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Doug Peta

In the second of our series of interviews about middle market lending, we speak with Doug Peta, Chief U.S. Investment Strategist at BCA Research, who offers insights about how the middle market contributes to the broader economy, how nonbank lenders came to dominate lending in this segment, how important middle market lending products are to institutional investors, and how wider economic factors are affecting the outlook for middle market investing.

Tell us a little bit about your role and background.
Sure. I’m the Chief US Investment Strategist at BCA Research. I’ve been in the business a little more than 20 years now. I have been an equity trader on the sell side. I have been an equity trader for a mutual fund, an analyst for a mutual fund,  a strategist for a mutual fund and for, the last nine years, a strategist at BCA Research.

Tell us about BCA, for those who aren’t familiar with it.
BCA is an independent provider of investment research. We’ve been doing this for 70 years. We are entirely top-down, macro-focused. And we are totally independent. We do not underwrite securities, we do not manage money, and we don’t have a trading desk. All we do is sell our thinking and our analysis of the world’s major economies and financial markets. Using a macro approach, we’re looking to the economy for insights into the future direction of financial markets. BCA stands for Bank Credit Analyst. And it was founded on the insight that if we track money flows through the economy, through the banking system and through the broader economy, that it might tell us something about the future direction of markets and the future direction of the economy.

And what are your main duties as Chief US Investment Strategist?
I lead a team that focuses on asset allocation within the United States. The practical application of what we’re trying to do with the analysis of the US and global economies is help institutional investors to develop the optimal asset allocation strategies in their portfolios. Our clients run the entire gamut of institutional investors: mutual funds, hedge funds, pension funds, life insurers, sovereign wealth funds, university endowments, family offices, a smattering of wealthy individuals. But it really does cover the entire gamut.

it seems to be something that we see over and over in capitalist economies, in economies with a driving sense of creative destruction.

Before we get into middle market lending per se, let’s talk a bit about the US Middle market just as an entity. So for someone who was unfamiliar with the term, how would you describe that part of our economy?
Man, anything that’s a little bit larger than a sole proprietor with one small retail shop on Main Street somewhere in the country, all the way up to just about anything that’s not a multinational. In terms of the financial markets, I’d eliminate the S&P 500 as being too large to be the middle market. Among publicly traded securities, the Russell 2000 pretty well covers that middle market space. And then of course there are lots of middle market companies that are not publicly traded. 

So that’s in terms of size. What about qualitatively? When you look at middle market companies alongside bigger corporations, what are the main distinctions that you see?
They can be more flexible. They don’t typically have large bureaucratic structures that can hinder an ability to react to developments rapidly. They don’t have the accumulated sense of becoming wedded to particular strategies. They tend to be more nimble in terms of making decisions, but also I think there’s a mental nimbleness that smaller companies have. When you are a giant like IBM in the late 1970s, it’s really difficult to respond effectively to smaller, nimbler competitors. And it seems to be something that we see over and over in capitalist economies, in economies with a driving sense of creative destruction. The bigger you are, the easier it is to become prey for more nimble competitors. And I think generally, companies or entities in the middle market do find it easier to be nimble and flexible and they don’t get stuck in ruts that almost preprogram the company’s direction. 

How does the middle market tend to factor into your work at BCA?
It’s always a factor in our take on the broader economy. For example, we spend a lot of time with the National Federation of Independent Businesses (NFIB) Survey every month. We’ve found that components of that survey, like hiring intentions and capital spending intentions, have proven to be really solid leading indicators for hiring and capital expenditures in the broader economy. So the middle market does provide a nice microcosm of what might be going on from 30,000 feet with the entire economy. Generalizing from the survey, much of what’s going on in the middle market does get reflected at the level of the overall economy.

I think it’s fair to say that a vibrant middle market space is associated with more dynamic economies.

Can you tell us a bit more about the role of the middle market vis a vis the broader economy, the interplay between them?
The middle market contributes a lot of hiring. And this is by no means settled opinion in economics, but I’ve come across some interesting research regarding increasing concentration in a field. That as a particular company gets bigger and bigger, or a handful of companies get bigger and bigger, it can actually stifle innovation and stifle productivity growth. A monopsony is the equivalent of a monopoly, but when we played Monopoly, we were talking about sellers: one seller or very few sellers, an oligopoly. In a monopsony, there are very few buyers. And if you’ve got very few employers in a particular space, those employers may actually wind up stifling innovation because they don’t face much competition. They tend to be oligopolists themselves. And they don’t really have an incentive to try to shake things up, to try to disrupt things. They actually want to prevent things from being disrupted for their own wellbeing. Again, this is in no way settled. It’s very early days for this research, with people beginning to bat it around, but it does seem that there may well be a link between increasing concentration in the economy and declining productivity gains. Well, if that’s true, then conversely, the less concentration you have, the more innovation and the more productivity gains. And a healthy and vibrant middle market space could help to promote productivity in the overall economy. 

