 Hello and welcome to episode 71 of the market maker podcast great to be back. You might have realized if you're a follower of the podcast series that there was a missing episode last week because I had my hands full unfortunately. Yeah, what's your excuse mean surely you don't have a good enough excuse. Just, just, just, you know, doing my part just helping humanity, adding another human being to the to the world. Yes. So yeah, can I just say amazing congratulations. Thank you. Yeah, I know. Because technically I'm still off at the moment you messaged me this morning. I'd literally, I said to my wife right, you know, I'm going to go back to work properly Monday. So just go in the other room sleep all night. I'll take care of this. I'll take care of both of the little ones. Yeah, big mistake. The brutal night shift. Yeah, if I'm sounding a little groggy. That will be why but but yeah good to be back in the first off as I normally do a couple of shout outs in order I think because as I've been away, kept my eye on the few things and LinkedIn I saw some really great news and first off for our own team for for a change. And that is for for Milan. First class degree computer science, the unveiled to the world this week so massive congratulations to him I know he's had quite a few things to hand on his plate both professionally and personally so absolutely awesome job to to get that done. And now onwards and upwards, you know the real difference that he can make our know will start now for us and for himself I'm sure so congratulations to Milan, Sophie as well. Not to neglect the other members of our awesome tech team. She also got a first. I know she announced that a couple weeks ago, and she went to the best university in the world, not him Trent. So that's where I went, of course, and then, yeah, just to mention the other, the other members of that team as well who are joining now full time, having now graduated so it's great to have you on board as well with us every day and their leader of course my main man just the glue that holds everything together so can't can't not give a mirror shout out as well. So yeah, just to get that out of the way and say well done to that team. But yeah let's talk about what's been going on because I did catch the episode that you did I think the day after or the morning of when the baby arrived. Obviously the Fed pulled the trigger, and they went big, and then volatility is being quite high, which is quite typical go back and do your back testing of when I typically tend to take holidays and so. The pattern is there. So yeah US stocks have recorded their worst first half in more than 50 years, and we're recording this so it's first of July now so it's good really good time I like to do this often. I know you're the same pierces I take a bit of a stock check where we are various periods throughout the year and typically quarterly semi annually and it's good good conversation I know we can talk a little bit about potential portfolio rebalancing and these things are very important at this time and we can also talk a little bit about debt and capital or equity capital markets as well. So it won't all be global markets we can throw in a little bit of kind of IBD chat as well so yeah the main crux of this as we know has been very well commented on in press run away inflation fears of slowing growth aggressive central bank tightening now well on its way. The SMP finished yesterday session down around a percent but it means that the index is in bear market down 20.6% the first six months of the year. The one stat I did see, obviously sensationalizing it was the FT they were talking about stocks are basically lost $9 trillion. Can that be right, but they were quoting the. The SMP 1500, which not something I'd look at a great deal, but to give you a bit of context. If you are relatively new to markets with the stock indices there's a variety of them and typically they look at different types of stocks different size index weighting things like that. The SMP 1500 because it's typically the 500 largest companies that most people would look at as a benchmark the 1500 tracks small medium and large cap groups. So I guess it's a pretty good barometer of just the general encapsulating what's been going on but obviously starts to blow up that figure. If you're a journalist to the nine trillion marker. But then yeah tech stocks of course have been arguably one of the main casualties for 2022 to date they've lost almost 30%. So you can stick on another 10 on top of the SMP loss, but they haven't all been losers. Although we can talk through and I'd like to get your input as to the rationale behind some of the equity sector performances. Energy stocks up 29%. Now just to put this in context I said the SMP, which was down 21% energy was up 29%. So phenomenal period for energy stocks that then perhaps you could talk us through that and talk us through consumer discretionary stocks which I know was the complete opposite. Yeah, why these sectors have performed like they have and is there any expectations that you have going forward for the next six months. Yeah, so definitely some sensationalist headlines as you were saying in the, like the FT in the light this morning. Yeah that kind of front page your US stocks suffer sharpest first half drop in more than 50 years, which is actually correct. So the first half of 2017 was the last time we had a bigger sell off in the first six months but I mean, I guess it's just a bit of timing this sell off we've had, as you said 22%, sorry 20.6%. So it's the official Nasdaq 30%, but it's just the timing of the seller just happens that we peaked at the end of