difficult to pin any one thing.I would say, it really dependshow the rest of the year plays out.There's a lot of things that could happen.We just had a major election,but we've got a couple more that are coming upin the next year or so.So those could always impact things.I think- - [Jamie] Yeah.A couple years ago, could we have predictedUkraine, Russia, maybe,but not in the way that it actually spilled out.We'll have to look at the oil and gas picture,the dollar picture.In terms of whether or not we're gonna get additional hikes.I think part of that dependson what happens in the credit picture.Much of last 2022,we already saw tightening in credit lending standards.I think there was something like 85% of reporting,small banks were already startingto tighten their lending, right?So we'll have to see a year out from that.What's happening post the January and February issues ,I guess more February-March in the banking sector.So that's one thing that could affect it.Also, one or two data points as you know in employmentor prices do not a story make.So we still have additional numbers we need to seein the labor picture.And I was actually thinking this morning,if I had to pin the entire futureon one piece of information, like as a former CIO,you look at, you know, tons and tons of data.If I just wanted to look at one numberfor the rest of the next three years,I think I'd wanna see labor statistics.I think they're more important now than ever,and I think that's gonna have a lot to dowith where we see the Fed.- So unemployment's ticked up, where are we now?3.7, 3.8%.Is there a magic number at which pointthe Fed can kindly sort of take a victory lapand said it's done its jobto really have an effect on inflation.Let me ask you a quick second point to that questionbecause I don't think I'm as anywhere near as muchof an expert as you are.But when it comes to U.S. monetary policy,is there any argument to say that what the Fed doesis having less of effect now than it has previously?And that could be a culminationof so much fiscal stimulusthat there's just so much washing aroundthat it doesn't have as much as a leveraged effect.And secondly, so many of the productswhich they aim to affect don't affect thembecause there's 90 to 95%of the mortgages in the U.S. are fixed.So there's obviously very little effect right now.I mean, we'll see when that runs off.If you could talk a little bit to those two things.- So that's an interesting questionon whether or not the Fed impact is as large.I think back to your earlier pointon distortions in the equity and bond markets,central bank action does distortsome of the volatility we see there and some of the pricing,some of the curves pricing that we see.Sometimes when it doesn't make sense,it might have to do with stimulus, right?In terms of whether or not they have an effect.I mean, I think the Fed is a much different animalthan it was 20 years ago.And I think. first of all, you and I are probably too youngto really know what they were saying 30 or 40 years agoin person, anecdotally.But they certainly have this.We all have to move in lockstep type of mentality nowwhere they're all coming out and trying to show support.So it's definitely a different animal.I'm excited to one day read the autobiography of the Fedand and see what's really happening there.And I think listening to former Fed governors,we get to hear a lot more interesting thingsabout what's actually going on.Whether or not it has effect,again, I think it goes backto there's just a lot of variables,and I think this inflation scenario was really challenging.So no two inflationary scenarios have ever been the same.Go back to the 1920s, you can find multiple,in the U.S., you can find multiple different causesthat are driving inflationary scenarios,and we've got rates in equities in different places.So everyone can say this time is different,but this time really was different.It's a unique situation.So you have to see like the Fed started hikingwhen we were already about at an 8% inflation rate.So the solution was not immediately obvious.Again, in hindsight we can say,"Wow, at 8%, they started hiking,"but obviously they're paying attention to that, right?So we were seeing things that were really challengingin this sort of market environment.So I dunno if it's fair to saythat they can't change things.I think that this dynamic is really tough,especially coming out of post COVID and how much it,inflation was disrupted on a world order and globally.And so they're not just managinghow they're playing in this game,but they have to manage all the players on the fieldor think about how they're all maneuvering as well.And with the advent of AI and net technology,and the internet and social media,like 20 years ago when a hedge fund would say,we really know what we're doingbecause we have a key insight into this central bankor we're really tight with this person.I think those are harder to believe stories now'cause the world's gotten smaller in some respects, right?