So a thriving middle market functions as an engine for productivity, and often through disruption.
Exactly. Business creation is supposed to be a sign of a vibrant economy. When you have more companies being started and more companies going out of business, that just helps turn over the soil economically. It does breed that sort of creative destruction that Schumpeter talked about. That is essential to the economy, just as forest fires are essential to removing some underbrush to allow things in the forest floor to grow, to allow new growth to get going. So I do think it’s fair to say that a vibrant middle market space is associated with more dynamic economies. 

Interesting. Are middle market companies also more evenly distributed geographically across the country, and not necessarily concentrated in the major cities the way that bigger corporations tend to be? And if so, doesn’t that make middle market companies kind of a stabilizing force in the real economy?
They sure could be. No matter one’s political persuasion, I do think that the data unequivocally support the notion that there has been an increasing wealth gap in this country, and that that wealth gap tends to break out along urban/suburban and rural lines such that a lot of the gains of the ongoing economic recovery of the last 10 years have seemed to have been concentrated in cities and megalopolises. There’s this brain drain away from the interior to the cities. So one would think that geographic dispersion would be helpful for the economy.  

Can you think of an example to illustrate that?
I guess a homely example would be when I was a kid in the 70s, there was a brief fad of people collecting beer cans. On our screened-in back porch, we had hundreds of different beer cans from all over the country. If we’d go on vacation somewhere, we would look around to try to find cans of the local beers. Well, fast-forward 40 years to today, and to my knowledge, there are almost no regional or local metropolitan breweries anymore. Back in the 70s, it seemed like even your second-, third-, and fourth-tier cities had, say, three brewers. And yet now they are all gone. Anheuser Inbev is a combination between the US’s Anheuser Bush and Brazilian owner. Miller, which used to be from Milwaukee, is SAB Miller, South African Brewer. You must have had brewers with some skill dispersed across the country. And now, presumably, that’s gone, and that skill is only in these global corporate headquarters. All right, maybe you clear away the Cincinnati brewers and the Milwaukee brewers and Detroit brewers and Philadelphia brewers, but what we’ve seen spring up in the last 10, 15, 20 years, is this thriving craft brewing industry in which it’s even more atomized than it ever was when Hudepohl was in Cincinnati and Strohs was in Detroit and Schmidt’s was in Philadelphia. Presumably that’s led to a greater spreading of brewing techniques and an ability to make craft beers in more and more innovative ways in smaller and smaller batches on location in brewery/restaurants. So that’s actually kind of created a new hospitality industry and truly does account for some employment all over the country and some consumption all over the country as people go out to those brewery restaurants.

a healthy and vibrant middle market space could help to promote productivity in the overall economy.

So this also serves as an example of what you were talking about before – concentration of an industry giving way to the innovation of smaller, more nimble companies.
Right. You had an industry get really, really concentrated. And now, while the sales on grocery shelves may be more concentrated, you actually have this new craft brewing industry that has sprung up all over the country.

Let’s turn our attention now to middle market lending. This is an area of investing that has gotten a lot of attention recently, and we often hear about it in terms of investors’ “desperate search for yield.” Can you paint the economic backdrop for us?
Sure. [It starts with] zero interest rate policy, which came to be known as ZIRP. That acronym describes when the Federal Reserve set its policy rate at zero beginning in December of 2008, and left it there until December of 2015. So for seven years, we had the Central Bank in this country, and the preeminent central bank in the world, the de facto central bank for the rest of the world, setting interest rates at zero. Well, Europe underwent the same recession we did during the crisis and got caught up in that same global undertow. But then Europe went and had a second recession in 2012 amidst peak concerns about the future of the Eurozone and the common currency. Come 2012, Europe was in especially dire straits relative to the United States, which had at least experienced three or three and a half years of recovery. So Europe went one better than ZIRP. Europe tried NIRP, negative interest rate policy. And it’s still in place today. One of its policy rates is minus 40 basis points, or minus 0.4% [Ed. Note: On September 12, the ECB lowered its Deposit Facility Rate, the rate it pays on deposits that banks hold with the ECB, to -0.5%]. And that has fanned out, rippled out, into negative yields on a range of European government securities. Right now, the 10-year German Bund yields something like minus 30 basis points. You are actually paying Berlin for the privilege of lending to it. And it doesn’t begin and end with Germany. There are, today, $13 trillion of bonds worldwide that offer a negative yield [Ed. Note: At its peak in late August, this number reached $17 trillion]. 