November. We kind of started to move to the downside and then. So just so happens the first six months of this year has been all downside. It's not to say that we haven't had bigger sell offs at any point in the last 50 years, because of course we have. We've had more quarter four 2008 quarter one 2009 the S&P sold off 66% or 68% think it was right so we've had way bigger moves lower. It's just that just in the first six months of a calendar year we haven't had as big a move as this so. We've been talking about this all year of course so everyone knows the reasons the inflation crisis the hawkish pivot from central banks the commodity price pressures as a result of geopolitics the supplies chain factors that are ongoing, you know, China and all the rest of it so we know why it's happening but yeah, we often mostly talk about the indices on this pod but it's time to just lift the bonnet. As you said, because you delve into then so rather than just taking a whole index you then go down to the sub sectors right so that we split stocks into different sectors different categories depending on what type of business it is. And these businesses depending on what type of service or product they're selling often behave in different ways, you know, in certain parts of the cycle so basically every single sector has declined in the first half of 2022 apart from one. And that's energy and it's for obvious reasons, the price of oils shot higher because of supply risks associated with Russia invading Ukraine and so clearly energy companies revenues are derived from selling oil and when the price of the product you're selling just ramps through the roof and that's great news for you and that's why like here in the UK, for example, the government's announced to kind of one off windfall tax on energy profit energy company profits because you know that they're benefiting from this crisis right so look energy, a lot higher 30 plus percent, everything else has dropped. Okay, but then when you look at everything else we often talk about defensive sectors, and then the opposite to that is what we call like cyclicals. The defensive sectors utilities consumer staples healthcare, they're the ones that they've sold off but they've sold off the least. I think it's utilities is the best utilities is down 2% when the whole index is down 20 right. Now why is that well a couple of reasons. What are you talking about electricity and gas right selling to consumers. And the thing about their revenue streams of those companies they're very stable. So you are like consumers you're going to turn your lights on you're going to turn your AC on you're going to turn your heating on doesn't matter if you're in a recession, or if you're an economic boom. You know you're going to your consumption of electricity and gas is going to be fairly steady right so from a revenue point of view these companies revenues are very stable. And so that becomes really attractive when you're heading for a downturn that stability can be very attractive that's one thing. The second point is about if you're in an inflationary environment. Obviously we are then actually it's that type of business that can far more easily pass on the higher prices to their consumer. So electricity prices go up right and actually we're used to our electricity prices going up and down on our electricity bill. And that's always the way it is right, but most companies it's a lot harder, you know if you've been, whatever if you've been selling Mars bars at one pound for the last five years and now you want to increase the price of one pound 20. You're in the shop and you're like what went by 20. Not paying that right and so it's a lot harder for we talk about price being sticky. So a lot of people that manufacture and sell physical products that stickiness is really tough to pass these inflationary price pressures through to the customer right and so they have that hurts their margin and their profitability. So utilities are great a good inflation actually. So they've done well consumer staples, you know that stuff you buy, I don't know whatever Procter and Gamble or the often one I talk about its toothpaste or deodorant or shampoo. You're going to buy this stuff it doesn't matter what the economic situation is so again very stable revenues, health care similarly, if you're buying drugs will obviously you need to buy drugs and again that's not an economic decision. So again, stable revenues right so they're your three kind of defensives, then you have other kind of sectors that aren't defensive then more cyclical where the sales of these companies goes up and down with the economic cycle. So you know industrials and technology and consumer services, sorry communication services and then the big, the biggest loser of the whole lot in 2022 is something called the consumer discretionary sector. And that's like your, if you like your luxury goods. You know, are you going to buy your $2,000 burberry jacket, when you're worried that recessions about to hit, and you might lose your job. Well my, you know these discretionary products it's like nice, nice to have so you don't need them. I don't like the menu maybe aspires and I don't know but it's an economic decision where in a downturn you're not going to buy that stuff right so therefore those companies, they get their revenues are way way more cyclical. And so when we got a downturn ahead, no share prices get hammered the most. So yeah, I mean that's the situation. Yeah generally speaking, a six well it's actually a seven month downtrend, because it really started in December, and still going. A couple of stats for you then to kind of book book in