You're listening to Strictly Business Podcast with Lindsay Williams.
I received a piece of work from the 91 London Investment Institute,
which was co-authored by Philip Saunders and Sahil Matani, and it starts like this.
It says, with the US performing strongly and China showing signs of turning a
corner,
a global economic recovery is building.
There are abundant opportunities for investors, but 2025 requires a new
investment playbook, it says.
Philip Saunders and Sahil Murtani, as I said, were the co-authors.
But with me today is Philip Saunders from 91 in London.
And you mentioned at the end of it, you say you talk about where the pitfalls lie,
Philip.
And I think before we get into the nitty gritty of this piece,
I think the first pitfall is making predictions.
Because if you get the predictions right, people will say, well, you're supposed to
because you're an investment professional.
If you get them wrong, they're the pitfalls.
lie but how difficult or easy was it for you to look forward to 2025?
So Lindsay it's it's always difficult and and it's nobody's got a
perfect crystal ball
I think it's particularly difficult to forecast the year ahead and you know we're
also in an environment you know which
is still this sort of post-covid environment or post-GFC environment also
which which,
you know, where unusual things happen.
So, for example, when the Fed cut rates back in September, bonds sold off, you
know,
and that's highly unusual.
So I think that it's particularly difficult at the moment.
But I think that that doesn't mean that it's not worth, you know,
even attempting to sort of go through the process, because I think it's a good
discipline.
Let's start with your first point.
I don't want to be too prescriptive about this and go number one, number two, etc.
We'll let the conversation flow.
But let's go to macro first of all.
There are three regions that I always look at when I first get up in the morning, and
that's the United States, China, and Europe.
Now, the U.S.
is doing okay.
I mean, it created, I think, the last jobs print,
the non-farm payrolls number was something like 256,000 jobs were created, which is
pretty good.
So it's still a robust situation over there.
China, I noticed, is forecast to grow 4.7% this year,
even with the prospect of Trump tariffs.
Europe, on the other hand, slightly different.
But maybe you could summarise those three regions for us.
Sure.
So, I mean, the US is obviously the locomotive economy at the moment.
It managed to avoid a recession, which obviously...
caught a lot of people off guard because the odds were pretty high that that would
happen,
or at least a period of much weaker growth.
And, you know,
that's substantially down to obviously what's been happening in terms of AI
investment.
On the one hand, it's consumers, you know, having pretty good balance sheets at the
moment,
supported by COVID handouts.
And obviously,
the massive government deficit run in order to finance those handouts and a
whole
bunch of projects that Biden got through Congress and the Senate during his during
his term.
So the U.S.
has been running, you know, unusually for a period of sort of period when the
economy has positive traction.
A 7 percent.
a deficit which is equivalent to seven percent of annual gdp which is uh normally
something you see um as part of a
strategy to uh to bolster growth in a particularly weak economic environment so
pretty
unusual but the u.s basically economy has momentum uh
it's pretty healthy because despite the fact the government basically has borrowed
a lot um households are in good
shape we're seeing real wages basically drive growth because manufacturing has
continued to be pretty weak,
but services have more than offset that.
And I think looking forward over the next 12 months or so in the US, we think we see
more of the same.
We see positive productivity contribution,
which is very unlike the last sort of decade or so, when productivity is run at
about 1%.
It's running, you know, at least double that at the moment.
And that means you can have pretty strong growth above.
trend growth without the sort of typical inflationary consequences that people, you
know, obviously worrying about at the moment.
So that's the US.
And we think that that is generally quite constructive for global growth.
Let's flip to Europe and Europe looks pretty miserable.
But that's the dominant narrative at any rate.
So much of that is.
presumably in the price.
Sorry to interrupt.
Is that mainly because of the demise of the German economy and the German
political situation?
Because it looks pretty dire in Germany.
Is that the main driver of Europe's sluggishness?
I think that's, well, Germany and France in particular are struggling.
And, you know, part of that relates to...
You know, the fact that China is becoming Germany's competitor used to be its
customer.
It's now its competitor.
And obviously, that's most visible in the area of electric vehicles where China is
very dominant.
But it's also in areas like machine tools, traditionally areas that German industry
dominated.
And also high energy input costs, you know, because the sort of, you know,
German miracle or the recent version of it was.
you know, basically Chinese demand and very low energy costs as a result of
Russian gas.
So now Europe has very high energy costs.
And that, of course, makes it less competitive.
And that, I think, is a big structural challenge for the likes of Germany.
However, if we look more broadly in Europe,
I think if you look at the likes of Spain and East Europe, I mean, like Poland,
Poland has been phenomenally successful.
