Global market trends & forecasts with Kate Moore, Managing Director, and Head of Thematic Strategy at BlackRock
Willy Walker: Good afternoon, everyone, and welcome to another conversation with my friend Kate Moore. I'm extremely excited to have her joining me today. Let me do a quick background on Kate and then we're going to start reviewing some of the things that we talked about in the spring of 2021, which was the last time Kate and I talked on the Walker Webcast.
Kate Moore, Managing Director, is a member of the Global Allocation investment team and Head of Thematic Strategy at Blackrock. Her investment mandate includes identifying opportunities to exploit structural change, policy evolution, and dislocations across global industries. She is a member of the Human Capital Committee at BlackRock. She holds a B.A. in Political and Social Thought from the University of Virginia, where she currently serves on the Board of Managers of the Alumni Association. She also holds an M.A. in Political Economy from the University of Chicago.
So, Kate, last time you and I spoke, the ten-year was at 1.58%, and the Walker Webcast had been viewed by 700,000 people. Today, those numbers are 4.26% and our views are over 7 million. I guess I love one of those stats and I hate the other stat.
Some of the big themes from our last conversation: you started out on cybersecurity. And given that I had a long conversation this morning with my general counsel, Rich Lucas, about a new SEC rulemaking that is going to force publicly traded companies to disclose cyber breaches at an ever-increasing, I guess, rate of disclosure. It certainly seems like that theme isn't going anywhere anytime soon. Do you feel pretty good about staying in the cybersecurity/technology space these days?
Kate Moore: Yeah, Willy, first of all, so good to be able to do this with you again. Let me just say that those stats in terms of your viewership and listenership are amazing. I agree, the change in the ten-year has led to a really different investment environment. But I know we're going to dig into some of that later.
Willy Walker: A lot.
Kate Moore: Yeah. As you know, I'm a thematic investor, so I'm practically like a macro person who implements in equities but around specific themes. And I do this in a highly concentrated way, usually expressing between five and eight names. So, I'm taking specific company risk, although trying to buy a bunch of the winners.
Now, the cyber theme is one that's been in my portfolio for like three and a half years at this point, which is the longest I think I've held anything now. Some of the names have changed and I've shifted the weightings and I've hedged at different parts of the cycle. But I have to tell you, as we sit here, the beginning of September in 2023, I feel highly, highly highly convicted that this is an enduring theme, not just because of the regulatory side, but because there is incredible demand across every industry at this point for protection of data. Whoever owns and controls their data and safeguards it and is able to use it effectively will win against their competition. Cyber is critical to success across everyone.
I think what's really interesting is, you know, over the last six months or so, there was a lot of stress around whether or not a huge amount of demand had been brought forward during the pandemic for data protection and cybersecurity software. And so there were a lot of naysayers. Maybe the start at the end of last year a lot of naysayers are saying like, this is a trade that's over. But anyone who was paying attention to all of the rest of technology change and again, the importance of data and operations of every company understood that it was that cyber was just having a small air pocket and not necessarily a significant decline.
And most of these companies have reported over the last, let's call it month really since the beginning of August, and the numbers have been exceptionally strong for the first half of the year with huge increases in forward guidance. So, yeah, in case you don't get it from my enthusiasm, highly, highly convicted that this is an investment theme I will want to be in for the long term.
Willy Walker: The other one that you started with last time we spoke was clean energy. And I had our mutual friend Kiril Sokolov, both at the Walker & Dunlop Summer conference where you have spoken before as well as we broadcasted that conversation on the Walker webcast.
Kirill has a lot of conviction in clean energy, and he doesn't have an index fund, but he has his own sort of tracking fund, if you will, and it is done exceptionally well. You still feel good on the theme of clean energy?
Kate Moore: Yeah, absolutely. I mean, when I think about themes, there are different buckets. There's like a long run theme, there's something that's sort of spurred by discontinuous change or technology that gets introduced, or something that's around the market cycle, business cycle. I would say clean energy hits those first two buckets. This is a long run change really spurred by policy as well as discontinuous change which is inspired by technological innovation in the space. So, this is another kind of theme that I think you have to continue to evolve your holdings in. It's not like I'm going to buy five companies and hold that exactly forever, but I think this is something that we have to continue to put our time, effort and research hours behind.
There has been and we've certainly had this conversation internally at BlackRock and on the street, a whole different set of blowback against people who are investing in clean energy. You know, at BlackRock and even on my team, we invest pretty heavily in traditional energy as well as clean and new forms of energy and actually don't find that there is that much of a separation. Many of the companies are integrated in both. So yeah, I expect to spend a lot of my time there over the next five years.
