WEBVTT 1 00:00:00.372 --> 00:00:04.535 You're listening to Strictly Business Podcast with Lindsay Williams. 2 00:00:06.056 --> 00:00:06.817 Since Donald J. 3 00:00:06.937 --> 00:00:13.801 Trump was inaugurated as president, there's been a raft of executive orders 4 00:00:13.801 --> 00:00:15.801 and policy changes covering all sorts of things, 5 00:00:15.801 --> 00:00:18.684 internal politics, geopolitics, socioeconomic issues, tariffs, and so on. 6 00:00:19.105 --> 00:00:22.567 There's been an unintended consequence, I think, when it comes to Mr. 7 00:00:22.647 --> 00:00:23.868 Trump's intentions. 8 00:00:24.308 --> 00:00:25.008 U.S. 9 00:00:25.008 --> 00:00:28.011 market participants have been rattled by these changes. 10 00:00:28.371 --> 00:00:29.652 With me is Philip Saunders. 11 00:00:29.932 --> 00:00:32.733 director, Investment Institute at 91 in 12 00:00:33.153 --> 00:00:37.954 London. I was looking at an FT post on LinkedIn the other day, Philip, 13 00:00:37.974 --> 00:00:43.076 and there was a lot of MSCI index performance graphs. 14 00:00:43.776 --> 00:00:46.797 And the US one was heading south, 15 00:00:47.297 --> 00:00:52.378 and the other ones were either going sideways or going north, notably in 16 00:00:52.378 --> 00:00:52.618 Europe. 17 00:00:52.618 --> 00:00:59.120 Are you seeing people saying, wait a second, US asset classes have had their 18 00:00:59.120 --> 00:01:01.120 day, and we should be looking elsewhere? 19 00:01:01.120 --> 00:01:03.719 Well, I think it probably isn't quite as simple as that. 20 00:01:04.199 --> 00:01:08.302 But it's clear that we've been through a period of US exceptionalism. 21 00:01:09.403 --> 00:01:14.066 US assets have performed absolutely and relatively extremely well. 22 00:01:15.247 --> 00:01:18.149 And a lot of other markets have, frankly, been disappointing. 23 00:01:18.149 --> 00:01:23.913 I mean, if you look at the performance since COVID, for example, US equities, 24 00:01:23.913 --> 00:01:25.913 even with the recent correction, 25 00:01:25.913 --> 00:01:28.396 have trounced European equities and Chinese equities. 26 00:01:29.056 --> 00:01:32.778 So I think that the issue is this, you know, how far can the elastic stretch? 27 00:01:32.958 --> 00:01:36.880 Because, you know, part of it is justified because, you know, 28 00:01:36.940 --> 00:01:40.682 clearly the U.S. 29 00:01:41.003 --> 00:01:43.204 is probably the most shareholder friendly environment. 30 00:01:44.665 --> 00:01:49.948 Productivity growth has been superior to other economies on a sustained basis. 31 00:01:50.208 --> 00:01:52.829 And also index composition is different. 32 00:01:52.849 --> 00:01:57.872 So part of the relative performance is a function of index composition. 33 00:01:58.296 --> 00:02:00.437 So I don't think we should get too carried away about this. 34 00:02:00.797 --> 00:02:04.558 However, the relative valuation of U.S. 35 00:02:04.618 --> 00:02:08.459 assets, you know, take the dollar as well, you know, has, you know, 36 00:02:08.539 --> 00:02:14.601 did reach extraordinary levels sort of over the course of 2025, and particularly 37 00:02:14.601 --> 00:02:16.601 after that, 38 00:02:16.601 --> 00:02:16.641 after Trump was elected. 39 00:02:17.442 --> 00:02:21.603 And so to some extent, you know, elastic stretches and then it contracts. 40 00:02:22.503 --> 00:02:25.004 And we're in one of those contraction phases. 41 00:02:25.404 --> 00:02:29.406 Whether that then turns into, you know, that we've seen the peak U.S. 42 00:02:29.467 --> 00:02:31.708 exceptionalism and U.S. 43 00:02:31.808 --> 00:02:36.030 assets basically now move into a sustained period of underperformance. 44 00:02:36.791 --> 00:02:40.453 Well, really, the jury's probably out on that one, to be realistic. 45 00:02:40.773 --> 00:02:44.155 You've sort of answered my next question, which was, is this just a blip? 46 00:02:44.515 --> 00:02:51.099 Is this just a sort of market reallocation for a short term gain or loss, 47 00:02:51.179 --> 00:02:51.879 whatever it is? 48 00:02:52.328 --> 00:02:55.651 Or do you think that this trend may become entrenched, in other words, 49 00:02:55.891 --> 00:03:00.115 the MSCI USA underperforming the Europe MSCI? 50 00:03:01.056 --> 00:03:01.756 Sure. 51 00:03:01.756 --> 00:03:07.522 So I think for the time being, I think that, you know, actually, you know, truth 52 00:03:07.522 --> 00:03:09.522 be told, nobody knows. 