WEBVTT 1 00:00:00.372 --> 00:00:04.535 You're listening to Strictly Business Podcast with Lindsay Williams. 2 00:00:05.436 --> 00:00:09.498 I received a piece of work from the 91 London Investment Institute, 3 00:00:09.558 --> 00:00:14.202 which was co-authored by Philip Saunders and Sahil Matani, and it starts like this. 4 00:00:14.702 --> 00:00:19.625 It says, with the US performing strongly and China showing signs of turning a 5 00:00:19.625 --> 00:00:19.885 corner, 6 00:00:19.965 --> 00:00:22.247 a global economic recovery is building. 7 00:00:22.707 --> 00:00:29.352 There are abundant opportunities for investors, but 2025 requires a new 8 00:00:29.352 --> 00:00:31.352 investment playbook, it says. 9 00:00:31.352 --> 00:00:33.374 Philip Saunders and Sahil Murtani, as I said, were the co-authors. 10 00:00:33.454 --> 00:00:37.095 But with me today is Philip Saunders from 91 in London. 11 00:00:37.475 --> 00:00:42.818 And you mentioned at the end of it, you say you talk about where the pitfalls lie, 12 00:00:42.818 --> 00:00:44.818 Philip. 13 00:00:44.818 --> 00:00:46.179 And I think before we get into the nitty gritty of this piece, 14 00:00:47.800 --> 00:00:49.981 I think the first pitfall is making predictions. 15 00:00:50.021 --> 00:00:55.303 Because if you get the predictions right, people will say, well, you're supposed to 16 00:00:55.303 --> 00:00:57.303 because you're an investment professional. 17 00:00:57.303 --> 00:00:57.964 If you get them wrong, they're the pitfalls. 18 00:00:58.444 --> 00:01:04.507 lie but how difficult or easy was it for you to look forward to 2025? 19 00:01:04.507 --> 00:01:11.329 So Lindsay it's it's always difficult and and it's nobody's got a 20 00:01:11.349 --> 00:01:12.370 perfect crystal ball 21 00:01:14.070 --> 00:01:20.993 I think it's particularly difficult to forecast the year ahead and you know we're 22 00:01:20.993 --> 00:01:22.993 also in an environment you know which 23 00:01:22.993 --> 00:01:27.856 is still this sort of post-covid environment or post-GFC environment also 24 00:01:27.856 --> 00:01:29.856 which which, 25 00:01:29.856 --> 00:01:31.856 you know, where unusual things happen. 26 00:01:31.856 --> 00:01:36.400 So, for example, when the Fed cut rates back in September, bonds sold off, you 27 00:01:36.400 --> 00:01:36.820 know, 28 00:01:36.820 --> 00:01:37.801 and that's highly unusual. 29 00:01:37.841 --> 00:01:40.162 So I think that it's particularly difficult at the moment. 30 00:01:41.303 --> 00:01:48.026 But I think that that doesn't mean that it's not worth, you know, 31 00:01:48.166 --> 00:01:52.568 even attempting to sort of go through the process, because I think it's a good 32 00:01:52.568 --> 00:01:52.668 discipline. 33 00:01:53.056 --> 00:01:54.177 Let's start with your first point. 34 00:01:54.217 --> 00:01:58.440 I don't want to be too prescriptive about this and go number one, number two, etc. 35 00:01:58.801 --> 00:02:00.262 We'll let the conversation flow. 36 00:02:00.282 --> 00:02:01.963 But let's go to macro first of all. 37 00:02:03.525 --> 00:02:09.650 There are three regions that I always look at when I first get up in the morning, and 38 00:02:09.650 --> 00:02:11.650 that's the United States, China, and Europe. 39 00:02:11.650 --> 00:02:13.650 Now, the U.S. 40 00:02:13.650 --> 00:02:15.650 is doing okay. 41 00:02:15.650 --> 00:02:17.650 I mean, it created, I think, the last jobs print, 42 00:02:17.650 --> 00:02:20.558 the non-farm payrolls number was something like 256,000 jobs were created, which is 43 00:02:20.558 --> 00:02:22.558 pretty good. 44 00:02:22.580 --> 00:02:26.123 So it's still a robust situation over there. 45 00:02:26.223 --> 00:02:30.567 China, I noticed, is forecast to grow 4.7% this year, 46 00:02:31.027 --> 00:02:33.870 even with the prospect of Trump tariffs. 47 00:02:33.930 --> 00:02:35.971 Europe, on the other hand, slightly different. 48 00:02:36.052 --> 00:02:39.755 But maybe you could summarise those three regions for us. 49 00:02:40.335 --> 00:02:41.035 Sure. 50 00:02:41.035 --> 00:02:44.799 So, I mean, the US is obviously the locomotive economy at the moment. 51 00:02:46.440 --> 00:02:50.544 It managed to avoid a recession, which obviously... 52 00:02:50.848 --> 00:02:57.391 caught a lot of people off guard because the odds were pretty high that that would 53 00:02:57.391 --> 00:02:57.551 happen, 54 00:02:57.551 --> 00:03:00.832 or at least a period of much weaker growth. 55 00:03:02.053 --> 00:03:04.314 And, you know, 56 00:03:04.314 --> 00:03:09.716 that's substantially down to obviously what's been happening in terms of AI 57 00:03:09.716 --> 00:03:11.716 investment. 58 00:03:11.716 --> 00:03:15.459 On the one hand, it's consumers, you know, having pretty good balance sheets at the 59 00:03:15.459 --> 00:03:15.678 moment, 60 00:03:15.879 --> 00:03:17.840 supported by COVID handouts. 