- Yeah. Yeah.- So I think there's just a lot of variablesthat come into play on that.It's just a very different environment.- When it comes to commercial real estate.There's some talk in the marketthat this is a possible shoe to drop.- Yeah.- It feels like a lot of these loansare gonna roll off very slowly.I even read a newspaper today that there are some bankswho are trying to offload these loans even at a discountand take their losses now.Now, part of me thinks,"Oh great, some of these smaller banks are being prepared."And then part of me thinks, "Well, hang on a sec,maybe they can see something that we can't yet,and they're just trying to get them off their booksat 90 cents in the dollar or something."Do you have a particularly strong viewon where we stand on commercial real estateand how much of an impact it could have?- If I had to make one strong view?I would say when everyone's fleeing an asset classor everyone says it's not a great place to be,wait two years and it'll probably startto look more interestingbecause the capital flooded out, right?It's like watching the tides.And so you might wanna be there.So I think eventually,it'll become a good place to search for alphabecause there'll be a drain of capital.I think it probably offers new opportunities to investorswho can step in and fill the holejust like that happened in private creditand private equity years ago.So hedge funds, private investors, those sorts of things.I think it's really easy to pointto commercial real estate right nowand say there's a bad actor,there's something we want to avoid.But that's overly simplistic.There's probably pockets of opportunity,maybe not right this second, but down the road.- I can't work it out.Because I mean, I watch these new shows like you doand they keep telling methat there's so many cities across Americawhere offices in the middle of these citiesare just completely empty.And maybe that's just one of those timeswhere the media is just maybe exaggerating a storyand that we're ingesting that media,and then it starts to become a reality.So do we all need to be a little bit carefulabout how we ingest this media?- Well, I mean, in parts,I don't think they're wrong, right?Downtown Manhattan feels very different to methan it did 15 years ago.San Francisco feels very different to methan it did five years ago.This work from home phenomenon has legs.And I think it potentially, and this is not a Goldman view,my view may have changed the future of work forever,but there's always something that else that comes onand changes another part of it, right?So I don't know what that next step will be,but there's also repurposing that can be doneand imagination that can be done.Like who before we work,who would've thought the coworking space would've been-- Yeah.- Something that would've taken off so strongly.So there's gotta be opportunities.I think what is distressing?I was just in my hometownand there's a really large mall there.- What's your hometown?- Charlottesville, Virginia.- Okay.- And it used to be the place to hang out on Friday nightswhen I was a tween.And I was driving by it on Friday night,and there were very few cars in the parking lot.- [Jamie] Really?- And that is a huge piece of real estate.So what do you do with that?I don't know, but University of Virginiacould theoretically one day be 100,000 students, right?Because they've also got Zoom classes and whatnot.So there's opportunities to expand into these places.Maybe it just looks different.And with AI, maybe there's jobswe don't even know about yetthat could be going to these locations.- Yeah. Well, who knows with AI.And maybe they just become college professorsand we're all just getting our degrees online.Who knows?It's such a big question mark.You mentioned China just now.I was gonna ask, me included,I think people expected the reopening of China, so to speak,to create quite a lot of demand for energy, oil,and that didn't really unfold.Do you think the oil prices now,I mean actually we've got some use todayout of the Middle Eastthat there's gonna be a cut in production.So the oil prices are doing a little better.But do you think that's somethingthat people were positioned?Were a lot of people positioned for a pickup in-- [Elizabeth] Yes.