that that segment is that looking at the S&P 500 worse performance over the first half from 1928 to 2022. So given a nice pool of data. So the first half of this year ranks talking calendar. So, understand the context you were saying earlier but looking at the calendar year 2022 ranks fourth worst. So more more downside than that was 1940 20.9% lower 1962 26.5% lower 1932, which any market historians will recognize was by far the worst that was down 44.5% for the first six months. So all three of the years I've just mentioned 1940 62 1932. Their second half of the year looked like this gone. So in third place, after being down around basically 21% it rallied 7.4% for the second half. So the second worst start to the year in 62 down 26 and a half percent then rallied 20% in the second half. And in 1932, the big downside that I mentioned actually rallied then for the second half of the year 53.4% So that's just just to put out there, because one of the things I did see was a note out of Morgan Stanley's wealth management team, and they were saying that watch earnings estimate cuts, and the bottom or bottoming in economic surprise indices to signal a buyable bottom. Now I know you don't like going around picking bottoms peers but earning season. And on your radar buyable bottom comes up all types of images. I think that. Yeah. So I guess you've rolled off those stats. I guess in there you're basically asking a question that you didn't actually verbalize which is what's going to happen in the second half of 2022 then. I would definitely not be bullish second half of the year. Yet, but definitely not. I think there's a big difference here well I'm not. I don't know what monetary policy was doing going that far back maybe but the thing about the second half of this year is the central banks are not coming to your rescue. Investors are very you know we've been used to without the luxury for a few decades that whenever stocks go down. Don't worry. Central banks are in with their stimulative programs and pumping them back up right that's gone in 2022. That is not going to happen. So that's a key factor to understand when you're trying to judge what's going to happen in the second half of this year what is the rebound potential. Well we might not even rebound at all we might actually continue to sell off by the way, but the central banks not going to drive the rebound. That's an important thing. So, for me, July is the critical month that will shape the next six months I think, and to keep elements to this month, the earnings season. So as you've just mentioned with quarter to now ended and so as normal, we now get big companies corporations reporting their performance in quarter to number one so that's looking backwards you know revenues and profits and all the rest of it. Much more importantly, yes guidance forecasting for the rest of the year, and are they going to revise down their earnings and almost certainly but how much are they going to revise it down. You know how badly did quarter to get impacted because of this inflation crisis this is what we want to find out. That's really key. That's happening throughout the month right takes like four weeks for all of these companies to report that's going to be ongoing. Another critical thing is on the 13th of July. 130pm London time. Market in your calendar US CPI for the month of June. Okay, this is massive, massive, massive, massive. We had some inflation data earlier this week. Earlier this week yesterday, actually. There was something called the court inflation is a tricky one that there's lots of different measures and different types and yesterday's measure was something called the PCE. And this is actually important because it's the feds preferred measure of inflation. And so we have some data that and it actually came in lower than expected. And at the time yesterday afternoon I was like, wow, okay, that's quite notable. And the thing is, I should, I should make clear, this is for the month of May. So this is PCE inflation data for May. So it's, it always gets reported two or three weeks after the CPI data is reported so this is, it's slightly old news we're ended. This is May now right and this is May data so it's a little bit further back was looking but it was lower than expected. And I thought, well, you might well see stocks rally off the back of this but and they did for all of about one minute. And then they actually sold off. And I thought that was incredibly interesting as a gauge of sentiments. There was a, there was a reason to buy yesterday afternoon. And while some I'm sure did in the end the sellers still were in control and the market closed lower for the day. I thought it was a really interesting sign that this is still a bearish market. There was in amongst all that inflation data there was something called the personal spending data for the US for the month of May. And we were expecting a strong increase 0.6% month on month so we're expecting consumers personal spending numbers to be 0.6% higher in May than they were in April. The actual reading was only plus 0.2%. So it's quite a big miss. What's happened is up until this point, was this inflation thing has been, you know, with us for a while, because the savings rate was so huge through COVID. People were saving a lot of money because they weren't going out. Then you had your stimmy checks, right, so people are flush with cash. What's been happening is even though prices have been ramping up quite rapid, very rapidly, consumers are still being out there spending, because they got so much cash right. It could be that people are looking at that personal spending number and going new. Maybe