Not a great situation for investors who actually need to be achieving some kind of return.
Right. There are institutional investment constituencies that have a yield imperative. If you are a life insurer, if you are a pension fund, you have a fixed schedule of liabilities that you have to defease with income from your investment portfolio. If you're a life insurer, you don’t know which people in your pool of insured are going to die next year and the year after that and the year after that, but actuarially, you have a very, very good sense of just how many people in that pool are going to die, and therefore what are the premiums you are going to need to pay out. If you are that life insurer, you cannot defease that fixed, unyielding schedule of obligations with a 30-year Treasury that’s yielding 2.5 percent. You can't do it with a 10-year Treasury yielding 1.8 or 1.9 percent. You most certainly can't do it with this range of negative-yield sovereigns in the developed world. If you’re an endowment and you have to pay out 5 percent of the principal every year to maintain your tax-free status, you need at least 5 percent of income every year on your investment portfolio to avoid eating into the principal of that endowment. So these three institutional constituencies – life insurers, pension funds, endowments – have a desperate need for yield. And you’ve got a world with very, very little yield. The Fed just cut interest rates [a few weeks ago] and is likely to provide even more accommodation as the year plays out, and the European Central Bank has very clearly indicated that it is going to begin buying more assets, buying more bonds. Reducing the supply of bonds should presumably have the effect of driving the price of all the remaining bonds higher. Well, price and yield move in opposite directions. So that additional buying from the European Central Bank can be expected to be something of an anchor on yields in Europe and worldwide. So you have these constituencies that desperately need yield, in addition to retirees that also need income in a western world that is aging.

A lot of savvy investors said, “This is a chance to earn alpha, but without taking on any more risk. Because these companies now have to pay more to borrow even though their creditworthiness hasn’t changed.”

Enter middle market lending, then.
Right. Against that backdrop, there’s a real need for investment products from the middle market, securitized loans to middle market companies or pools of capital that have been raised to lend directly to middle market companies. From the perspective of the economy, there’s also a need for entities to provide capital to this dynamic part of the economy that we were talking about before.

Before the financial crisis, that lending role was being filled by the major banks. What happened to cause the shift toward nonbank lenders in the middle market space?
Because of the banking regulation that ensued in the wake of the crisis, to some degree large banks orphaned that middle market space. Basel III applied onerous capital charges to any but the most plain-vanilla loans. And those capital charges made a bank that’s a publicly traded company unwilling to make those loans because they generated very low returns on equity. Now, I think this is an important point: they generated very low accounting returns on equity because of this notional capital charge. “Notional” meaning no basis in the real world but inputted as an accounting entry. So as a result, you had publicly traded banks turning their backs on loans that may well have been generators of positive net present value but because of this regulation-driven accounting entry, kept the banks from wanting to make those loans. So that threatened to dry up a source of funding for this vibrant part of the economy, the middle market. A lot of investors saw an opportunity. A ton of capital was raised. Savvy people looked around, took stock of the environment in 2010 and 2011, and said, “Gee, there are some really good borrowers out here that are having a hard time getting capital. There are some really good credits here that can’t go to Chase anymore to borrow to the extent that they did in the past. And in this kind of frightened, skittish post-crisis financial landscape, other lenders are pretty cautious as well. They're just scared. You know, they remember the trauma of 2007, 2008, 2009, and they're kind of gun-shy.” When you put all that together, less supply and less willingness even among the pools of capital that might be able to lend to these companies, it meant that you got paid more for lending to them. Or, conversely, the middle market had to pay more to borrow.

