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This is the Bloomberg Surveillance Podcast. Catch us live weekdays at 7 a.m. Eastern on Apple CarPlay or Android Auto with the Bloomberg Business App. Listen on demand wherever you get your podcasts or watch us live on YouTube.

I've got Jess Metten sitting in for TK this morning. I'm Paul Sweeney, live here in our Bloomberg Interactive Broker Studio, streaming live on YouTube as well. Jess, all right, back in my sell-side analyst days, when a salesman was booking your Chicago visit, which you had to do like once or twice a year to go see accounts in Chicago.

they would start with Northern Trust.

This was a big deal.

That was the deal. And then once you got the Northern Trust meeting locked down, then you can build all around that for the rest of the day.

So then the stress is over.

Exactly. Our next guest, Anvidi Bahuguna, is a global co-CIO of Northern Trust Asset Management, joins us here in our Bloomberg Interactive Brokers studio. Anvidi, what's the number one issue that you and your team are talking about today? Because for the longest time, It's been AI, and it's generally been a really good thing for the marketplace now. Now it seems like people are kind of asking some different questions.

How do you position that AI story within your investment framework?

Thank you, Paul, for having me. I think the question is excellent because we have started tweaking our portfolios a little bit this month, starting this month. On the growth side, we have tremendous growth in the U.S., We do see inflation moderating in fits and starts.

What's worrying us.

A bit is the fact that we still don't have a handle on the geopolitics situation, which means maybe the inflation story remains front and center for a while. And also, the AI story is beginning to have a few cracks, as you saw last week with Corweave. Now, we still think that's a one-off and we are going to see solid productivity boost from AI. We're going to see improvement in the growth picture. All of that is still to come.

But one of the things that we are grappling with is, do we begin to start worrying about a few growth hedges in our portfolio? So far, we haven't needed growth hedges because Being long equities has been a good trade. Being short bonds has been a good trade. We've sort of barbelled in the portfolios until September, cash and.

equities.

This month, we went and closed our bond underweight and moved neutral bonds because if there are some cracks to the story, you need a hedge and bond still remains a pretty decent hedge in the portfolios.

I'm glad you brought this up. So the S & P 500 Dividend Aristocrats Index. So this consists of... The S & P 500 Dividend Aristocrats Addict. So it basically consists of companies that have increased payouts for the last 25 years. Month to date, it's up almost 6%. S & P 500's flat. So we're seeing a lot of those like staples, healthcare, energy, a lot of these other corners of the market taking off this month relative to obviously tech underperforming. How do you view that? Are those corners of the area, those dividend payers, is that where you're going right now if you're still staying with inequities?

That's an excellent question. And it sort of depends just on what your opportunity set is. So if you are planning for your client's entire asset allocation portfolio, you can go to bonds for your income. And right now, bonds are giving tremendous amount of income. Plus, you have the potential for price appreciation if spreads come come in. If you don't have that opportunity set, if you have to look within the equity universe, which is what many investors do, then what is your alternative to tech and AI, which is 40% of the S & P index? And you need to look for something else. And so I'm not surprised at all that people are looking for those stocks which have a negative beta to the tech sector. And

in our context at Northern Trust, what we do is we quantitatively look at stocks with really good quality, low volatility, and income.

All right, your title is Global Co-CIO. How do you think about the US versus rest of the world these days?

So there again, I think it's very interesting that the market is starting to look for alternatives to the U.S. story, which at a market capitalized stock level is still very much a tech story. So there are now parsing through countries to say, where can I get diversification from tech? So we are overweight emerging markets, but that's still a tech story.

EM index has.

The best returns projected this year, higher than actually the US returns at around 30%. And that means you're long Korea, you're long Taiwan, you're long the tech. In fact, you're longer small component of tech, you're long semiconductors. you would see, just as you say, just dividend stocks outperforming, you will see globally UK, Europe, which have less exposure to tech in their indices, outperforming in this period. So that's one area to look at. We are still very positive on the AI and the productivity trade. So we are long barbelled US and EM. But we are neutral Europe and UK.

We are not underweighted.

It's an interesting development because we saw periods of this last year where after just so many booms within the AI trade where the first quarter of last year, the US greatly underperformed its counterparts internationally. But then we'd see these bounce backs where it wouldn't necessarily stick just given the earnings picture. being historically so strong at this point in the cycle for the S & P 500. So when you're seeing sort of these outperformances in certain nooks overseas, I mean, how long can that really last? Because it seems like people keep underestimating this bull run in U.S.

stocks and it keeps proving people wrong.