- Energy prices going into 2023,and how do you see that playing out?- Yes, I think so.I think part of that was the combinationof equity and bond correlations were highcoming out of COVID and positive rate.So institutional investors, retail investors,everyone's kind of lookingfor some sort of diversification in their portfolioother than cash,because if you think about it,this time of year ago is really when cash started to pay.It didn't before that.- Yeah. - I mean, it's literally,it hasn't been that long since we were at 0% rates.It's been kind of amazing.So where do you look for diversification?You look to hedge funds, you can look to cash.Some investors are prohibited from investing in cash.Commodities, you can look at,but a lot of institutional investors at leasttook commodities outta their portfolio a decade agobecause it experienced some challenging returns.And it's a difficult asset class usually to hold.- [Jamie] Yeah.- And same with the retail markets.But you saw in COVID, with all the supply chain disruptions,retail really was the first one saying,"I'm looking at copper, I'm looking at gold."And then, and then really last year,or maybe one or two years post COVID,you started hearing the institutional investors like,"Okay, where can I reach for yield?"So I do think there was a lot of moneybeing considered to be put into commodities last year.It may not have been direct.It might have been through a CTA strategyor something like that,but there was a lot more interestthan I've heard in a really long time.So what happened in this cycle? Is it China?One, I wish I was in China right nowbecause I would love to see what it's likein this reopening.If you remember when we reopened, it was just-- Yeah.- [Elizabeth] Completely amazing scenario.- Oh, optimism everywhere.- Right, so I'd love to be there.But I think this commodity storymight be a little different.If you think about how expensive it is to hold it,literally the carrying costof holding a commodity right now.And that's not just oil, it's metals as well.- Right, I never thought of that. Yeah.- You've got high cash ratesso you've got a high opportunity cost,and then you've got the actual costof the physical commodity and storage.And so the only way really to get the price back upis to keep destocking, and it'll happen.So commodities are at the same timethe most challenging asset class to invest in,and also like pretty predictable to some extent.All you gotta do is get the supply low enoughthat it'll popand it'll become an investible asset class again.And in general, it's kind of energy works, right?- Final question on digital assets.Bit of a leftfield question,but I do remember a few years ago,admittedly when Bitcoin and Ethereum was so much higher,but there was a lot of debate that on a long-term view,that asset allocators were gonna think seriouslyabout allocating capital to some of these digital assets.Is anyone even having those conversations right now?Are cryptocurrencies even like on the tableas a possible asset cost to invest in?Or are people just waiting till the volatilityand those prices calms down?- So yes, there are in fact public institutions,public pension funds that do invest in crypto.First of all, take a step back.Almost all public institutions have exposure to crypto.They may not know it, but it's in your CTA portfolioor it's in your private equity book, right?There's some flavor of it in there.But there are some that make direct allocationsvery, very small.When folks push back and say,"Why hasn't the market gotten therein terms of digital assets and investing?Why are they so late?"My response to that is in December of this year,there were a handful of really large institutions that said,"We're going into private equity for the first time."Private equity has been aroundlonger than you and I have been around.- Yeah.- And now institutions are just starting to allocate.So it just is a longer haul.In terms of the rest of your question, is it the volatility?It's hard to dedicate scarce resourcesto an asset that's gonna have to be such a small allocationwith such a high volatility.- Yeah.- It's just where do you maximize your time,say 80/20 rule, right?- That makes perfect sense to me.Elizabeth, this has been a fascinating conversation.Thank you so much for taking the time to chat.- Thank you so much for having me.(gentle music)