61 00:03:18.760 --> 00:03:19.561 And obviously, 62 00:03:19.601 --> 00:03:26.466 the massive government deficit run in order to finance those handouts and a 63 00:03:26.466 --> 00:03:26.826 whole 64 00:03:26.826 --> 00:03:32.591 bunch of projects that Biden got through Congress and the Senate during his during 65 00:03:32.591 --> 00:03:34.591 his term. 66 00:03:34.591 --> 00:03:36.591 So the U.S. 67 00:03:36.591 --> 00:03:40.597 has been running, you know, unusually for a period of sort of period when the 68 00:03:40.597 --> 00:03:42.597 economy has positive traction. 69 00:03:42.597 --> 00:03:43.159 A 7 percent. 70 00:03:44.620 --> 00:03:51.384 a deficit which is equivalent to seven percent of annual gdp which is uh normally 71 00:03:51.384 --> 00:03:53.384 something you see um as part of a 72 00:03:53.384 --> 00:03:57.988 strategy to uh to bolster growth in a particularly weak economic environment so 73 00:03:57.988 --> 00:03:58.287 pretty 74 00:03:58.287 --> 00:04:01.450 unusual but the u.s basically economy has momentum uh 75 00:04:01.450 --> 00:04:08.213 it's pretty healthy because despite the fact the government basically has borrowed 76 00:04:08.213 --> 00:04:10.213 a lot um households are in good 77 00:04:10.213 --> 00:04:14.957 shape we're seeing real wages basically drive growth because manufacturing has 78 00:04:14.957 --> 00:04:16.957 continued to be pretty weak, 79 00:04:16.957 --> 00:04:17.579 but services have more than offset that. 80 00:04:18.379 --> 00:04:24.162 And I think looking forward over the next 12 months or so in the US, we think we see 81 00:04:24.162 --> 00:04:26.162 more of the same. 82 00:04:26.162 --> 00:04:28.885 We see positive productivity contribution, 83 00:04:29.665 --> 00:04:35.288 which is very unlike the last sort of decade or so, when productivity is run at 84 00:04:35.288 --> 00:04:37.288 about 1%. 85 00:04:37.288 --> 00:04:38.510 It's running, you know, at least double that at the moment. 86 00:04:38.910 --> 00:04:42.392 And that means you can have pretty strong growth above. 87 00:04:43.032 --> 00:04:49.974 trend growth without the sort of typical inflationary consequences that people, you 88 00:04:49.974 --> 00:04:51.974 know, obviously worrying about at the moment. 89 00:04:51.974 --> 00:04:52.015 So that's the US. 90 00:04:52.535 --> 00:04:56.216 And we think that that is generally quite constructive for global growth. 91 00:04:56.596 --> 00:04:59.817 Let's flip to Europe and Europe looks pretty miserable. 92 00:05:00.978 --> 00:05:03.919 But that's the dominant narrative at any rate. 93 00:05:03.939 --> 00:05:04.759 So much of that is. 94 00:05:05.215 --> 00:05:06.476 presumably in the price. 95 00:05:07.456 --> 00:05:08.156 Sorry to interrupt. 96 00:05:08.396 --> 00:05:14.039 Is that mainly because of the demise of the German economy and the German 97 00:05:14.039 --> 00:05:16.039 political situation? 98 00:05:16.039 --> 00:05:16.220 Because it looks pretty dire in Germany. 99 00:05:16.460 --> 00:05:22.382 Is that the main driver of Europe's sluggishness? 100 00:05:24.243 --> 00:05:28.365 I think that's, well, Germany and France in particular are struggling. 101 00:05:30.666 --> 00:05:33.067 And, you know, part of that relates to... 102 00:05:33.867 --> 00:05:37.628 You know, the fact that China is becoming Germany's competitor used to be its 103 00:05:37.628 --> 00:05:37.748 customer. 104 00:05:37.748 --> 00:05:38.748 It's now its competitor. 105 00:05:38.868 --> 00:05:44.650 And obviously, that's most visible in the area of electric vehicles where China is 106 00:05:44.650 --> 00:05:46.650 very dominant. 107 00:05:46.650 --> 00:05:50.572 But it's also in areas like machine tools, traditionally areas that German industry 108 00:05:50.572 --> 00:05:52.572 dominated. 109 00:05:52.672 --> 00:05:58.414 And also high energy input costs, you know, because the sort of, you know, 110 00:05:58.494 --> 00:06:01.415 German miracle or the recent version of it was. 111 00:06:02.283 --> 00:06:09.028 you know, basically Chinese demand and very low energy costs as a result of 112 00:06:09.028 --> 00:06:11.028 Russian gas. 113 00:06:11.028 --> 00:06:13.551 So now Europe has very high energy costs. 114 00:06:14.011 --> 00:06:16.473 And that, of course, makes it less competitive. 115 00:06:16.473 --> 00:06:20.316 And that, I think, is a big structural challenge for the likes of Germany. 116 00:06:20.716 --> 00:06:24.178 However, if we look more broadly in Europe, 117 00:06:24.959 --> 00:06:30.763 I think if you look at the likes of Spain and East Europe, I mean, like Poland, 118 00:06:30.863 --> 00:06:32.363 Poland has been phenomenally successful. 119 00:06:32.383 --> 00:06:37.425 So we need to be a bit careful because there are some economies in Europe 120 00:06:37.425 --> 00:06:39.425 actually doing pretty well at the moment. 