That is the number one client question we have because it's so easy to have a home bias in your portfolios.

And U.S.

Is such a great country to have a home bias in because the stocks do so well.

And the earnings growth.

And earnings growth is tremendous. Tremendous.

Yeah, I mean, the first half of earnings growth based on Bloomberg Intelligence data averaged over 30%. So outside of the bounce back from COVID or the great financial crisis, that's about the greatest earnings growth we've seen in decades.

It's really a matter of if your opportunity set is only equities and you need a hedge, then how do you hedge? And we saw some benefits of strong US dollar on top of US earnings in the last few months. But if you notice last month, that's starting to reverse also. Because right now, the strong yields on the front end of the curve makes US a really attractive, pays from currency pairs point of view also. So you see strength in US dollar for that reason also. But that sees some wobbles as the AI trade sees some wobbles. And you see the currency also depreciate recently, USD, when you saw people focusing not just on the monetary policy front anymore, but also on the flows because So much money has

flown into the country, capital flows for stocks. If that starts reversing, that's something to worry about.

30 seconds left on fixed income here. Do I take credit risk or just clip the U.S. two-year treasury at 470 here?

So that was our stance, Paul, for a while.

But I think with the growth worries and how the yields have widened recently, we are ready to take some credit risk.

Nice to see.

Take some credit risk out there. I mean, so go buy some SpaceX 30, 40-year bonds.

All right.

Anvidi, thank you so much for joining us. Really appreciate it. Anvidi Bahugana, Bahuguna, excuse me, Global Co-CIO of Northern Trust Asset Management out there in Chicago.

Stay with us. More from Bloomberg Surveillance coming up after this.

You're listening to the Bloomberg Surveillance Podcast. Catch us live weekday afternoons from 7 to 10 a.m.

Eastern.

Listen on Apple CarPlay and Android Auto with the Bloomberg Business app.

Or watch us.

Live on YouTube.

Violetta Todorova joins us here. Senior Research Analyst at Leverage Shares. Violetta, thank you so much for joining us here. What's your outlook for stocks here? Given that we're in an interest rate environment where it seems to be higher, and much higher relative to the last several years higher for longer what does that mean for stocks in your perspective.

This is a very good question especially after we've seen the bruising sell-off in semiconductor stocks last week. So just to answer your question is If we look at the three major indices in the US, the S & P 500 is just a notch below its record high, while the Nasdaq, it's retreated about 7%. But the Philadelphia Semiconductor Index is down 24% from its record high. So every sector is behaving differently, but the market is laser-focused on technology stocks. and this earnings season will definitely put earnings into the test. But as we are entering earnings season this week in earnest, I just had a quick look at the charts and especially I had a look at the semiconductor index and I started noticing some signs of

weakness and the current sell-off is resembling the sell-offs we've seen in 2022 and 2024, our momentum indicators have broke below its bull market range, which means that the semiconductor sector is prone to a deeper pullback. So when I make an analogy between 2022 and 2024, those two years, the Philadelphia Semiconductor Index dropped significantly. 49% and 43%, and we are now down 24%. So I think we are likely to see an initial rebound, especially for the next couple of weeks throughout reporting season. However, over the next four months, I think it could be potentially more weakness coming.

And let's not confuse things because a lot of journalists are asking me, is it similar.

To the dot-com bust?

I think we are not having a similar setup when the semiconductors index declined 84% and the bear market lasted for two years. Those sell-offs throughout the bull market last around seven to eight months. And given that semiconductors peaked around June, I would expect furthermore weakness for another four months maximum until we finally find the bottom and then stocks recover. However, there would be other sectors outperforming in the coming months.

Well, the bubble arguments, Paul, when a lot of this happens, I mean, if you look at the PE on a forward basis ratio for the S & P 500, still around 19 times forward earnings. So, I mean, that's much lower than when it peaked out over above 23%. about a year ago. So I'm curious when, Violeta, when you're looking at this, as far as when people want to compare this to the dot-com bubble, obviously the valuations are very different. And then also the earnings growth is backing up a lot of these AI-related names and corners tied to AI.

Absolutely. So the earnings are definitely here.

And just for Q3, we are expecting to see earnings growth of above 30%. and still resilient earnings in Q4 and throughout 2027. So definitely we are not comparing. We are not at the same situation back to 2000 during the dot-com burst.

Right, not like a pets.com type situation.

Absolutely.

So I think earnings are so far supporting the equity market. And despite the strongly rising treasury.

Yields, equities.

extended their bull run.