So these nonbank lenders saw a real opportunity that the big banks were more or less forced to leave on the table.
The beautiful thing for an investor was that it had nothing to do with the economics of lending to these companies. It had to do with a convention that society – the banking system part of society – agreed upon, that, “We can’t be as willing to make these loans anymore.” And I do think as an investor, it’s always something that bears looking into when you come upon an opportunity to buy something from a seller that is selling for noneconomic reasons. Or in the case of the banks becoming less willing to lend, to step into the shoes of a service provider that has ceased to provide that service not for any economic reason but for some sort of convention, some sort of accounting entry, some notional change. So a lot of savvy investors said, “Gee, we want to invest there. This is a chance to earn alpha, to make more than a market return, but without taking on any more risk. Because these companies now have to pay more to borrow even though their creditworthiness hasn’t changed in any material way versus what it was in 2006 or 2007.” So a ton of capital got raised.

I would expect that loan performance is going to deteriorate, two, three, four years out because we have seen a steady erosion of protections for lenders.

That’s when the space began to fill up with lenders, right?
This brings me to one of my all-time favorite investment maxims from the late Barton Biggs, who was the strategist at Morgan Stanley for a long time. Barton Biggs said, “There is no investment idea that is so good that it cannot be destroyed by too much capital.” My take on that is that alpha – returns above the market return – accrues to the providers of scarce capital. So in 2010, 2011, yeah, there was great opportunity in lending to middle market firms to be that scarce provider of capital. But now fast-forward to 2017 when the business development companies, the BDCs, the publicly traded lenders to the middle market space, were having their first-quarter March 31 earnings calls. One after another, they lamented how competitive the lending environment was. Because so much capital had been raised expressly to lend to middle market borrowers, now we were heading to something of a Barton Biggs situation. There was so much capital wanting to lend that it had become a borrower’s market, not the lender’s market that it was in 2010 and 2011. And that backdrop as far as I can tell has persisted through today.

So what is the state of the middle market lending space at this point?
We are in a very borrower-friendly, late-cycle market. That is what typically happens as the cycle progresses. Because banks – and I suppose other lenders as well -- tend to be rearview-mirror lenders. They make their underwriting decisions based on what has happened over the last several quarters in terms of credit performance. The deeper we go into an expansion, credit performance gets better and better and better because the economy has been expanding. But when you look prospectively, when you look out into the future, as the economy gets better and better and better and the rearview mirror decisions become more and more accommodating, you are setting yourself up for a fall.

Are you saying that that’s what’s already happened in the space?
If we go back to 2009 when the firms in the financial services space that had survived were busily filling sandbags and putting them around the foundations of their companies, to get a new loan by an underwriting committee it had to be underwritten so tightly that it squeaked. But that presaged really good loan performance in 2011, 2012, 2013. Because a properly underwritten loan, assuming that there’s no unexpected recession or no unexpected exogenous shock, takes two or three years to go bust. So that performance two or three or four years out is largely a function of the underwriting standards today. Well, I would expect that loan performance is going to deteriorate, two, three, four years out because at least in the publicly traded space, in the corporate bond space, anecdotally, we have seen a steady erosion of protections for lenders. Covenants, the contractual provisions that dictate what borrowers can and cannot do, have been progressively loosened to the point where, to some degree, they barely exist at all today.

This is what you mean by the shift to a borrower-friendly market.
Right. In that environment, you can borrow, because a company does not default or go bankrupt unless it cannot find another lender with which to roll over its maturing debts. And in the desperate-search-for-yield world that I was describing, with $13 trillion of negative-yield bonds, it’s really difficult to go bust. Because if you offer just 50 basis points, a half of a percentage point more yield, today, you are likely to have a line of would-be lenders out the door and around the corner to lend to you no matter how dodgy a credit you might be. So I don’t think we’ve seen the end of the credit cycle yet. I think it’s still somewhere over the horizon. I don’t think it comes in the next year. It should be a good time to raise money if you are a middle market borrower. Loans that have already been made to the middle market should perform really well. We should continue to see much lower default rates than we will see across the entire cycle (and when we talk about the “entire cycle,” we mean a recession and an expansion). So I think things are going to look great and perform really well, let’s say over the next year. But that does sow the seeds for poor performance further on down the road because when current conditions are so good, when things in the rearview mirror look so good, lenders let their guard down.

