Afsane you've had a good party a career dealing with oil we didn't run out of
oil the way we thought we were. There are a lot of issues including
geopolitical ones. But given what we just talked about that
possible paradigm shift from asset value over into wages if you're maintaining a
portfolio if you're investing funds the way you do have Sunny what does that
tell you. What would you do.
It doesn't sound very good for investors.
If asset ISE are going down. They David even in this very difficult
year for the economy and for renewables renewables were up about 9 percent.
Now obviously this year they felt far behind.
Oil and gas as we all know. But if you look on a three year basis I
have some numbers here. Clean energy was up about eight point
nine percent versus oil and gas which was up three point three percent.
If you look at the five years again renewables have been doing better.
So the interesting thing also is that from you ask about wages but there's now
more people working in clean energy than in fossil fuels.
As we speak. So the economy is shifting and those
jobs are actually pretty well paid because there is a shortage of people
who have the experience. So in terms of investments there are a
number of areas obviously in climate including food and AG.
We're seeing that more people are looking for for high quality foods.
So there is a big big potential for investing in that area.
And it's not just in the short term because fertilizer prices are high
because of the Ukraine war or or supply chain problems.
It's a longer term issue. So energy clean energy and food and AG
obviously have the wind on their backs. Specialty also because of the New
Inflation Act that is also going to put resources in that area.
But even if we had not had the inflation act you would still have a lot of
interest in those areas. The only other two things I was going to
say on that front is also biotech and life sciences that also got killed over
the last few years relative to the rest of the market.
Very interesting. We look at it very actively.
But but again those are areas where you see startups as well as established
companies doing more and more. Last but not least I would love to know
what Gregg also thinks. If we could be going back to a 60 40 or
a 70 30 where people were getting bonds out of their portfolios.
But is this a good environment to start thinking bonds if our scenarios about
the economy are right. So outside.
So it's the know I'm in the bond markets a modern day Poseidon Adventure.
When I heard that quote. So I do think the good news in the bond
market is that we're largely past the pain.
So it's been a really difficult environment to say the least.
If you think about just the 10 year Treasury we're at 50 basis points now
we're at 340 basis points. So there's been a dramatic repricing.
High yield yields are up from four and a half to nine a half percent.
So I think we're getting closer to the end.
And just six nine months ago investors were asking about the benefit of bonds
in the portfolio 60 40 construct. I do think that game has changed.
It's still a little early because some volatility is on the horizon here.
But we're in a much better place today than where we were back in 2021 and
2020. So I feel pretty constructive even
though I do believe that there is volatility had.
And just think about how we move from a Fed pricing perspective.
Right. So this time last year there was
basically zero Fed hikes priced into the market.
And now we're pricing in you know close to four and a half percent.
So that's a dramatic move a real repricing.
And no wonder why not only bonds were hit but equities have been hit in the
process. So Greg let's pursue that 40 part
percent of it and the higher investment as our fixed income part of it.
We have people on here who say high yield as you just said that's a good
idea. Investment grade not so much.
Is that where you are. You know these the high yield market is
really different this time in this cycle.
Aside I talked about energy. So about 20 percent of the U.S.
high yield market is the energy space. That's a very different market going
into this cycle than what we've seen in previous kind of economic downturns.
It's a much higher quality segment than we've seen historically.
All the risk has been pushed off into the levered loan market investment grade
corporate bonds also much longer duration lower quality.
So somewhat perversely and interestingly a high yield bond market in the US looks
pretty attractive relatively. I just think it's a little early to get
too excited as we enter or the possibility of entering into a recession
as I have yet to see credit spreads stay stable and not widen heading into a
recession. So that's kind of where we're at but
it's definitely something to keep on the radar.
And does change the dynamic at 60 40. I'll say another thing we hear from time
to time is high yield might be the new form of equity.
That's the place you want to take your risk assets in high yield.
As you look at your portfolio does that make sense to you.
You know we're actually looking at a donation of what you just said which is
a lot of startups. DAX got very large funding over the last
few years. And as you know it was relatively easy
for venture funds to raise money and for new companies to raise money that has
come to an end. And they don't go for the traditional
high yield market obviously. But as they can't get funding for the
rest of their growth they're looking at new sources of ID within credit markets.
And so we are looking at those markets specifically because we think that there
might be a lot of really good value I think on the high yield market there.
It's always a Grexit. There's the energy component and the non
energy component. Obviously the energy component has a lot
of oil and gas in it. And so we have not been doing a lot in
that area. Sunny I'm curious about when you talk
about renewables when you talk about some of the biotech a lot of those firms
include the startups you're talking about.
It's really based on the earnings in the out years.
They're not making so much money now. Maybe not at all.
They're going to make in the later years as interest rates go up.
That discount rate really hurts you doesn't it.
So does that still make it a good investment.
I think it's still and we still are going to do really well from innovation
in our economy. So out of those companies.
Well while a lot of them will need 10 12 years to grow some of them will not need
as long as that. So you hope that your investments start
bearing fruit. Some will bear fruit a little sooner.
Some will barefoot a little later. That as a whole we still expect higher
returns relative to the markets. Let's not forget the kind of returns
that we saw in equity markets over the last 10 years are unlikely in the next
10 years. And no question that private investments
in new start ups will still do better in our view.
One last quick one if I could Greg to you on fixed income when you talk about
again that 40 percent of the portfolio. Do you have a preference for short
duration. Where are you on duration.
Well so right now we're pretty defensive on the duration side.
We're we're pretty flat but if you believe that the economy is slowing then
I think being long duration is the defense mechanism and that's really
starting to assert itself. Just look at the shape of the yield
curve. So the market's basically telling you
that the offensive nature being long duration has value.
And so that's why it's inverted. As the market back into the yield curve
is not keeping up with the front end. So the way I'm thinking about it we're
thinking about it at PJM is you want to actually be long duration heading into a
recession.