that's the first signal that inflation is now beginning to bite in terms of damaging consumption. Maybe that's possibly why but that's kind of just getting into the sort of the nitty gritty of the data that we get on a month by month basis. But that's for May, right? On the 13th of July, we'll get the CPI, the consumer price index for the month of June. That'll be the latest update. And that is key because of what happened last month. So the May inflation data that was announced on the, I think it was the 10th of June, showed that inflation had pinged back higher. Prior to that, we had thought inflation peaked in March, but May saw it jump back above and so proved that actually hadn't peaked, it's still going up. So what we want to know is, is that inflation trend definitely still back on the up? Is the June inflation number going to be larger than the May inflation number indicating this inflation problem still getting worse? And so, right, the Fed are going to have to carry on with their massive hikes each meeting. Is the May reading where you got that clip high, was that the anomaly? And actually, does the June reading drop back down and kind of the idea that the inflation peak is behind us, does that narrative come back to the table? So when we start feeling a little bit more relieved and maybe the Fed aren't going to have to hike as much and et cetera, et cetera, right? So that July 13 inflation number and the US earnings for quarter two is key. So ask me at the end of July. I'll have a more confident opinion on what's going to happen in the second half of this year. So that sounds like an incredibly sensible way to economically monitor the situation, but mechanically, what about this idea of rebalancing to just make sense of some recent market movements away from just kind of interpretation of forecasting on data. Is there other activities that would seasonally happen around now that can have influence on prices? Yeah, so the day your wife gave birth was the low of the year. I'm already long, Peter. We had a big sell off. That was Fed Day, FOMC Day, and that currently is the low of the year. I mean, so far, this is only a couple of weeks ago, right? I'm not saying that is the low of the year. We're not going to break it. That's not what I'm saying at all. Right now, that's the low of the year. From that point, we actually had a bit of a rally over the last couple of weeks. We've had a bit of a rally. I'm talking about US stocks here until like the last couple of days and that's come back. All right, but we had a period there, really between let's say the, let's say the week beginning the 20th of June. That week, we had a solid, actually a pretty sizable bounce. And people are going, oh, wow, okay, that's interesting. What's going on there? How do you explain that economically? And people were scratching their heads and we were trying to spin an argument. Oh, maybe people think that the recession is going to happen sooner because inflation is worse and the Fed are going to have to hike faster. The recession is going to come sooner. Well, then maybe the Fed won't have to hike as much. Oh, and maybe in 2023, they might start cutting interest rates and you were reading articles about this and people are trying to spin a story. But actually, I don't think it's got anything to do with economics at all. That rebound week beginning the 20th is most likely due to quarter end rebalancing. So this is a sort of phenomenon like in the asset management industry where you're running equity portfolios. Then you'll be, you know, your kind of language is what's my asset allocation weightings, you know, what's my strategy, and therefore right as a result of that what the weightings have what proportion of my portfolio will I be investing in equities for example. And let's say you've got 50% weighting in equities. Okay, let's say at the start of quarter to so on the first of April, you've got 50% 50% of your portfolios in equities and that's your strategy. But then as quarter to unfolds equities sell off sharply. Okay, for the whole a quarter to literally from the first of April to the 30th of June, it's a big downtrend. So what that means is if you do nothing with your portfolio. Naturally, you're going to see the proportion of your portfolio made up of equities dropping because the price of those shares are going down faster than other stuff in your portfolio. And it might be that by the coming to the end of quarter to your equity waiting is 45% now, not because you've been selling anything is just that's natural creep because of price change. Okay. So here you are at the end of quarter to nearly and your 45% equities but that's not your strategy. Your strategy is linked to a lot of stuff you've agreed with your client through like an investor policy statement and so it's really your job to make sure your weightings are in line with strategy and with constraints and risk parameters and so on. And so if you're now underway equities, you've got a what we call rebalance, which means you've got to bring your weightings back in line. You've got 45% equities but you should be 50. We're going to need to buy equities and a lot of them. And actually the net rebalancing figure was thought to be in the US this is just US equities only. The net rebalancing was plus $29 billion dollars in that week. Okay, so you add a net plus 29 billion on the rebalancing flows, which is almost certainly why the S&P and kind of US stock complex went up. It wasn't really anything to do with any kind of clever rationale around 2023 Fed rate cuts or anything, it was just straight up what we call window dressing rebalancing at the end of the