Willy Walker: So, you also, in coming out of the pandemic in the spring of 2021, you talked about the strength of the consumer, and you really liked retail at that time – sort of on the theme of the great reopening. Fast forward to two years later, it's hard to believe that this was our last conversation, all this stuff. But two plus years later, how is the US consumer doing? And do you still like retail?
Kate Moore: Yeah, the consumer is a completely mixed bag at this point, Willy, which I think you know, and it's really hard to make a clear decisive call on consumers in aggregate, unlike in the spring of 2021 where consumers were flush with cash, savings rates were super high, we were starting to really see wage growth come in across all different types of workers in industries.
But the corporate data and again, I'm just going to go back to some of the reporting from the second quarter that happened over the last month to six weeks - the corporate data has been pretty mixed on the consumer. On one hand, you have a company like Dollar General, which is really geared to the lower end consumer cutting their profits forecasts and giving some warnings. Then you had Lululemon, which just reported last week, it lifted its full year outlook. It was very constructive. And then you have companies like BestBuy who again will talk about air pocket post-pandemic, you know, saw a decline in overall demand for their products as people had already stocked up on electronics, actually saying they think the worst is over. And the post-pandemic lull in electronics purchases, you know, is gone. And they have a pretty constructive outlook for 2024.
So, it's a completely mixed bag when you talk to companies about what they're expecting the consumer to do over the next year. But we do know there are a couple of big pressures on consumers, particularly lower-end consumers, over the course of the next few quarters. One of them is that tax refunds to small businesses, which often are exactly like the regular consumer, are being cut off. Without that kind of tax support, you will see a decline in spending and a retrenching. The second, and this is something that's come up a lot. We have debates about student loan payments, but at least it looks like the initial student loan payments are coming in meaningfully higher than original estimates. So that could have a really significant impact on the cohort that is expected to start paying after the moratorium.
Willy Walker: Sorry to jump in: Are they coming in higher in the sense that more are paying or that the actual calculated number is a higher number than projected?
Kate Moore: Higher calculated number.
Willy Walker: Yeah, but the question I have on that is that the Biden administration said that they're not allowing for the federal government to report delinquencies to the credit bureaus. And so, my question would be, if you aren't having that file back to whether your FICO score changes or not, why pay?
Kate Moore: I mean, it's a great question. I guess it depends on how you sleep at night. But I think there are a lot of people who are going to make that decision if they have floating rate student loan debt and it looks onerous and it's going to impact their ability to pay their rent and utilities and live a somewhat normal life, they may decide not to pay because it's not going to affect their overall credit score.
And others, you say, hey, this is an obligation I have. I've got this education that's afforded me this opportunity to have this job or this career. And so, as a result, I will pay. I mean, but I think it's going to be messy. For those that do decide to pay, the actual bill looks higher, I guess, because of the adjustment in rates. And then the third thing I was going to say is that, you know, oil prices are rising, and energy prices disproportionately hurt the lower end consumer. And so, we know that it's going to be kind of an issue.
Willy Walker: Well, one thing you didn't mention there, Kate, that I've been hearing a lot about anecdotally is credit card defaults. And I went to a very close friend of mine who's one of the very best bank analysts in the country and asked specifically about net charge offs and delinquencies on credit cards. His response to me was, “We're in a normal cycle. We don't view this to be anything other than a normalization of defaults after having historically low default. And we don't see this peaking at any level that is a problem to the banks or to the overall health of the economy.” Are you in that camp or do you think that there is more to weakening consumers on the credit card side?
Kate Moore: No, I think that's a really smart bear assessment. One of the things we've also seen, and this is data that came out, the personal spending for August or for July - grew at like point 6% month over month. That's pretty big. That is, you know, supporting continued economic growth. Sure, savings have come down. And sure, some people are not paying all of their credit cards and delinquencies may rise in certain pockets.
But in general, we've also seen very strong wage growth across all income cohorts. Maybe the pace of that wage growth is going to come off a little bit. And frankly, it should after these last couple of years. It's unsustainable. But we are not seeing, in aggregate, a consumer that is so stressed that we have to take down our economic growth expectations in the near term.
And I think there's just going to be a lot of differentiation. I mentioned those three companies at the beginning, and you know, it's going to be our work to dig in and say, what are the consumers, what are the customers of each of these companies doing? How is their consumption pattern changing? Where are they most stressed? And it could be a real opportunity for Alpha, to be honest with you.
