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Earnings season to offer ‘a huge unveiling’ of companies’ recession plans: Strategist

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Threadneedle Ventures Founder Ann Berry joins Yahoo Finance Live to discuss recessionary expectations, global revenue exposure, asset allocations, liquidity, and the outlook for private markets.

Video Transcript

BRAD SMITH: Joining us to discuss the latest market volatility is Threadneedle Ventures Founder Ann Berry. Ann, always a pleasure to speak with you. You know, first, because we mentioned some of the earnings that are coming out this week, your expectations as we kind of navigate this earnings season.

ANN BERRY: Well, Brad, I think a lot of this week is going to be forward looking. I know companies are reporting what they've just experienced in the prior quarter. But I actually think the market is looking for something very different. I think this is gonna be a huge unveiling of what companies plans are going to be to deal with recessionary expectations for the rest of this year and going into 2023.

So I'm expecting lots of announcements around cost controls. I'm expecting lots of announcements around managing global revenue exposure. And I'm expecting lots of strategic announcements around looking for assets that can be sold, looking for divesting non-core activities. So those are the three themes I'm expecting to hear through this earnings season.

JULIE HYMAN: Yeah, and we definitely have been talking about some of the stuff that's been announced already, right? We mentioned earlier Johnson&Johnson, which is planning to spin off its consumer products business, for example. So kind of where are we in this cycle, Ann?

We were talking at the top of the show about the monthly Bank of America fund manager survey which shows really bearish sentiment right now. The most bearish it has been. Does that mean we're at or near a bottom?

ANN BERRY: I don't think that we are actually near a bottom quite yet. And the reason I say that is we haven't really seen full impact yet of what the global slowdown is going to do to the US economy.

If we look at the S&P 500, Julie, we know that about 40% of revenues generated by companies on that index come from international markets, which are seeing a double whammy right now of a stronger US dollar, meaning that those overseas revenues are worth less when repatriated, and the fact that global demand is slowing down. So volume is going to be impaired. So I think until we see the full impact of that global dynamic on the domestic US businesses, we're not there yet in terms of calling the bottom, in my opinion.

BRAD SMITH: And so is it not too late to get into some of the already crowded trades that we were discussing earlier, long US dollar, long oil, commodities, long ESG assets as had come out within the BofA survey?

ANN BERRY: I'm staying out of those at the moment. Just again, I just don't have conviction that we've seen the bottom on those. But what I am trying to do is shore up positions in businesses like J&J-- I know you spent time talking about it-- companies like Walmart-- it's one I'm a fan of-- where I do think we're seeing cracks in valuation that are disproportionate relative to the stability of those businesses, and relative to their ability to navigate a recession and come out stronger on the other side.

JULIE HYMAN: So again, when we talk about this cycle and we talk about liquidity right now, Ann, we definitely-- we've been talking with folks in capital markets who have been saying it's not dead. We've seen not a lot of IPOs, not a lot of SPAC deals, certainly. But maybe we could see more sort of take private transactions. What's your view on that?

ANN BERRY: Well, there is definitely liquidity in the private market, Julie. And you're seeing that, yes, with the announcement of the potential take private of NCR by Veritas which is the big private equity fund here in the US. We've seen the Zendesk activity.

We do know that there is a huge warchest of just under a trillon dollars that's sitting out there in the private markets, and about another trillion apparently that's going to be raised by about 2,000 funds in the coming 12 to 18 months.

So it's there. And what is also sitting out there is a lot of capital in the private credit market, meaning that you have got funds willing to extend loans to leveraged buyout leaders, to companies with good free cash flow at, yes, higher interest rates than we've seen in the past. But the money is there for businesses that can support capital structures and interest levels that are required to get these deals done.

So I think the bigger issue right now is the M&A is not happening at the velocity it could happen at. Not because the capital is not there, but because there's uncertainty around whether valuations have troughed so that buyers don't get FOMO or they don't get buyer's remorse. And in the public domain, so that boards can have the confidence to accept bids for their businesses without feeling they risk looking foolish because they sold too early.

BRAD SMITH: What is a wave of acquisitions or take private offers mean for the employment situation? You typically see companies either pre-acquisition, trim their costs tremendously, or even post-acquisition go through a massive restructuring based on who the acquirer is.

ANN BERRY: It's a great point. I think that what we're going to see is, Brad, as those kinds of restructurings happening, even with just the threat of an acquisition-- so even if one isn't consummated, even if bids aren't made, companies right now, I think, are hunkering down. We've seen a lot of activist hedge fund investors. So we have seen that part of Wall Street sharpening their pencils. We saw it, for example, with Peloton. We've seen it with Kohl's.

And so even the threat that there might be capital willing to come in, jostling to have change, including change of ownership, is going to force management teams to come out very proactively with plans talking about what their cost control and what their focus areas are going to be. And that's what I'm referring to when I expect to see that this earnings season as management teams try to get ahead of the acquisition threats.

JULIE HYMAN: Ann, good to see you. Be well. Ann Berry, Threadneedle Ventures founder, appreciate it.