quarter. So this has got me thinking, talking about Milan at the beginning of the episode. I'd love Milan to run some numbers for me about the severity of kind of stock losses over certain periods to then going into the seasonal pockets of quarter in the annual to see the impact. Can we quantify window dressing in duration of the dressing, if you want to call it that, and then the scope of size compared to the size of the loss that pre pre came that move so that could be interesting. Yeah, but okay. Well, let's, let's, let's pivot and let's talk about the fact that you know something I always say when I talk to the various different students I meet is that irrespective if you're going to work in global markets, or in the more classical kind of banking side of the bank, you definitely should have an idea about what's going on in the economy, because even if you're looking at mergers and acquisitions equity debt capital markets. A lot of this is influenced by economic conditions and the outlook for the economy, which ultimately is derived from things like monetary policy fiscal policy so on. And with that in mind then so let's pivot and let's talk a little bit about how fundraising has gone in the first six months of the year was gone, incredibly badly. If you're in the business like an investment bank of providing services to help companies raise capital. So there's kind of this very broadly kind of split the capital raising activities into three categories, equity. And then when I was going to say debt, you could say two categories equity and debt but within debt, there's two parts as bonds. So your corporate bonds your corporations are issuing bonds but then if the amounts of money being raised is a lot smaller than it's just loans right you'll go to your bank and you'll have a whatever revolving credit facility or you'll have an overdraft facility just borrowing money from your commercial bank right So equities, bonds and loans. Okay. And yeah fund raising stand 25% in 2022 compared to 2021 looking at the first six months of each of those years. On the one hand, I mean 25% that's a huge number you are the comp is really bad though because 2021 was off the scale the biggest year ever. That's the biggest year in history for capital raising. Okay, so that's a bit unfair. So when you say 25%, okay, coming off 2021 it was always going to be hard to try and compete with that but the numbers are that $4.9 trillion has been raised. So that's down 25%. So in 2021 it was 6.6 trillion. According to Refinitiv, by the way. But when you delve into it a bit closer so if we just park the debt side and look at equities. So equity raising this is like everyone will have heard of IPOs right so initial public offerings but also then follow on offerings. So IPO in the past, when you issued shares and you sold them and these shares now trade on the stock exchange, you can still raise more capital through issuing and selling equity. But it's not called initial public offering anymore you've done that so it's called a follow on offering right. So if you take IPOs and initial, sorry and follow on offerings then we're down 70%. Compared to 2021 70. So by the end of June we only had 252 billion raised and not only is it down 70% and you still might say well it's unfair to really just compare it to last year. But 252 billion capital raised in the first six months of a year. That's the lowest since 2005. That's globally. Okay, if you look at the US, it's even worse. If you look at US only. They raised just above, like only had 18 IPOs in the first half of this year, which is crazy and raised only just 40 billion. That puts it at the worst first six months since 1999. The worst equity capital markets in the first half of the year, this century in 2022, which is kind of insane and I guess it kind of makes sense right it's all part of this bigger macro story that we've described at length and, and I guess what happened is that there was one IPO in the start of May. Baishan mom, which is, I don't know if you've actually even kind of ever ever heard of them but they're an eye care company. So health health care basically they used to be called valiant pharmaceuticals maybe people might have heard of them more but they kind of rebranded. But on May, they were trying to raise capital, initial public offering, and they were looking to raise $840 million. It would have been the second would have been the second largest listing of the year. But it was appetite is so bad. In terms of risk. And, you know, in public markets you've seen that with the S&P and then as that blah blah blah in private markets as well. So they were trying to raise 840 million it went so badly the book building process and trying to get investors, you know, demand up and in the end they had to they had an IPO price at $18 per share which was kind of below range but in the end the only managed to raise 630 million. When they were trying to raise 840 to put that into context normally when you're running an IPO like this, your demand is normally going to be at least double. Right your book is going to be at least will have demand for at least double the amount we're trying to raise. And then investment banks can have the luxury of going right we're going to pick and choose from the bidders. So the type of investors we want to have owning part of our company, and you'll be looking for a mix between, you know, longer term asset manager investors that's investors who are in it for the longer term. So you might want 80% of your book to be long term kind of long only asset managers, and then you might want 20% that's more short term money like hedge funds, who are most likely