Willy Walker: So, there's both the good and the bad. I'm going to come to a really, really prescient statement you made in our last conversation. I'm saving that for last. But on this one, I think you probably might have gotten this one wrong but tell me you might have been right. But you were talking about business services in April of 2021, coming back as people back to the office and the people who supply to offices and uniforms and things of that nature would reflate as we had a reopening of the economy. At least we both know that people haven't actually gone back to the office. But that doesn't necessarily mean that uniform supply companies and all sorts of others you know, I think you mentioned in our conversation things like people going back to stadiums and obviously all the concessionaires in stadiums are all back at it in full form. So, was that a good theme or did that one not play out the way that you thought?
Kate Moore: Yeah, I actually cut that risk pretty shortly into the third quarter. So, yes, it did not play out. This idea that we were going to have more of a shift back to urban centers and more of a shift back to professional services didn't really play out. There were a couple of names that I'm going to mention like Live Nation, for example, that have done really well, where people have wanted to consume entertainment and do that. But, you know, commercial real estate much better than I do. And that certainly was not a place - we weren't invested specifically in commercial real estate, but in the kind of secondary and tertiary benefits of people coming back into the office and reusing their commercial space. So that's one of those things where you have to say, “Hey, the data is not coming in as expected. You cut the risk right away and you move on and reallocate.”
I know there's a lot of debate around returning to office. BlackRock is returning four days a week beginning next week. There's a lot of debate about what that will look like in the future and what types of workers need to be present in office versus can do their job equally well from their homes part of the time. I just don't think we're going to see the same spend ever again on those professional services.
Willy Walker: In our last conversation, we also talked about chips and the chip supply shortage at that time. You have to remember; this was April of 2021. Neither of us at that time knew that the CHIPS Act was going to be passed by Congress and signed into law by President Biden, where $56 billion was going to go on bond-shoring, if you will, chip manufacturing in the country.
But one of the comments you made was that given the supply shortage of chips during the pandemic, that you were projecting that those industries that were very chip-dependent might actually start hoarding chips.
Two things: one, what's your take on the CHIPS Act and the onshoring of chip manufacturing and whether you know, and I'd be surprised if you said that's not good for the long-term viability of U.S. industry and also chip manufacturing. But then second, are we actually seeing hoarding at this point now that supply chains have freed up where companies are actually stockpiling? Or is it just in time delivery to most of the major chip users in the United States?
Kate Moore: Oh, my gosh. I feel like we could talk about this for the next three hours. So, I'm just going to try to simplify it. This is an area I'm really passionate about and spend a lot of my time on as a more growth-oriented macro investor.
On the CHIPS Act, let me just say this: there will be an enormous amount of global demand for all kinds of semis and derivative products. Every country needs to be investing in their own production or creating very positive relationships with other suppliers. But I think the demand is going to be so great so if the U.S. doesn't make these investments, we will be in a really tough position. Do I think that means that all of our global ties get cut as a result of us building our own fabrication and putting money behind companies that specifically focus on semis in the U.S.? No. As we think about the total addressable market, this thing is going to get larger and larger and larger by the year.
So, we're doing this fun exercise on my team and actually I'm going to run the meeting on this tomorrow where we've asked people kind of like which sectors, they expect to gain the most market share over the next seven years for 2030, and which sectors people expect to lose the most market share. They can choose an industry as well.
And in my boat, honestly Willy, is semi's. I mean, I think this is a place where we're going to see larger and larger market share of just the U.S. and global companies in the global indices. This is, as I said, an addressable market that is ballooning in size. Any policy that supports domestic investment I think is a good idea.
Willy Walker: On the CHIPS Act, Kate, since you know so much about this, my understanding and we've got a number of plants being built in the United States right now, one in Phoenix, one outside of Syracuse, New York, all over the place. But that, you know, NVIDIA, which has become this incredible company, they're still having to go to Taiwan to get their chips manufactured. So, what we sort of have here is somewhat of an Apple setup where the intellectual property and technology is being built in the United States, but then it's going offshore to actually be manufactured.
Is there any visibility to the manufacturing plants that are being built in the United States that will have the capability to actually manufacture the NVIDIA chips that are so important to AI and the growth of AI in the global economy?
Kate Moore: I mean, we're going to get there Willy, but it's not going to be a 2024 or late 2023 phenomenon. What you're referring to is that