So I think we are going to see a little bit of a reprieve in equities, given that the October hike is pretty much on a pause. So we are looking at three more interest rate hikes, one in December and potentially another two in the first half of 2027. So if we are seeing growth of between 25% and 30%. I think that will be sufficient by itself just to overtake these elevated borrowing costs. And I believe after three interest rate hikes, we will reach the peak of this hiking season.

But of course, everything remains dependent on.

The situation in the Strait of Hormuz and where Brent prices are going. But looking at the recent deal between Washington and Moscow with diesel, if we have a resolution in the Middle East conflict in the next couple of months and we see a retreat in Brent prices, I think treasury yields will drop and most probably the Federal Reserve wouldn't need to deliver two more hikes in 2027 if we start seeing Brent dropping to around $ 70 which will be a massive tailwind for equities. But if we presume that Brent remains around 100 and we get to see another three interest rate hikes, I think those earnings will be put on the test. And price action most probably is going to be choppy, but I'm not bearish

as yet. I think there is further upside in equity markets. Just the easy gains are behind us. And most probably we will get to see increased volatility and more choppy price action in the next 12 months. But the overall trend remains up and I'm still quite supportive of equities.

Hi, Violetta. Thank you so much. We appreciate it, Violetta Todorova. She's a senior research analyst for Leveraged Shares. Stay with us.

More from Bloomberg Surveillance coming up after this.

You're listening to the Bloomberg Surveillance Podcast. Catch us live weekday afternoons from 7 to 10 a.m.

Eastern.

Listen on Apple CarPlay and Android Auto with the Bloomberg Business app or watch us live on YouTube.

Our next guest notes, very simple. In bold, everything is AI and rates. I'm going to start right there. Ben McMillan, CIO of IDX Advisors. Ben, that's been kind of the call here. People are starting to maybe ask some more questions about the AI trade, particularly in the context of maybe how some of that build-out is being financed in an environment where we do have higher rates for longer.

How do you guys kind of put that together?

No, that's exactly it.

I mean, I think, you know, you go back a year ago and it was just, you know, the AI trade was kind of this, you know, one block trade and maybe it was, you know, people dumping money into an NVIDIA or whatever. And now, not surprisingly, 10 years backing up, investors are becoming more discriminating. We're hearing talk about people just saying, why don't I just buy the, you know, long bonds and, you know, forget about it.

So capital is becoming more discerning. And then CoreWeave, I think, was kind of the canary in the coal mine last week, you know, as it relates to your point about how these things are being funded. Because, you know, there's a lot, you know, they went the debt route. Whereas you look at some of the other so-called neoclouds, which, by the way, let's back up. This is part of the AI trade where they're basically the middleman, the GPU middleman. Somebody had a good analogy. It's almost like WeWork, where they get into these long debt obligations as it relates to power centers and data centers and things like that. And then they need to kind of go back and rent out the GPUs, which themselves are a depreciating asset, et cetera,

et cetera. And, you know, CoreWeave borrowed a lot of money to do that. And now all of a sudden, Wall Street's looking at that and saying, wait a second, like, you know, we need to be compensated more for this. So you see their bonds back up. You see their CDS explode. You know, meanwhile, you look at some other parts of that ecosystem, like Nebius is a good example.

They have the same business model, but they funded it with shareholder equity. And so they sold off, but we're hearing a lot of chatter of some discerning investors saying, all right, this might be a way to get in on that trade. So anyway, back to the original point, Wall Street is starting to really take a close look now at the AI trade, quote unquote, and who's going to come out of it alive.

And over the next two weeks, we'll have more than 50% of the market cap by the S & P 500 reporting, including NVIDIA's top customers. So you'll have Meta later this week. We also have, over the next couple of weeks, Amazon, Microsoft, Google, What are you expecting to hear from them when it comes to this CapEx story and then obviously the debt issue that a lot of people are scrutinizing?

Well, yeah, I think you're going to start to hear, you know, a lot of talking, you know, about the financial engineering behind this. So my guess is irrespective of how they're doing it, these companies are going to want to get ahead of this after seeing what happened to CoreWeave and say, no, we're doing it a smart way.