This is interesting. Given the two-to-four-year playout you suggested, it seems like you could pretty closely predict when the performance of these loans will drop based on when we started to see an erosion of protections for lenders. Just to be clear, where do you pinpoint the timing of when this drop-off began to occur?
I guess I’d say generally sometime after 2012. I do think the 2009, 2010, 2011, 2012 vintages were well underwritten. Because of the opposite of what Barton Biggs said. You know? You get good deals when you’re the scarce capital. So I’d say somewhere between 2012 and today, or let’s say 2013 and today, things started turning. Now, that’s natural. That’s just the way the cycle goes. You can make fantastic loans at the peak of the recession or in the immediate aftermath of the recession, because people are scared and because then the current conditions are really lousy. So if you are a lender with a lot of capital, now you can pick and choose to whom you want to lend. And with very little competition, it’s very much a lender’s market. So it’s a lender’s market at the bottom of the cycle, it’s a borrower’s market at the top of the cycle. If you think about cycles as sine waves, we just kind of transit from that lender’s market at the trough to the borrower’s market at the peak. And I don’t exactly know where the equator is, the halfway line between the trough and the peak. But I would think it was somewhere around 2014, 2015, when things really started moving in borrowers’ favor.

I don’t think we’ve seen the end of the credit cycle yet. I think it’s still somewhere over the horizon. I don’t think it comes in the next year.

And when you look at the actual loan agreements, are there any provisions in particular, or omissions of covenants, that you started seeing and thought, “Wow. Really?”
Well, it seems like the pay-in-kind provision is back. And it’s hard to believe it’s back just 10 years after it was derided as a terrible idea. Pay-in-kind allows the borrower, instead of making its interest payment, to simply issue more bonds in satisfaction of that payment. So, to make the math easy, let’s say you borrow at a 10% annual rate and you pay interest twice a year. And let’s say you borrowed $1,000. So if you borrowed $1000 at 10 percent, you owe $100 in interest every year. Semiannually, you owe $50 in interest. Instead of forking over $50 in satisfaction of the interest payment to service the debt, pay-in-kind provisions allow you to simply issue another $50 of face-value bonds. So instead of getting $50 on its $1000 principal, a lender now gets $1,050 of principal. If this sounds a little bit like the pick-a-pay mortgages where people could choose on their subprime mortgages from a menu of options, only one of which fully amortized the loan, only one of which satisfied the interest such that the principal didn’t rise, you can see where this can lead to trouble if there is a turn in the economy. Because with pay-in-kind, you may have a borrower who got more extended than the lenders intended when the lenders underwrote that initial loan. And if borrowers exercise that pay-in-kind option in their own interest, presumably they're going to do so when conditions are worsening. So that you wind up with $1,050, then $1,100, then $1,150, then $1,200 of debt instead of the $1,000 you started with. And when that incremental [$50] gets to $1,200, it was undertaken at the very worst possible time.

That’s sobering.
And I think just beyond the bond covenants, you can just look around. Argentina was able to issue 100-year bonds. It makes me wonder about our species. Do we never learn? How many times in the last century did Argentina default? Like five, six, seven times. It’s a serial defaulter. Austria issued 100-year debt with a one-something percent coupon. I don't know what’s going to happen in the next hundred years, but when central banks around the world have 2-percent inflation targets, it would seem that on an inflation-adjusted basis, a buyer of that 100-year paper yielding 1.15 or 1.1 percent, is almost certain to lose money.

What about leverage levels? Some market watchers are concerned about some of the middle market companies amassing debt at increasingly high ratios to their earnings. Is that something that you’re concerned about as well?
I have a more sanguine view about the level of corporate debt in the overall economy. Now, I haven’t dug into the data at the middle market level. But I would suspect that much of the leveraged loan issuance has been for middle market borrowers. I think we just have to take a step back and understand. Look. If you are a corporate treasurer or CFO and you have not extended the maturity of your firm’s liabilities, and if you haven’t shifted at least some of your funding from a much higher imputed cost of equity, if you haven’t shifted some of your financing burden from more expensive equity to debt which is generationally cheap, I think you should have been fired. You’re not acting in shareholders’ interest. Now that doesn’t mean to spend like a sailor on leave. But surely, given how low interest rates are, it makes sense to shift at least a little bit of the funding burden from equity to debt. And so I think it is very natural and healthy for corporations in the aggregate to have increased their debt burden. And we shouldn’t worry if the debt burden is 10 or 20 percent larger than it was before the crisis [if] interest rates [are] 3 or 4 percent if you’re investment grade relative to 7 percent before the crisis. Or if you can perhaps borrow at six-something percent as a high yield borrower when you were borrowing at 8 or 9 before the crisis. Given that it’s so much cheaper to service that debt, then you have capacity to have more debt. And so that’s what I see when I look at the aggregate level. When we look at things like nonfinancial corporate debt as a share of GDP, it doesn’t worry me in the slightest that that number is higher. It just tells me that CFOs and treasurers and management teams are rational. We spent a good amount of time talking about what a great borrower’s market it is. Well, if you’re a borrower, you ought to participate. It’s the lenders who ought to worry. But if you’re a borrower, man, you should get while the getting is good.