Video recorded on June, 5, 2023 at FTSE World Investment Forum

Terms of use

© 2023 London Stock Exchange Group plc and its applicable group undertakings (the “LSE Group”). The LSE Group includes (1) FTSE International Limited (“FTSE”), (2) Frank Russell Company (“Russell”), (3) FTSE Global Debt Capital Markets Inc. and FTSE Global Debt Capital Markets Limited (together, “FTSE Canada”), (4) MTSNext Limited (“MTSNext”), (5) Mergent, Inc. (“Mergent”), (6) FTSE Fixed Income LLC (“FTSE FI”), (7) The Yield Book Inc (“YB”) and (8) Beyond Ratings S.A.S. (“BR”). All rights reserved.

FTSE Russell® is a trading name of FTSE, Russell, FTSE Canada, MTSNext, Mergent, FTSE FI, YB and BR. “FTSE®”, “Russell®”, “FTSE Russell®”, “MTS®”, “FTSE4Good®”, “ICB®”, “Mergent®”, “The Yield Book®”, “Beyond Ratings®” and all other trademarks and service marks used herein (whether registered or unregistered) are trademarks and/or service marks owned or licensed by the applicable member of the LSE Group or their respective licensors and are owned, or used under licence, by FTSE, Russell, MTSNext, FTSE Canada, Mergent, FTSE FI, YB or BR. FTSE International Limited is authorised and regulated by the Financial Conduct Authority as a benchmark administrator.

All information is provided for information purposes only. All information and data contained in this publication is obtained by the LSE Group, from sources believed by it to be accurate and reliable. Because of the possibility of human and mechanical error as well as other factors, however, such information and data is provided "as is" without warranty of any kind. No member of the LSE Group nor their respective directors, officers, employees, partners or licensors make any claim, prediction, warranty or representation whatsoever, expressly or impliedly, either as to the accuracy, timeliness, completeness, merchantability of any information or of results to be obtained from the use of FTSE Russell products, including but not limited to indexes, data and analytics, or the fitness or suitability of the FTSE Russell products for any particular purpose to which they might be put. Any representation of historical data accessible through FTSE Russell products is provided for information purposes only and is not a reliable indicator of future performance.

No responsibility or liability can be accepted by any member of the LSE Group nor their respective directors, officers, employees, partners or licensors for (a) any loss or damage in whole or in part caused by, resulting from, or relating to any error (negligent or otherwise) or other circumstance involved in procuring, collecting, compiling, interpreting, analysing, editing, transcribing, transmitting, communicating or delivering any such information or data or from use of this document or links to this document or (b) any direct, indirect, special, consequential or incidental damages whatsoever, even if any member of the LSE Group is advised in advance of the possibility of such damages, resulting from the use of, or inability to use, such information.

No member of the LSE Group nor their respective directors, officers, employees, partners or licensors provide investment advice and nothing contained in this document or accessible through FTSE Russell Indexes, including statistical data and industry reports, should be taken as constituting financial or investment advice or a financial promotion.

Past performance is no guarantee of future results. Charts and graphs are provided for illustrative purposes only. Index returns shown may not represent the results of the actual trading of investable assets. Certain returns shown may reflect back-tested performance. All performance presented prior to the index inception date is back-tested performance. Back-tested performance is not actual performance, but is hypothetical. The back-test calculations are based on the same methodology that was in effect when the index was officially launched. However, back- tested data may reflect the application of the index methodology with the benefit of hindsight, and the historic calculations of an index may change from month to month based on revisions to the underlying economic data used in the calculation of the index.

This publication may contain forward-looking assessments. These are based upon a number of assumptions concerning future conditions that ultimately may prove to be inaccurate. Such forward-looking assessments are subject to risks and uncertainties and may be affected by various factors that may cause actual results to differ materially. No member of the LSE Group nor their licensors assume any duty to and do not undertake to update forward-looking assessments.

No part of this information may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without prior written permission of the applicable member of the LSE Group. Use and distribution of the LSE Group data requires a licence from FTSE, Russell, FTSE Canada, MTSNext, Mergent, FTSE FI, YB and/or their respective licensors.

Past performance is no guarantee of future results. Charts and graphs are provided for illustrative purposes only. Index and/or rate returns shown may not represent the results of the actual trading of investable assets. Certain returns shown may reflect back-tested performance. All performance presented prior to the index or rate inception date is back-tested performance. Back-tested performance is not actual performance, but is hypothetical. The back-test calculations are based on the same methodology that was in effect when the index or rate was officially launched. However, back-tested data may reflect the application of the index or rate methodology with the benefit of hindsight, and the historic calculations of an index or rate may change from month to month based on revisions to the underlying economic data used in the calculation of the index or rate.