121 00:06:39.425 --> 00:06:41.486 Okay, so it's a fragmented Eurozone, if you like. 122 00:06:42.586 --> 00:06:48.248 Now China, I threw out a figure of 4.7%, which is something I read on a website, 123 00:06:48.368 --> 00:06:50.728 and one doesn't know where that comes from. 124 00:06:51.268 --> 00:06:52.329 We don't really believe it. 125 00:06:53.029 --> 00:06:54.089 Oh, you don't believe it. 126 00:06:54.809 --> 00:06:58.971 So these are sort of, and funnily enough, they always achieve their targets. 127 00:06:59.391 --> 00:07:00.551 And so one shouldn't. 128 00:07:00.651 --> 00:07:01.912 put too much store in that. 129 00:07:01.952 --> 00:07:08.054 So clearly, growth this year has been significantly weaker in reality than the 130 00:07:08.054 --> 00:07:10.054 official numbers, 131 00:07:10.054 --> 00:07:12.036 because the consumer in China has remained pretty weak. 132 00:07:12.736 --> 00:07:16.798 And China basically has relied very heavily on exports to keep the show on the 133 00:07:16.798 --> 00:07:16.917 road. 134 00:07:17.358 --> 00:07:22.740 I think looking forward into next year, or the current year, as it is now, you know, 135 00:07:22.740 --> 00:07:29.463 we have a rather contrarian view in the sense that most, you know, the narrative 136 00:07:29.463 --> 00:07:31.463 is that China basically is beset with 137 00:07:31.463 --> 00:07:34.550 problems with its property market and with excessive amounts of debt. 138 00:07:35.451 --> 00:07:40.234 And sure, you know, China, like just about every other economic bloc, faces 139 00:07:40.234 --> 00:07:42.234 challenges. 140 00:07:42.234 --> 00:07:47.579 But we think that the powers that be now are sufficiently alarmed that we've 141 00:07:47.639 --> 00:07:48.700 seen, you know, 142 00:07:48.780 --> 00:07:55.364 significant moves to try and bolster growth over the course of 2024. 143 00:07:55.524 --> 00:07:57.766 Those often will have a lagged impact. 144 00:07:58.727 --> 00:07:59.427 And... 145 00:07:59.707 --> 00:08:01.708 In the year ahead, we expect 146 00:08:03.049 --> 00:08:08.371 QE with Chinese characteristics as being an anti-deflation sort of kind of step. 147 00:08:09.252 --> 00:08:11.493 And interest rates are being kept very, very low. 148 00:08:11.633 --> 00:08:17.996 So I think that we think that the biases for China to do a bit better than expected 149 00:08:19.997 --> 00:08:20.697 is strong. 150 00:08:21.257 --> 00:08:24.619 And if it does, and if we're right about Trump. 151 00:08:25.923 --> 00:08:32.529 If Trump's not interested in an all-out trade war with China, as far as we can 152 00:08:32.529 --> 00:08:34.529 see, then I think that basically, 153 00:08:34.529 --> 00:08:36.312 you know, the Chinese economy might actually surprise on the upside. 154 00:08:36.412 --> 00:08:37.112 Very good. 155 00:08:37.112 --> 00:08:43.838 So you don't believe the number that I gave, but you're leaning towards an upside 156 00:08:43.838 --> 00:08:45.838 surprise, which is very good. 157 00:08:45.838 --> 00:08:47.838 What about interest rates and bonds? 158 00:08:47.838 --> 00:08:49.963 This has been an alarming trend in just over two weeks of 159 00:08:50.444 --> 00:08:54.447 2025. The bond market has had a horrible time. 160 00:08:54.767 --> 00:09:00.111 notably in the United Kingdom for internal reasons, but also in the United States and 161 00:09:00.111 --> 00:09:02.111 elsewhere, Philip? 162 00:09:02.111 --> 00:09:04.155 Yes, it's apart from China where bond yields continue to fall. 163 00:09:05.076 --> 00:09:10.820 Elsewhere, we've basically seen, you know, since the Fed, as I mentioned earlier, 164 00:09:10.820 --> 00:09:12.820 since the Fed raised, sorry, 165 00:09:12.820 --> 00:09:15.464 reduced rates by 50 basis points, you know, actually bonds have had a torrid 166 00:09:15.464 --> 00:09:17.464 time. 167 00:09:17.464 --> 00:09:19.327 But we need to step back from this and understand the context. 168 00:09:19.828 --> 00:09:22.870 And the context is a bond bear market. 169 00:09:22.930 --> 00:09:23.991 We're in a bond bear market. 170 00:09:24.111 --> 00:09:26.153 which has been underway since 2020. 171 00:09:27.354 --> 00:09:32.678 And we happen to think we're in a different inflation and interest rate 172 00:09:32.678 --> 00:09:32.718 regime, 173 00:09:34.239 --> 00:09:36.281 which has sort of longer-term consequences. 174 00:09:37.382 --> 00:09:41.385 But this particular move probably is pretty close to culmination. 175 00:09:41.766 --> 00:09:47.430 So we're getting to yields which are pretty attractive for longer-term 176 00:09:47.430 --> 00:09:49.430 investors. 177 00:09:49.430 --> 00:09:52.995 We're actually pretty constructive about inflation for this year at any rate. 178 00:09:54.215 --> 00:09:57.616 Whereas, you know, inevitably there are going to be panics about, oh, 179 00:09:57.676 --> 00:10:04.318 growth is too strong and therefore there are inflationary consequences and Trump's 180 00:10:04.318 --> 00:10:06.318 going to put lots of tariffs in and they are 181 00:10:06.318 --> 00:10:06.359 automatically inflationary. 