So we need to be a bit careful because there are some economies in Europe
actually doing pretty well at the moment.
Okay, so it's a fragmented Eurozone, if you like.
Now China, I threw out a figure of 4.7%, which is something I read on a website,
and one doesn't know where that comes from.
We don't really believe it.
Oh, you don't believe it.
So these are sort of, and funnily enough, they always achieve their targets.
And so one shouldn't.
put too much store in that.
So clearly, growth this year has been significantly weaker in reality than the
official numbers,
because the consumer in China has remained pretty weak.
And China basically has relied very heavily on exports to keep the show on the
road.
I think looking forward into next year, or the current year, as it is now, you know,
we have a rather contrarian view in the sense that most, you know, the narrative
is that China basically is beset with
problems with its property market and with excessive amounts of debt.
And sure, you know, China, like just about every other economic bloc, faces
challenges.
But we think that the powers that be now are sufficiently alarmed that we've
seen, you know,
significant moves to try and bolster growth over the course of 2024.
Those often will have a lagged impact.
And...
In the year ahead, we expect
QE with Chinese characteristics as being an anti-deflation sort of kind of step.
And interest rates are being kept very, very low.
So I think that we think that the biases for China to do a bit better than expected
is strong.
And if it does, and if we're right about Trump.
If Trump's not interested in an all-out trade war with China, as far as we can
see, then I think that basically,
you know, the Chinese economy might actually surprise on the upside.
Very good.
So you don't believe the number that I gave, but you're leaning towards an upside
surprise, which is very good.
What about interest rates and bonds?
This has been an alarming trend in just over two weeks of
2025. The bond market has had a horrible time.
notably in the United Kingdom for internal reasons, but also in the United States and
elsewhere, Philip?
Yes, it's apart from China where bond yields continue to fall.
Elsewhere, we've basically seen, you know, since the Fed, as I mentioned earlier,
since the Fed raised, sorry,
reduced rates by 50 basis points, you know, actually bonds have had a torrid
time.
But we need to step back from this and understand the context.
And the context is a bond bear market.
We're in a bond bear market.
which has been underway since 2020.
And we happen to think we're in a different inflation and interest rate
regime,
which has sort of longer-term consequences.
But this particular move probably is pretty close to culmination.
So we're getting to yields which are pretty attractive for longer-term
investors.
We're actually pretty constructive about inflation for this year at any rate.
Whereas, you know, inevitably there are going to be panics about, oh,
growth is too strong and therefore there are inflationary consequences and Trump's
going to put lots of tariffs in and they are
automatically inflationary.
Well, you know, that's not entirely the case.
So the principal dynamic behind inflation, we believe, on a cyclical basis, at any
rate,
is for decline.
So we think that bond yields are there or thereabouts where they should be.
And we've seen this sort of general repricing of capital going on over the
last sort of, well,
since 2020.
Now, that, we believe.
is actually quite a constructive thing, because it means that the cost of
borrowing is obviously going to remain
significantly higher than it was in the post-GFC period.
But, you know, that was abnormal.
And that led to extraordinary levels of capital misallocation.
So this time around, you know, as Rachel Reeves is discovering in the UK, you know,
actually playing fast and loose, you know, means that your creditors basically
revolt.
And that imposes a discipline on governments.
And it also imposes a discipline on corporates.
So the kind of rampant financialization that characterized the post GFC period,
you know, is ebbing.
And I think that, you know, higher bond yields are part of that process.
One final point, and that is that if the US economy is going to continue to grow,
as we believe it will, at a reasonable,
reasonable clip, then...
The Fed's not going to be able to cut short-term rates much, you know, if at
all.
And that then means that the yield curve has to normalize, and investors need a
term premium for,
you know, lending long.
And so, therefore, weakness at the long end, you know, is understandable in those
circumstances.
So this is not about a financial crisis.
This is basically about sort of a logical response to economic conditions.
I was going to ask you about the Trump.
tariff situation because everyone's jumped on the trump tariff bandwagon and said
that if he raises tariffs across the
board whether it be mexico canada or china or the european union it doesn't matter
it's going to be inflation but i
don't want to do that because it's all up in the air it's purely hypothetical so we
won't do that have a look at a couple of niched uh points
that you make in your report and that's credit and you said that finding value
will be key and then you talk about emerging markets
fixed income.
And when I see the strength of the US dollar, I think of the currencies in
emerging markets.
And that's never good for that particular market you've just mentioned.
Maybe summarize those two asset classes, if you would.
Sure.
So as far as credit is concerned, obviously, credit spreads are incredibly
narrow at the moment.