If you are a corporate treasurer or CFO and you haven’t shifted some of your financing burden from more expensive equity to debt which is generationally cheap, I think you should have been fired.

I think a lot of people are probably still looking at that rising corporate debt in light of the housing debt that was at the heart of the financial crisis.
I don’t think increased corporate debt is analogous to a big pickup in residential mortgage debt, and in particular the subprime residential mortgage debt in 2006, 2007, 2008. Mortgage debt poses a special threat to the economy that no other debt does. This is a generalization, but it’s a fair one from the perspective of this former banks analyst. In general, the collateral for the United States banking system is homes. And so when you had way too many mortgages that were underwritten carelessly, if not outright recklessly, and then home prices started falling, in some places by double-digit rates year over year, you did have an existential threat to the United States banking system. In the winter of 2008-2009, we really weren’t that far away from going to the ATM machine and not being able to get anything out of it. Remember the S&Ls? They existed to take household deposits and turn them into 30-year fixed residential mortgages. Now, they got subsumed into the broader banking system and were given a new name, “thrifts,” after the S&L crisis. But they still existed. All that 30-year paper was still out there. That was an existential threat to the United States banking system and it became an existential threat to the global banking system. You can't say the same about corporate debt, because corporate debt is not held by the banking system in any kind of concentrated way. It is more dispersed throughout the economy and throughout a range of investors. And that dispersion means that it’s not something that poses an existential threat to the banking system or a particularly grave cyclical threat to the economy. So I do think the concerns about corporate indebtedness are overrated. That may put me and BCA in the minority, but I think that it’s a well-founded minority position, that we got to it fairly rigorously and that perhaps all the noise that you see in the media about this corporate debt bubble or the leveraged loan bubble really hasn’t dug that deeply.

On the question of fragility and resiliency, what if anything do middle market companies have going for them or against them when it comes to their ability to survive a downturn in the economy?
I don’t know that there’s anything about the middle market companies that makes the individual companies or the space in the aggregate more susceptible to downturns in the economy than others. But there are two factors that support the middle market relative to large and mega-cap companies such as dominate the S&P 500. The first one is that their effective tax rates tend to be higher than the multinationals who can, through clever accounting, divert a whole lot of profits into lower-tax jurisdictions and thereby reduce their effective tax rate, the rate that they actually pay on their earnings, to something below 21 percent. If you are solely domestic, you really don’t have any opportunities to get your tax rate below that top marginal 35% tax rate that prevailed until the end of 2017. Well, by cutting the top corporate marginal tax rate from 35% to 21%, it boosted all the companies that were paying 35 relative to the companies that were paying 21 or lower. And the middle market was paying 35, whereas Apple, or name your global multinational, was paying something well below 21. So that lower marginal tax rate didn’t do anything for the global multinationals, but it did a whole lot for a company that is entirely domestically oriented. So middle market companies do have that boost over the mega-caps, in that they now have a greater future stream of cash flows because they are now going to keep 79 cents of every marginal dollar versus the 65 that they were keeping through December 31, 2017. So that is a boost to the middle market relative to bigger companies. In terms of the other boost, I’m generalizing, and this doesn’t apply to every single middle market company. But in general, smaller companies tend to be more domestically focused than bigger companies. As a result, they are presumably a little better insulated from trade tensions. Now of course they may source inputs for their products from around the world and have their inputs get caught up in tariffs. But if we were to see something of a reversal in globalization, if the mega-caps have benefitted most from globalization, then its unwinding to some degree should act to their detriment more than to the detriment of the middle market. So if trade tensions appreciably worsen, then I would think that the middle market won't feel the pain from it as badly as more globally exposed companies.

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Doug Peta is Chief U.S. Investment Strategist at BCA Research, a pioneering provider of top-down independent investment research since its founding in 1949. He has been advising institutional investors around the world at BCA since 2010, variously leading its U.S. Investment Strategy, Global Asset Allocation and Global ETF Strategy teams. He has 21 years of investment experience as a strategist, analyst and trader. He earned his MBA (Economics and Finance) from the University of Chicago and his bachelor’s degree (Accounting) from the University of Virginia. He is a CFA charter holder.

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