182 00:10:06.419 --> 00:10:08.379 Well, you know, that's not entirely the case. 183 00:10:08.739 --> 00:10:14.481 So the principal dynamic behind inflation, we believe, on a cyclical basis, at any 184 00:10:14.481 --> 00:10:14.861 rate, 185 00:10:14.861 --> 00:10:15.861 is for decline. 186 00:10:15.961 --> 00:10:21.803 So we think that bond yields are there or thereabouts where they should be. 187 00:10:22.664 --> 00:10:28.557 And we've seen this sort of general repricing of capital going on over the 188 00:10:28.557 --> 00:10:30.557 last sort of, well, 189 00:10:30.557 --> 00:10:32.557 since 2020. 190 00:10:32.557 --> 00:10:32.606 Now, that, we believe. 191 00:10:33.086 --> 00:10:38.951 is actually quite a constructive thing, because it means that the cost of 192 00:10:38.951 --> 00:10:40.951 borrowing is obviously going to remain 193 00:10:40.951 --> 00:10:42.954 significantly higher than it was in the post-GFC period. 194 00:10:44.035 --> 00:10:46.197 But, you know, that was abnormal. 195 00:10:46.597 --> 00:10:50.180 And that led to extraordinary levels of capital misallocation. 196 00:10:50.641 --> 00:10:56.145 So this time around, you know, as Rachel Reeves is discovering in the UK, you know, 197 00:10:56.305 --> 00:11:01.830 actually playing fast and loose, you know, means that your creditors basically 198 00:11:01.830 --> 00:11:03.830 revolt. 199 00:11:03.830 --> 00:11:04.728 And that imposes a discipline on governments. 200 00:11:05.088 --> 00:11:07.570 And it also imposes a discipline on corporates. 201 00:11:07.590 --> 00:11:12.653 So the kind of rampant financialization that characterized the post GFC period, 202 00:11:12.693 --> 00:11:15.676 you know, is ebbing. 203 00:11:16.536 --> 00:11:20.679 And I think that, you know, higher bond yields are part of that process. 204 00:11:20.859 --> 00:11:27.464 One final point, and that is that if the US economy is going to continue to grow, 205 00:11:27.464 --> 00:11:29.464 as we believe it will, at a reasonable, 206 00:11:29.464 --> 00:11:29.806 reasonable clip, then... 207 00:11:30.274 --> 00:11:34.117 The Fed's not going to be able to cut short-term rates much, you know, if at 208 00:11:34.117 --> 00:11:34.417 all. 209 00:11:35.078 --> 00:11:41.704 And that then means that the yield curve has to normalize, and investors need a 210 00:11:41.704 --> 00:11:43.704 term premium for, 211 00:11:43.704 --> 00:11:45.704 you know, lending long. 212 00:11:45.704 --> 00:11:49.310 And so, therefore, weakness at the long end, you know, is understandable in those 213 00:11:49.310 --> 00:11:51.310 circumstances. 214 00:11:51.310 --> 00:11:51.732 So this is not about a financial crisis. 215 00:11:51.792 --> 00:11:56.216 This is basically about sort of a logical response to economic conditions. 216 00:11:56.717 --> 00:11:58.238 I was going to ask you about the Trump. 217 00:11:58.358 --> 00:12:05.201 tariff situation because everyone's jumped on the trump tariff bandwagon and said 218 00:12:05.201 --> 00:12:07.201 that if he raises tariffs across the 219 00:12:07.201 --> 00:12:12.224 board whether it be mexico canada or china or the european union it doesn't matter 220 00:12:12.224 --> 00:12:14.224 it's going to be inflation but i 221 00:12:14.224 --> 00:12:19.207 don't want to do that because it's all up in the air it's purely hypothetical so we 222 00:12:19.207 --> 00:12:21.207 won't do that have a look at a couple of niched uh points 223 00:12:21.207 --> 00:12:25.570 that you make in your report and that's credit and you said that finding value 224 00:12:25.570 --> 00:12:27.570 will be key and then you talk about emerging markets 225 00:12:27.570 --> 00:12:29.570 fixed income. 226 00:12:29.570 --> 00:12:30.951 And when I see the strength of the US dollar, I think of the currencies in 227 00:12:30.951 --> 00:12:32.951 emerging markets. 228 00:12:32.951 --> 00:12:34.272 And that's never good for that particular market you've just mentioned. 229 00:12:34.492 --> 00:12:37.333 Maybe summarize those two asset classes, if you would. 230 00:12:38.173 --> 00:12:38.873 Sure. 231 00:12:38.873 --> 00:12:43.275 So as far as credit is concerned, obviously, credit spreads are incredibly 232 00:12:43.275 --> 00:12:45.275 narrow at the moment. 233 00:12:45.275 --> 00:12:46.796 And so that means that as an investor, 234 00:12:46.936 --> 00:12:53.658 you don't get a lot of compensation for the additional risk you're taking by going 235 00:12:53.658 --> 00:12:55.658 down the credit curve, 236 00:12:55.658 --> 00:12:57.658 so to speak. 237 00:12:57.658 --> 00:13:00.033 And, you know, that is because actually the U.S. 238 00:13:00.093 --> 00:13:03.815 economy in particular didn't go into a recession. 