And so that means that as an investor,
you don't get a lot of compensation for the additional risk you're taking by going
down the credit curve,
so to speak.
And, you know, that is because actually the U.S.
economy in particular didn't go into a recession.
And there's a lot of capital around that's looking for a home, which has driven
credit spreads to very low levels.
And but all good things come to an end.
And, you know, what we're saying is that that we've in credit,
we've got to keep credit duration pretty short now.
and it's not the time to basically extend, we believe.
And one's got to look for sort of the niches that haven't fully repriced.
And so we mentioned collateral loan obligations as one area that we think is
attractively priced.
However, having said that, you know, obviously interest rates are now at a
different level.
And that means that you can earn...
attractive real rates of return.
So we've said it's sort of likely to be a coupon clipping year.
So you're likely to sort of, if you're a credit investor, you're likely to enjoy
your spread, and
I get a higher yield, and, and you will not be punished for this sort of, you
know,
the lack of value, so to speak, that might be something something to the future,
turning to emerging market fixed income.
Yes, I mean, the dollar has been sort of incredibly strong and that's it tightens
international credit conditions and it's,
you know, not particularly helpful.
But, you know, the dollar is, you know, is the dollar really going to have another
major leg on the upside?
I'm really, really not so sure.
The U.S.
is running an enormous current account deficit and, you know,
other areas of the market, other areas of the world economy.
If they do somewhat better than currently discounted,
then that's actually going to be quite helpful in terms of helping to stabilize
currencies.
So EM relative to the dollar is cheap.
Inflation dynamics are really good.
Inflation is generally continuing to come down and short term interest rates are
going to come down on the back of that.
So whatever the dollar does.
Let's continue the EM theme, but moving to the asset class of equities.
We'll start with.
developed markets though what a great year they had last year if you look at the s p
i just can't remember the number something like 23 and a half percent
uh increase which is a fantastic performance but not all developed markets
equities are created
equal are they i mean you could say you can look at nvidia and you can look at
boeing and you say wait a second they're both in the same country they're both
doing different things obviously but there's been a huge divergence in
performances
So you've seen, you know, U.S.
equity performance has been very, you know, again, very concentrated, you know,
like last year.
And so, you know, the sort of big, you know,
the Magnificent Seven in particular basically have their returns have
dominated again and
returns elsewhere have been sort of OK.
But relatively speaking, they look pretty pedestrian.
And this, you know, is.
Market concentration is the result of
momentum-dominated environments.
Active managers have been very concerned to move away from benchmarks because
it's more than their career is worth, so to speak.
And so you have this effect, but it is anomalous and it's gone, we think, too
far.
and it will unravel at some point.
You know, one doesn't know exactly when.
So it's been U.S. generating returns that have been way above other markets,
particularly with the sort of help by the stronger dollar as well.
And it's been a sort of particular section of the U.S.
market that has done sort of particularly well.
And at some point, these things tend to well, it's flowing.
It will ebb at some point.
And I think the context for that will be a better,
broader cyclical recovery in the US and also around the world.
And that's exactly what we envisage unfolding over the course of the year.
It may well be the sort of second half of the year, but by and large,
that is likely to be the key macro theme of the year.
And equity markets are likely to respond, i.e.
international markets tend to do better than the US.
And the least favoured cyclical sectors in the US tend to actually have a period of
recovery.
And just emerging markets now, quickly, I mean, I'm familiar with South Africa,
and although it's a shrinking stock exchange in Johannesburg, there are some
bargains to be had.
And those bargains were being snapped up last year.
So that's one thing.
But you highlight Asian tech.
Give us an overview of the whole EM equities scene, if you would.
Yeah, so...
It's obviously not so much tech as far as South Africa is concerned, if you put sort
of obviously process to one side.
And, you know, I think as long as there's reform momentum in South Africa,
as long as that holds up and as long as inflation moderates,
then that remains.
And as long as, you know,
South Africa can attract international capital.
You know, we're in a sort of bit of a virtuous circle,
although there's some big structural challenges that haven't really been
addressed as yet.
Looking more widely, you know,
actually emerging markets more generally have changed in the sense that, you know,
tech having been sort of a sort of very modest sector has now become quite an
important one.
And the value in tech is probably.
in EM tech and particularly in China, where you have obviously other challenges.
So, you know, this is where you can, if you believe the future is in tech, then,
you know,
maybe you should be sort of cashing in some of your
Nvidia exposure and diversifying it and looking at opportunities
outside the US.
Commodities now, a huge asset class for many.
emerging market economies.