53 00:03:10.584 --> 00:03:15.689 But for the time being, it seems that, you know, it's not going to be a straight 54 00:03:15.689 --> 00:03:15.788 line, 55 00:03:15.788 --> 00:03:18.912 but it seems that sort of the cyclical environment. 56 00:03:19.552 --> 00:03:21.994 probably favours it continuing for the time being. 57 00:03:21.994 --> 00:03:25.555 And then we can decide at a later date whether it's basically much more 58 00:03:25.555 --> 00:03:27.555 structural. 59 00:03:27.555 --> 00:03:31.499 But for the time being, what's happened is that we came into this year with very, 60 00:03:31.559 --> 00:03:37.762 very elevated expectations for US growth and US earnings, consequently, 61 00:03:38.623 --> 00:03:39.463 on top of that. 62 00:03:40.504 --> 00:03:46.727 And the policy volatility that's been introduced by Trump and the activity 63 00:03:47.767 --> 00:03:48.508 of Doge. 64 00:03:49.208 --> 00:03:55.890 in reducing spending in a very federal government spending in a very visible way 65 00:03:55.890 --> 00:03:57.890 that 66 00:03:57.890 --> 00:04:03.212 combined with a natural ebbing of economic growth which you can see in the employment 67 00:04:03.212 --> 00:04:05.212 figures has 68 00:04:05.212 --> 00:04:07.393 undermined these expectations coming into the year and 69 00:04:07.613 --> 00:04:14.495 given the high valuations of US equities you know if you basically have anything 70 00:04:14.495 --> 00:04:16.495 that casts doubt on 71 00:04:16.495 --> 00:04:20.558 the deliverability of earnings expectations in double digits type levels, 72 00:04:20.558 --> 00:04:22.558 then, you know, 73 00:04:22.558 --> 00:04:23.480 there's a risk of a market setback or correction. 74 00:04:23.520 --> 00:04:25.121 And that's exactly what we've seen. 75 00:04:25.662 --> 00:04:31.506 On top of this, we've seen positioning, you know, again, pretty extreme, 76 00:04:31.606 --> 00:04:38.472 everybody's loaded up with US assets, because US assets have outperformed for so 77 00:04:38.472 --> 00:04:40.472 long, and people, it's been a momentum market, 78 00:04:40.472 --> 00:04:41.194 and it's sucked more money into the into the leaders. 79 00:04:42.335 --> 00:04:47.739 And, you know, conversely, the narrative for Europe was that Europe basically is 80 00:04:47.739 --> 00:04:49.739 irredeemably unproductive. 81 00:04:49.739 --> 00:04:51.739 troubled. 82 00:04:51.739 --> 00:04:53.649 And Germany basically has significant structural problems. 83 00:04:55.090 --> 00:04:58.372 Its Chinese customers are becoming competitors and all that kind of thing. 84 00:04:59.132 --> 00:05:01.133 Europe's overregulated the whole story. 85 00:05:01.673 --> 00:05:03.654 And there's a lot of truth in that. 86 00:05:04.214 --> 00:05:07.956 But basically, positioning had got very, very light. 87 00:05:08.056 --> 00:05:14.639 So a lot of this is just simply a positioning adjustment in the light of a 88 00:05:14.639 --> 00:05:16.639 questioning. 89 00:05:16.639 --> 00:05:21.044 of the relative growth prospects for, say, the EU and other economies and the US. 90 00:05:21.464 --> 00:05:22.505 OK, so US assets. 91 00:05:22.545 --> 00:05:24.287 Let's focus on equities, if we can. 92 00:05:24.627 --> 00:05:31.212 Maybe a little bit overstretched when it comes to valuations, whichever valuation 93 00:05:31.212 --> 00:05:33.212 you favour, price, earnings, whatever it is. 94 00:05:33.212 --> 00:05:35.916 But European equities, underinvested in and a little bit lower. 95 00:05:35.976 --> 00:05:40.340 So people are saying, well, this is a good excuse for us to redress the balance 96 00:05:40.340 --> 00:05:42.340 somewhat. 97 00:05:42.340 --> 00:05:44.340 That's the first point. 98 00:05:44.340 --> 00:05:46.340 The second point is, do people like... 99 00:05:46.340 --> 00:05:50.335 European unity, because you've got Sir Keir Starmer, the Prime Minister of the 100 00:05:50.335 --> 00:05:52.335 United Kingdom, getting people together, 101 00:05:52.335 --> 00:05:53.978 26 people on an online call and everything. 