239 00:13:04.876 --> 00:13:10.739 And there's a lot of capital around that's looking for a home, which has driven 240 00:13:10.739 --> 00:13:12.739 credit spreads to very low levels. 241 00:13:12.739 --> 00:13:15.221 And but all good things come to an end. 242 00:13:15.481 --> 00:13:21.205 And, you know, what we're saying is that that we've in credit, 243 00:13:21.205 --> 00:13:23.646 we've got to keep credit duration pretty short now. 244 00:13:25.214 --> 00:13:29.096 and it's not the time to basically extend, we believe. 245 00:13:31.017 --> 00:13:36.619 And one's got to look for sort of the niches that haven't fully repriced. 246 00:13:37.059 --> 00:13:42.902 And so we mentioned collateral loan obligations as one area that we think is 247 00:13:42.902 --> 00:13:44.902 attractively priced. 248 00:13:44.902 --> 00:13:48.104 However, having said that, you know, obviously interest rates are now at a 249 00:13:48.104 --> 00:13:50.104 different level. 250 00:13:50.525 --> 00:13:52.226 And that means that you can earn... 251 00:13:52.710 --> 00:13:54.190 attractive real rates of return. 252 00:13:54.290 --> 00:13:58.352 So we've said it's sort of likely to be a coupon clipping year. 253 00:13:59.992 --> 00:14:06.594 So you're likely to sort of, if you're a credit investor, you're likely to enjoy 254 00:14:06.594 --> 00:14:08.594 your spread, and 255 00:14:08.594 --> 00:14:13.616 I get a higher yield, and, and you will not be punished for this sort of, you 256 00:14:13.616 --> 00:14:14.076 know, 257 00:14:14.076 --> 00:14:17.757 the lack of value, so to speak, that might be something something to the future, 258 00:14:18.137 --> 00:14:20.918 turning to emerging market fixed income. 259 00:14:22.258 --> 00:14:28.702 Yes, I mean, the dollar has been sort of incredibly strong and that's it tightens 260 00:14:28.702 --> 00:14:30.702 international credit conditions and it's, 261 00:14:30.702 --> 00:14:31.303 you know, not particularly helpful. 262 00:14:32.264 --> 00:14:37.467 But, you know, the dollar is, you know, is the dollar really going to have another 263 00:14:37.467 --> 00:14:39.467 major leg on the upside? 264 00:14:39.467 --> 00:14:39.788 I'm really, really not so sure. 265 00:14:39.808 --> 00:14:40.508 The U.S. 266 00:14:40.508 --> 00:14:46.072 is running an enormous current account deficit and, you know, 267 00:14:46.232 --> 00:14:49.934 other areas of the market, other areas of the world economy. 268 00:14:50.530 --> 00:14:54.892 If they do somewhat better than currently discounted, 269 00:14:55.012 --> 00:14:59.294 then that's actually going to be quite helpful in terms of helping to stabilize 270 00:14:59.294 --> 00:15:01.294 currencies. 271 00:15:01.294 --> 00:15:01.735 So EM relative to the dollar is cheap. 272 00:15:03.015 --> 00:15:04.976 Inflation dynamics are really good. 273 00:15:05.136 --> 00:15:10.899 Inflation is generally continuing to come down and short term interest rates are 274 00:15:10.899 --> 00:15:12.899 going to come down on the back of that. 275 00:15:12.899 --> 00:15:14.899 So whatever the dollar does. 276 00:15:14.899 --> 00:15:18.302 Let's continue the EM theme, but moving to the asset class of equities. 277 00:15:18.322 --> 00:15:19.022 We'll start with. 278 00:15:19.222 --> 00:15:25.786 developed markets though what a great year they had last year if you look at the s p 279 00:15:25.786 --> 00:15:27.786 i just can't remember the number something like 23 and a half percent 280 00:15:27.786 --> 00:15:32.649 uh increase which is a fantastic performance but not all developed markets 281 00:15:32.649 --> 00:15:34.649 equities are created 282 00:15:34.649 --> 00:15:39.913 equal are they i mean you could say you can look at nvidia and you can look at 283 00:15:39.913 --> 00:15:41.913 boeing and you say wait a second they're both in the same country they're both 284 00:15:41.913 --> 00:15:46.737 doing different things obviously but there's been a huge divergence in 285 00:15:46.737 --> 00:15:48.737 performances 286 00:15:48.737 --> 00:15:49.455 So you've seen, you know, U.S. 287 00:15:49.515 --> 00:15:55.640 equity performance has been very, you know, again, very concentrated, you know, 288 00:15:55.640 --> 00:15:57.640 like last year. 289 00:15:57.640 --> 00:16:00.705 And so, you know, the sort of big, you know, 290 00:16:00.825 --> 00:16:07.771 the Magnificent Seven in particular basically have their returns have 291 00:16:07.771 --> 00:16:09.771 dominated again and 292 00:16:09.771 --> 00:16:10.493 returns elsewhere have been sort of OK. 293 00:16:11.013 --> 00:16:13.295 But relatively speaking, they look pretty pedestrian. 294 00:16:13.816 --> 00:16:15.037 And this, you know, is. 295 00:16:15.593 --> 00:16:19.836 Market concentration is the result of 296 00:16:21.557 --> 00:16:23.698 momentum-dominated environments. 