And I think the simple view is, from a simpleton, and I class myself as a
simpleton,
is that if economic growth is going to be coordinated with China and the United
States
at the forefront of global economic growth, then demand for commodities goes
up.
Do you see it that simply?
I see it.
Sometimes things are pretty simple, and I see it that simply.
So it's interesting that, you know, we've been in a period where, particularly with
the weakness of China,
because also China is obviously the sort of taker of 50% of a lot of commodities.
You know, China has been weak, particularly traditional China,
but commodity prices have actually held up pretty well in the circumstances.
It's been a period of consolidation.
And that is a testament to the fact that the industry...
over the years has consolidated,
and it means that capital discipline has been pretty good amongst resource
companies,
and supply is relatively tight.
So if we see a meaningful uptick in global demand,
then we believe that resource stocks are going to benefit from that,
and countries that basically are resource rich should benefit from that.
All things being equal, obviously, all things aren't necessarily equal.
So pretty constructive about industrial metals on a sort of...
one year and beyond view.
We're still constructive about gold, you know, because it's sort of hedging
attributes, I think,
basically, are now more widely appreciated.
It's become a major reserve asset, again, for central banks.
And oil, you know, oil, interestingly, is one of the ones where actually there's,
you know,
the potential for more supply than demand.
And so, therefore, we're less constructive about...
oil prices but uh you know they've been strong in the early part of this year um
and
um and so we're unlikely to see oil prices weaken significantly from currencies
finally terribly terribly
important for every single country in the world the rate of their currency against
the u.s dollar or whatever other currency uh they favor
but i was always taught when i first became first sat on a trading broking desk
they
said a currency move doesn't stop.
It's a long-term move.
And it seems to me that the long-term move at the moment is a strong US dollar.
Do you see it that way in 2025, Philip?
So the dollar has remained in a bull market now for some years.
And if you step back,
you can see these sort of significant bull and bear markets that the dollar and other
currencies
have experienced.
I mean, currencies are like any other traded financial asset from that.
perspective, you know, people tend to focus on the short term volatility.
But if you step back, you can see that they have very pronounced trends.
So the dollar remains in the bull market.
It's from a valuation perspective, it's, you know,
about as strong as it's been since the, you know, the Reagan dollar bull markets
back in the 1980s.
And it means that the oxygen, you know, even if Trump turns out to be marvellous.
you know, is really getting a bit thin for the currency.
So, essentially, I think that, you know, we've got further, obviously,
sort of in the first half of the year, we're likely to see sort of continued US
exceptionalism in terms of its relative growth rate,
and that tends to be currency supportive.
And it will be interesting to see how the dollar pays in those circumstances.
But we're sort of closer to the end than the beginning is the point I'm making.
And ultimately, you know, valuation does have an effect.
And so therefore, you know, ultimately the dollar will fall back from these kinds of
levels,
possibly slightly higher.
Finally, you talk about super power rivalry and I see them huffing and puffing
and there's some bristling and
there's some posturing.
But do you worry about that sort of thing?
Or would you just say, look, it's just something for...
a major US TV network to headline.
And we don't worry about that too much as an investment theme.
So geopolitics, basically.
Yes, exactly.
Yeah.
So I think the reality of the situation is that we, you know, we are in a Cold War
and,
you know, it's sort of Cold War II.
It's very different to Cold War I.
And, you know, China's relationship with Russia, so-called dragon.
bear relationship, you know, is not going to change.
And the there is going to be a parting of ways in many senses from a sort of more
macro economic
perspective.
So that's the reality we have to live with and think about.
However, you know, you've got an administration coming in that is pretty
pragmatic.
Got people like Elon Musk on board, who's got a significant business in China.
The Chinese and American economies, many levels are going to remain highly
integrated.
And that actually probably suits everybody.
However, America is going to be more forcible about protecting what it sees as
its strategic interests,
which China does already.
So that probably makes sense.
And I think that there will be proxy wars and conflicts and so forth.
Because You know, this is not about kissing and making up.
This is about striking a deal, establishing some kind of detente,
but continuing to actually continue to to face off against each other.
So the Chinese are not going to suddenly stop building, expanding their Navy, for
example,
and adding to their sort of their missile inventory.
So and this, of course, obviously is is going to be pretty positive for capital
investment.
you know because competition you know means that supply chains have to be moved
it means
It's the investment in better defence products.
And there is this general economic rivalry because China and the US understand that
ultimately it's about
economic power.
You know, Russia doesn't seem to understand that, but China certainly does.
Philip, thank you so much for your extended analysis.
Philip Saunders is from the Investment Institute at 91 in London.
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