We're thoughtful about this, you know, whatever it might be. And I think you're also going to start to hear to the extent, you know, you look at some of these players, Meta is a good example. You know, a lot of people said, all right, you know, Muse, you know, why should we be excited about this? And they said, listen, we own the audience. We have the mode already. You know, this isn't a glorified middleman business. We can directly pump Muse into billions of customers. For the bigger companies that have that established moat, that have the cash behind it, I think they're going to, for lack of a better term, kind of flex on that. And then, of course, it remains on earnings. There's been a real concern about earnings slowdown,

token slowdown. And we've even seen that in our own models. We went from being entirely frontier spend to We're a small company, but we spend $ 20, 000 a month on AI compute. Over the year, over the last 18 months, that's shifted almost entirely to open source, open weight models, as has a lot of other companies. So again, that's in the zeitgeist as well as we get closer to these IPOs.

Yeah, and I mean, Meta last month, after on the back of that news from Muse, its stock was up 27% in September. So that was its best month since November 2022. Obviously, when it was in the tranche, a lot of people were doubting Meta at that time. But it's up hundreds of percents an hour since then.

Exactly. And I was just looking at a tweet from Dan Ives this morning. He was saying, hey, on their earnings call, one of the key issues is for them to articulate kind of a monetization model for views. That'll be key. On your platform at IDX, you have funds, you have ETFs, mutual funds. Where are you seeing the flows these days?

So it's interesting. We've got a commodity fund, which has gotten a lot of interest over the last year or two. We've actually got, we call it the Alternative Fiat Fund, ticker symbols GLDB. And it's a risk-managed gold, Bitcoin, silver, Ethereum fund. So that's kind of aimed at the, quote unquote, debasement trade. And that's not surprisingly gotten a lot of interest more recently. And so when we zoom back out, because we manage a lot of portfolios separate and distinct from our funds, a lot of interest in tactical fixed income, a lot of interest overseas, you know, people are starting to look at EM, people are looking at LATAM, you know, more, uh, again.

So I would say commodities more, more broadly as part of the conversation. So it's, you know, it's back to kind of, you know, blocking and tackling, you know, diversification, um, You know, and being more mindful of kind of, you know, risks in the portfolio. I will say, though, a lot of conversations we have, because most of our clients are advisors, institutions, you know, they're looking at it and saying, listen, Mag7, you know, how do we do anything other than this?

You know, because our clients, you know, if the risk is to the upside, you know, if we kind of sit this out and go into S & P equal weight or a quality tilt or something like that. So a lot of people, a lot of investors are worried about kind of how to play this with, you know, with managing the quote unquote upside risk.

I put out this stat last week that ended up being snapped about this 1% streak. The S & P 500 went without at least a 1% decline. It was 53 consecutive sessions, and then that was ended last Wednesday. And then, of course, the VIX below 19. But obviously, on a micro level, there's a lot of volatility going on underneath the hood of the indexes. Talk to us about that and when you can't really see it on the VIX level.

So that's an excellent, excellent point. We actually had kind of an internal research note about this, where And investors are asking us, the VIX is so low, the VIX is so low, and we've been calibrated. There's a generation of investors who have been calibrated on buy the dip, really since 2008.

Paul was just talking about this earlier. Yeah, exactly.

But you look at the VIX, and what was interesting is if you look at the implied correlation, at least as of last week, it was sitting in the first percentile, saying that the stock's correlation to each other was so, so low.

So you're seeing a lot of dispersion.

And again, this kind of correlates well to the headline trade where we see S & P kind of closer at all-time highs, but 50% or whatever in a bear market. That same thing was happening in the VIX. And that's a powder keg, which we actually saw to some degree kind of. detonate on, you know, since then it's, you know, VIX is backed up to whatever it is, 22, but that is the latent risk that was there under the hood to your point.

So what breaks that then? When do you see it turn from a micro story to more of a macro story? And then you see it reflected in the VIX and other, those volatility gauges.

Well, I mean, I, you know, I think to some degree, we kind of started seeing that on, on Friday and I'm not surprised that it was credit that got it there. You know what I mean? That's the old saying, you know, the bond holders, you know, see the risks first and, you know, Corweave was kind of the big headline and that just kind of I think shocks Wall Street back into, okay, we've got to be more discerning about the risks under the hood there. And there's always, to some degree, a contagion effect where people start to see that and all of a sudden it's, all right, let's move out of credit and long duration. Let's start to de-risk more generally, potentially buy insurance. VIX goes up. That's not saying that

there's a crash imminently, but that is saying that the headline number for the VIX was too low and we're starting to see it re-rate normally.

All right, so you guys have an Arizona office in Scottsdale.

Yep.

And then you have one in St.

Pete. Yep.

Where's the Lake Tahoe office?

One of our guys is from Reno, so that would be the next one.

Okay.

All right.