297 00:16:27.960 --> 00:16:34.204 Active managers have been very concerned to move away from benchmarks because 298 00:16:34.884 --> 00:16:37.286 it's more than their career is worth, so to speak. 299 00:16:38.126 --> 00:16:42.309 And so you have this effect, but it is anomalous and it's gone, we think, too 300 00:16:42.309 --> 00:16:42.488 far. 301 00:16:44.150 --> 00:16:46.652 and it will unravel at some point. 302 00:16:46.772 --> 00:16:48.413 You know, one doesn't know exactly when. 303 00:16:48.913 --> 00:16:54.037 So it's been U.S. generating returns that have been way above other markets, 304 00:16:54.057 --> 00:16:57.219 particularly with the sort of help by the stronger dollar as well. 305 00:16:58.059 --> 00:17:00.461 And it's been a sort of particular section of the U.S. 306 00:17:00.521 --> 00:17:02.582 market that has done sort of particularly well. 307 00:17:03.223 --> 00:17:07.165 And at some point, these things tend to well, it's flowing. 308 00:17:07.806 --> 00:17:09.047 It will ebb at some point. 309 00:17:09.087 --> 00:17:13.249 And I think the context for that will be a better, 310 00:17:13.709 --> 00:17:17.651 broader cyclical recovery in the US and also around the world. 311 00:17:18.031 --> 00:17:22.933 And that's exactly what we envisage unfolding over the course of the year. 312 00:17:22.953 --> 00:17:25.954 It may well be the sort of second half of the year, but by and large, 313 00:17:26.014 --> 00:17:30.076 that is likely to be the key macro theme of the year. 314 00:17:30.896 --> 00:17:32.977 And equity markets are likely to respond, i.e. 315 00:17:33.117 --> 00:17:35.398 international markets tend to do better than the US. 316 00:17:37.659 --> 00:17:42.061 And the least favoured cyclical sectors in the US tend to actually have a period of 317 00:17:42.061 --> 00:17:42.241 recovery. 318 00:17:42.697 --> 00:17:46.840 And just emerging markets now, quickly, I mean, I'm familiar with South Africa, 319 00:17:46.900 --> 00:17:52.603 and although it's a shrinking stock exchange in Johannesburg, there are some 320 00:17:52.603 --> 00:17:54.603 bargains to be had. 321 00:17:54.603 --> 00:17:54.825 And those bargains were being snapped up last year. 322 00:17:55.365 --> 00:17:56.126 So that's one thing. 323 00:17:56.346 --> 00:17:58.127 But you highlight Asian tech. 324 00:17:59.307 --> 00:18:03.450 Give us an overview of the whole EM equities scene, if you would. 325 00:18:05.011 --> 00:18:07.352 Yeah, so... 326 00:18:08.793 --> 00:18:14.576 It's obviously not so much tech as far as South Africa is concerned, if you put sort 327 00:18:14.576 --> 00:18:16.576 of obviously process to one side. 328 00:18:16.576 --> 00:18:20.718 And, you know, I think as long as there's reform momentum in South Africa, 329 00:18:20.978 --> 00:18:26.060 as long as that holds up and as long as inflation moderates, 330 00:18:26.901 --> 00:18:29.242 then that remains. 331 00:18:29.382 --> 00:18:34.004 And as long as, you know, 332 00:18:34.344 --> 00:18:36.745 South Africa can attract international capital. 333 00:18:37.781 --> 00:18:40.583 You know, we're in a sort of bit of a virtuous circle, 334 00:18:40.623 --> 00:18:45.967 although there's some big structural challenges that haven't really been 335 00:18:45.967 --> 00:18:47.967 addressed as yet. 336 00:18:47.967 --> 00:18:49.849 Looking more widely, you know, 337 00:18:49.910 --> 00:18:55.133 actually emerging markets more generally have changed in the sense that, you know, 338 00:18:55.213 --> 00:19:01.497 tech having been sort of a sort of very modest sector has now become quite an 339 00:19:01.497 --> 00:19:03.497 important one. 340 00:19:03.497 --> 00:19:06.661 And the value in tech is probably. 341 00:19:07.661 --> 00:19:13.344 in EM tech and particularly in China, where you have obviously other challenges. 342 00:19:13.845 --> 00:19:20.769 So, you know, this is where you can, if you believe the future is in tech, then, 343 00:19:20.769 --> 00:19:22.769 you know, 344 00:19:22.769 --> 00:19:23.350 maybe you should be sort of cashing in some of your 345 00:19:23.850 --> 00:19:29.773 Nvidia exposure and diversifying it and looking at opportunities 346 00:19:30.434 --> 00:19:31.414 outside the US. 347 00:19:31.935 --> 00:19:35.897 Commodities now, a huge asset class for many. 348 00:19:36.297 --> 00:19:38.038 emerging market economies. 349 00:19:38.498 --> 00:19:44.099 And I think the simple view is, from a simpleton, and I class myself as a 350 00:19:44.099 --> 00:19:44.239 simpleton, 351 00:19:44.239 --> 00:19:50.801 is that if economic growth is going to be coordinated with China and the United 352 00:19:50.801 --> 00:19:52.801 States 353 00:19:52.801 --> 00:19:55.903 at the forefront of global economic growth, then demand for commodities goes 354 00:19:55.903 --> 00:19:56.123 up. 355 00:19:56.123 --> 00:19:57.143 Do you see it that simply? 