going to be in and out quite quickly. So you want some of that because you want some liquidity on the secondary market on the stock exchange you want some volume, so that the you know on the order books, so that the price can behave well so to be that far below six the only raised 630 million aiming for 840. As soon as that happened, basically that's it has been no IPOs. That's because that it was so bad. It was like wow, everyone just kind of pulled back. And so it's really, really bad climate at the moment for, you know, trying to raise any type of capital, which makes it, and then you come back to the kind of tech sector on the more kind of high growth, sexy tech stocks and FinTechs. The big problem they have is that they're not profitable. So they're cash burning. And the problem is that they need to raise capital it's not a question of, we should we should we not let's try and time it for when market conditions are favorable for us to raise capital. Some of these companies that they have to otherwise they'll literally run out of money and get bankrupt. And so what what we're finding is that a lot of these tech, big FinTech names are having to raise that they're having to have what we call down rounds. So you know you have like your seed round then your series A and your series B and your series C and however many series you need right until you're profitable. So these are rounds of funding to fuel this growth. And what we're finding is running a lot of down rounds which means that companies are having to raise capital at a valuation that's lower than the valuation of the previous round. And so they're basically having to accept a big discount from a previous valuation because they need the money. Otherwise they won't survive. And obviously this is incredibly negative amongst the investor community. Because basically you're having to take a big haircut. If you were involved in a previous round you're having to take a big haircut on the kind of valuation of your of your asset. So this is what's happening in private markets. And yeah, it's just really bad. So if you are working in that space in the kind of advisory arm, surely then it's not that these deals go away they just get parked. Would that be an assumption and actually we're going to go through the next flush when we see whenever that might be so yeah 1824 months or whenever but surely there's going to just result in pent up demand and everyone will be rushing. And there'll be astronomical demand at some point because there'll be just people wanting to get back in again is that is that a normal. Was that a true assumption to have. Yes, it's cyclical like everything right. So, well, if you have the luxury as a business, right, but you don't need external capital. So there's, even if you do need it, you can try and delay it, but how do you delay it we've got to cut costs. You've got to try and spend less money on a month by month, you've got to reduce your cash burden. But then this is all like vicious kind of negative feedback because how do you do that we lay people off. Maybe I might, I might lay off some autonomous car driving engineers and 10% of my workforce. Exactly. So I know it's a bit of a spiral because if everyone's laying people off well and obviously this just makes the recession, even worse. And then the fundraising conditions stay bad for longer. So obviously only so much cost cutting you can do right in the end, you've got to even if you get down to the real skeleton. You've obviously still got to be operating and trying to grow the business to try and actually achieve the end goal where you actually turn profitable. So, if you do have the luxury though where you don't need capital, and you can cut costs if you want then yeah fine people are just parking the bus and we'll wait, we'll wait 12 months. You're always going to get a rebound. We're just not quite exactly sure yet whether or when that rebound would be, but yeah at the moment we're really right at the trough probably office, you know, incredibly negative kind of fundraising conditions out there in the private markets. Sure. Well, look, great explanation is always peers and a good way to kind of fit in for the different chat to the supplement the global macro kind of view on things so we'll call it an entity episode there. Don't forget to check out the show notes of the episode for links to either our finance accelerator simulations they are still going on so if you're a student and you have finished now and you're free for the summer. If you're looking for something to do. Well, the summer is a great time to skill up, get some practical experience and yeah we do this for absolutely free. It's sponsored by Morgan Stanley, none other than the major US investment bank themselves so we'd love to get you with that so it's a two hour free sales trading market making asset management simulation. Again, check out the show notes to register we do it every week. And also for our daily newsletter that we put out and yeah I'll be keen to get back in the hot seat as of Sunday night. In fact, look out for the amplify me YouTube channel my look ahead for the week will go out as per normal and then yeah. If you've been missed. It's good to have you back just the world. You know, what's going to happen in the second half of 2022. Well, all right, the Fed aren't going to help you out, but at least Anthony chunks back at his desk. That's it, you know, Jay power was texting me is what's happening me last week. I was like, look Jay, just hold off that I'm not going to have any more children so don't worry. All right, cheers. Thanks everyone and see you next week. Have a good weekend. Take care.