Not too bad. I see this more and more people not in the city. I can't imagine doing that, but a lot of people are. Ben McMillan, thanks so much for joining us. Appreciate it. Ben McMillan, he's the CIO of IDX Investors here. Stay with us.

More from Bloomberg Surveillance coming up after this.

You're listening to the Bloomberg Surveillance Podcast. Catch us live weekday afternoons from 7 to 10 a.m.

Eastern.

Listen on Apple CarPlay and Android Auto with the Bloomberg Business app.

Or watch us live on YouTube.

U.S.

Peak season for air freight and shipping. That's upon us right now as we approach the holidays.

You're just telling the economy.

Exactly right. Telling the economy. We've got some hot wars out there. What does it mean for the global shipping business? Oscar de Baca. He is the CEO of DHL Global Forwarding. He joins us here. Oscar, thanks so much for taking the time here. Just give us an overview as you guys approach your peak season for shipping. How is the market out there?

It's complicated, and the flows around the globe, both air and ocean freight, are obviously complicated, but you have to continuously watch what's happening tomorrow. But at the same time, we actually do see that the stocks are building up in the U.S. If I take the containers, imports is about 10% up compared to September last year.

So you actually really start to see that happening.

We see the same thing physically in our US businesses where you see the retail stocks moving, the retail storage, so inventory, moving up about 5% compared to last year. We expect that that sort of will neutralize a little bit, and it will be pretty similar to last year. But all that in the background of a highly complex supply chain around the globe, where we obviously.

Have to be quite inventive on a day-to-day basis.

Oscar, talk to us about the resilience of the global supply chains.

Yeah, I think what is really interesting to see is, I always say that since 2019, I think, And anybody that has something to do with supply chains has learned resilience really fast. And if you look how agile supply chains are today compared to then and how fast we, but also our customers can respond to the unexpected is impressive, but also needed and required because let's face it, since 2020, every six months there's been a at least a surprise in basically the geopolitical environment, and therefore global supply chains.

If I take a simple example, the Suez Canal is still only partly used compared to what it should be, and that adds about 10 days to, or at least 10% to the overall transit time, in this case, to New York. But it does mean that the capacity requirements, so the overall available capacity of ships, is therefore reduced by 10% compared to an increased demand. Similar with air freight, where you see that if I take the air freight into the US, the demand is grown by 15%, while the actual supply is in a single-digit increase because simple factors that become the world can't produce that many new airplanes, freight airplanes at the same time. So you see that that's driving not only complexity, but also, of course, freight

rates up. both in ocean and air freight, more in air freight even. So those complexities that together with other things like growth, for instance, in AI data centers, which is absorbing about 23%, sorry, 42% of the total capacity in air freight at the moment is related to AI data center buildup and all of that. So that's within all the things that we're doing also and puts some pressure on the on the overall supply chains as well.

Oscar talk to us about i guess these two hot wars we're dealing with one in iran in the in the broader middle east and then obviously the other one in ukraine how does that impact kind of your business on a day-to-day basis i would think it would push your insurance rates up your cost of doing business up which i guess you try to pass along to customers how does that all has been playing out over the.

Last few years.

Obviously, to start with, you mentioned insurance. That's obviously something for customers, but also for what we provide to our customers. Indeed, specifically in the Middle East, in the hottest months that we have behind us, that was actually really an issue, the insurance cost for freight going through, for obvious reasons.

You see, the other point is that obviously the whole.

air space above Russia is obviously for, not for all, but for most of the Western Airlines is closed.

So that means that.

Distances are longer. So that's an impact that it actually has. I spoke earlier about the routing around Africa and not the Suez Canal anymore. That has an impact on total capacity. And then there's obviously the day-to-day responsiveness that is required in organizing supply chain.

So to take an example, I don't think.

Any global company would anymore source their products from one single continent, at least not their key components, but always make sure that you have an alternative in different continents. So that you can always respond to the unexpected. And that obviously means that you get more complicated supply chains.

And the average kilometer driven per product has substantially increased over the past years, as you can see in the globalization radar that we published last week.

Oscar, thanks so much. We really appreciate getting a few minutes of your time. Oscar DeBach, he's the CEO of DHL Global Forwarding, getting the update on logistics.

This is the Bloomberg Surveillance Podcast, available on Apple, Spotify, and anywhere else you get your podcasts. Listen live each weekday, 7 to 10 a.m. Eastern on Bloomberg.com, the iHeartRadio app, TuneIn, and the Bloomberg Business app. You can also watch us live every weekday on YouTube and always on the Bloomberg Terminal.

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