356 00:19:58.684 --> 00:19:59.384 I see it. 357 00:19:59.384 --> 00:20:02.565 Sometimes things are pretty simple, and I see it that simply. 358 00:20:03.165 --> 00:20:08.287 So it's interesting that, you know, we've been in a period where, particularly with 359 00:20:08.287 --> 00:20:10.287 the weakness of China, 360 00:20:10.287 --> 00:20:13.929 because also China is obviously the sort of taker of 50% of a lot of commodities. 361 00:20:15.230 --> 00:20:18.071 You know, China has been weak, particularly traditional China, 362 00:20:19.452 --> 00:20:23.713 but commodity prices have actually held up pretty well in the circumstances. 363 00:20:23.753 --> 00:20:25.434 It's been a period of consolidation. 364 00:20:28.075 --> 00:20:30.936 And that is a testament to the fact that the industry... 365 00:20:32.997 --> 00:20:34.698 over the years has consolidated, 366 00:20:34.978 --> 00:20:40.700 and it means that capital discipline has been pretty good amongst resource 367 00:20:40.700 --> 00:20:42.700 companies, 368 00:20:42.700 --> 00:20:43.482 and supply is relatively tight. 369 00:20:43.982 --> 00:20:47.923 So if we see a meaningful uptick in global demand, 370 00:20:48.964 --> 00:20:53.866 then we believe that resource stocks are going to benefit from that, 371 00:20:53.926 --> 00:20:57.567 and countries that basically are resource rich should benefit from that. 372 00:20:58.528 --> 00:21:01.209 All things being equal, obviously, all things aren't necessarily equal. 373 00:21:01.778 --> 00:21:06.959 So pretty constructive about industrial metals on a sort of... 374 00:21:08.204 --> 00:21:10.325 one year and beyond view. 375 00:21:11.545 --> 00:21:18.348 We're still constructive about gold, you know, because it's sort of hedging 376 00:21:18.348 --> 00:21:20.348 attributes, I think, 377 00:21:20.348 --> 00:21:20.429 basically, are now more widely appreciated. 378 00:21:20.469 --> 00:21:24.271 It's become a major reserve asset, again, for central banks. 379 00:21:25.411 --> 00:21:30.433 And oil, you know, oil, interestingly, is one of the ones where actually there's, 380 00:21:30.433 --> 00:21:32.433 you know, 381 00:21:32.433 --> 00:21:33.494 the potential for more supply than demand. 382 00:21:34.315 --> 00:21:37.156 And so, therefore, we're less constructive about... 383 00:21:37.712 --> 00:21:44.396 oil prices but uh you know they've been strong in the early part of this year um 384 00:21:44.396 --> 00:21:46.396 and 385 00:21:46.396 --> 00:21:51.420 um and so we're unlikely to see oil prices weaken significantly from currencies 386 00:21:51.420 --> 00:21:53.420 finally terribly terribly 387 00:21:53.420 --> 00:21:58.443 important for every single country in the world the rate of their currency against 388 00:21:58.443 --> 00:22:00.443 the u.s dollar or whatever other currency uh they favor 389 00:22:00.443 --> 00:22:05.127 but i was always taught when i first became first sat on a trading broking desk 390 00:22:05.127 --> 00:22:07.127 they 391 00:22:07.127 --> 00:22:07.953 said a currency move doesn't stop. 392 00:22:08.353 --> 00:22:09.854 It's a long-term move. 393 00:22:09.854 --> 00:22:13.316 And it seems to me that the long-term move at the moment is a strong US dollar. 394 00:22:13.556 --> 00:22:16.138 Do you see it that way in 2025, Philip? 395 00:22:19.140 --> 00:22:22.682 So the dollar has remained in a bull market now for some years. 396 00:22:22.763 --> 00:22:24.223 And if you step back, 397 00:22:24.304 --> 00:22:31.248 you can see these sort of significant bull and bear markets that the dollar and other 398 00:22:31.248 --> 00:22:31.288 currencies 399 00:22:31.288 --> 00:22:32.069 have experienced. 400 00:22:32.089 --> 00:22:36.792 I mean, currencies are like any other traded financial asset from that. 401 00:22:36.932 --> 00:22:40.575 perspective, you know, people tend to focus on the short term volatility. 402 00:22:41.035 --> 00:22:43.977 But if you step back, you can see that they have very pronounced trends. 403 00:22:44.017 --> 00:22:45.678 So the dollar remains in the bull market. 404 00:22:46.799 --> 00:22:51.942 It's from a valuation perspective, it's, you know, 405 00:22:52.022 --> 00:22:58.187 about as strong as it's been since the, you know, the Reagan dollar bull markets 406 00:22:58.187 --> 00:23:00.187 back in the 1980s. 407 00:23:00.187 --> 00:23:05.872 And it means that the oxygen, you know, even if Trump turns out to be marvellous. 408 00:23:06.388 --> 00:23:08.989 you know, is really getting a bit thin for the currency. 409 00:23:11.050 --> 00:23:16.592 So, essentially, I think that, you know, we've got further, obviously, 410 00:23:17.072 --> 00:23:23.255 sort of in the first half of the year, we're likely to see sort of continued US 411 00:23:23.255 --> 00:23:25.255 exceptionalism in terms of its relative growth rate, 412 00:23:25.255 --> 00:23:25.656 and that tends to be currency supportive. 413 00:23:27.617 --> 00:23:30.778 And it will be interesting to see how the dollar pays in those circumstances. 414 00:23:30.838 --> 00:23:34.099 But we're sort of closer to the end than the beginning is the point I'm making. 415 00:23:35.040 --> 00:23:39.806 And ultimately, you know, valuation does have an effect. 416 00:23:40.047 --> 00:23:46.691 And so therefore, you know, ultimately the dollar will fall back from these kinds of 417 00:23:46.691 --> 00:23:46.891 levels, 418 00:23:47.472 --> 00:23:48.492 possibly slightly higher. 419 00:23:50.734 --> 00:23:57.538 Finally, you talk about super power rivalry and I see them huffing and puffing 420 00:23:57.538 --> 00:23:59.538 and there's some bristling and 421 00:23:59.538 --> 00:23:59.640 there's some posturing. 422 00:24:00.561 --> 00:24:02.042 But do you worry about that sort of thing? 423 00:24:02.062 --> 00:24:05.344 Or would you just say, look, it's just something for... 424 00:24:05.684 --> 00:24:08.505 a major US TV network to headline. 425 00:24:08.785 --> 00:24:12.546 And we don't worry about that too much as an investment theme. 426 00:24:13.466 --> 00:24:14.927 So geopolitics, basically. 427 00:24:15.107 --> 00:24:15.807 Yes, exactly. 428 00:24:16.247 --> 00:24:16.947 Yeah. 429 00:24:18.187 --> 00:24:24.869 So I think the reality of the situation is that we, you know, we are in a Cold War 430 00:24:24.869 --> 00:24:26.869 and, 431 00:24:26.869 --> 00:24:28.869 you know, it's sort of Cold War II. 432 00:24:28.869 --> 00:24:30.869 It's very different to Cold War I. 433 00:24:30.869 --> 00:24:34.372 And, you know, China's relationship with Russia, so-called dragon. 434 00:24:34.512 --> 00:24:38.015 bear relationship, you know, is not going to change. 435 00:24:38.235 --> 00:24:44.941 And the there is going to be a parting of ways in many senses from a sort of more 436 00:24:44.941 --> 00:24:46.941 macro economic 437 00:24:46.941 --> 00:24:48.941 perspective. 438 00:24:48.941 --> 00:24:50.941 So that's the reality we have to live with and think about. 439 00:24:50.941 --> 00:24:54.450 However, you know, you've got an administration coming in that is pretty 440 00:24:54.450 --> 00:24:56.450 pragmatic. 441 00:24:56.450 --> 00:25:00.095 Got people like Elon Musk on board, who's got a significant business in China. 442 00:25:01.796 --> 00:25:07.019 The Chinese and American economies, many levels are going to remain highly 443 00:25:07.019 --> 00:25:09.019 integrated. 444 00:25:09.019 --> 00:25:09.641 And that actually probably suits everybody. 445 00:25:11.242 --> 00:25:16.224 However, America is going to be more forcible about protecting what it sees as 446 00:25:16.224 --> 00:25:18.224 its strategic interests, 447 00:25:18.224 --> 00:25:18.466 which China does already. 448 00:25:19.226 --> 00:25:23.469 So that probably makes sense. 449 00:25:24.369 --> 00:25:28.071 And I think that there will be proxy wars and conflicts and so forth. 450 00:25:28.131 --> 00:25:31.653 Because You know, this is not about kissing and making up. 451 00:25:31.753 --> 00:25:35.595 This is about striking a deal, establishing some kind of detente, 452 00:25:35.655 --> 00:25:41.237 but continuing to actually continue to to face off against each other. 453 00:25:41.297 --> 00:25:46.119 So the Chinese are not going to suddenly stop building, expanding their Navy, for 454 00:25:46.119 --> 00:25:48.119 example, 455 00:25:48.119 --> 00:25:49.381 and adding to their sort of their missile inventory. 456 00:25:50.661 --> 00:25:56.844 So and this, of course, obviously is is going to be pretty positive for capital 457 00:25:56.844 --> 00:25:58.844 investment. 458 00:25:58.844 --> 00:26:03.110 you know because competition you know means that supply chains have to be moved 459 00:26:03.110 --> 00:26:05.110 it means 460 00:26:05.110 --> 00:26:07.556 It's the investment in better defence products. 461 00:26:08.697 --> 00:26:15.140 And there is this general economic rivalry because China and the US understand that 462 00:26:15.140 --> 00:26:17.140 ultimately it's about 463 00:26:17.140 --> 00:26:19.140 economic power. 464 00:26:19.140 --> 00:26:20.543 You know, Russia doesn't seem to understand that, but China certainly does. 465 00:26:20.963 --> 00:26:23.165 Philip, thank you so much for your extended analysis. 466 00:26:23.205 --> 00:26:27.107 Philip Saunders is from the Investment Institute at 91 in London. 467 00:26:29.028 --> 00:26:32.750 The views and opinions expressed in these podcasts are those of Lindsay Williams. 468 00:26:33.090 --> 00:26:39.713 and various contributors and do not reflect the policy, position, or opinion 469 00:26:39.713 --> 00:26:41.713 of any other agency, 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