102 00:05:53.998 --> 00:05:54.959 And do people like that? 103 00:05:54.959 --> 00:05:58.381 Do they say, right, we're going to take on this Trump fellow? 104 00:06:00.102 --> 00:06:02.444 Yeah, I don't think it's really about that. 105 00:06:03.264 --> 00:06:06.647 And because a lot of that is just sort of posing. 106 00:06:07.708 --> 00:06:09.569 There is something fundamental underneath it all. 107 00:06:09.669 --> 00:06:12.031 And that is the fact that basically the... 108 00:06:13.427 --> 00:06:16.910 The new prospective German Chancellor, Merz, 109 00:06:18.371 --> 00:06:25.157 is pushing forward pretty rapidly to try and get the fiscal debt break taken off or 110 00:06:25.157 --> 00:06:27.157 circumvented 111 00:06:27.157 --> 00:06:29.157 in Germany. 112 00:06:29.157 --> 00:06:33.324 And this is critical because Germany basically only has a debt to GDP ratio of 113 00:06:33.324 --> 00:06:35.324 60%, whereas 114 00:06:35.324 --> 00:06:35.406 France, it's over 100. 115 00:06:36.367 --> 00:06:41.211 And so Germany is in a reasonably good, relatively speaking, reasonably good 116 00:06:41.211 --> 00:06:43.211 fiscal position. 117 00:06:43.211 --> 00:06:47.394 So the fact that Germany is moving to reflate on top of, you know, 118 00:06:47.434 --> 00:06:50.176 obviously reductions in interest rates in the EU, 119 00:06:51.476 --> 00:06:58.200 that is much more consequential than Keir Starmer trying to sort of lead Europe in 120 00:06:58.200 --> 00:07:00.200 its sort of opposition to 121 00:07:00.200 --> 00:07:01.141 both Trump and also Russia. 122 00:07:02.122 --> 00:07:02.822 All right. 123 00:07:02.822 --> 00:07:06.424 So you've had a look at the graphs I described in my introduction. 124 00:07:06.544 --> 00:07:11.547 You've said to yourself, OK, a perfectly natural readjustment in the short term. 125 00:07:11.627 --> 00:07:18.433 term, you don't, from what I can gather, think that this is a medium and long-term 126 00:07:18.433 --> 00:07:20.433 readjustment. 127 00:07:20.433 --> 00:07:21.615 So I think that, you know, there is a case for that being so. 128 00:07:22.236 --> 00:07:29.121 And I think that, you know, because all things go in these long cycles, you know, 129 00:07:29.121 --> 00:07:31.121 we probably pass peak US exceptionalism, 130 00:07:31.121 --> 00:07:34.025 but it's not a sort of straight line. 131 00:07:34.306 --> 00:07:35.006 Okay. 132 00:07:35.006 --> 00:07:40.571 So if you like, back in the day, these tend to map with dollar cycles, you know, 133 00:07:40.571 --> 00:07:42.571 cycles of dollar strength. 134 00:07:42.571 --> 00:07:47.833 So in the 1980s, you saw the Reagan period, and that was another phase of U.S. 135 00:07:47.893 --> 00:07:48.693 exceptionalism. 136 00:07:48.953 --> 00:07:55.895 And that peaked in 1985 with the dollar trading at astronomical levels relative to 137 00:07:55.895 --> 00:07:56.896 the Deutschmark then. 138 00:07:58.196 --> 00:08:04.418 And then there's been a subsequent phase which sort of petered out before the 139 00:08:04.418 --> 00:08:06.418 global financial crisis. 140 00:08:06.418 --> 00:08:07.859 So, you know, they tend to sort of be cycles. 141 00:08:08.979 --> 00:08:15.242 And so we may well be entering a different cycle whereby American exceptionalism is 142 00:08:15.242 --> 00:08:15.481 less. 143 00:08:15.802 --> 00:08:19.823 However, I think that there are a number of things that, you know, 144 00:08:20.804 --> 00:08:26.966 the Trump administration is taking some risks with the economy here in order to 145 00:08:26.966 --> 00:08:28.966 actually achieve 146 00:08:28.966 --> 00:08:29.067 fiscal sustainability. 147 00:08:29.988 --> 00:08:31.668 And if they succeed in doing that, 148 00:08:32.208 --> 00:08:38.091 it's arguably worth taking a bit of pain in the short term and in order to actually 149 00:08:38.091 --> 00:08:40.091 put the. 150 00:08:40.091 --> 00:08:40.496 US economy on a sort of firmer footing. 151 00:08:40.916 --> 00:08:44.297 So to write the US economy off, I think is wrong. 152 00:08:44.918 --> 00:08:46.518 But clearly, valuations are elevated. 153 00:08:46.518 --> 00:08:51.861 And if you look at actually forward, 12 month forward PE multiples, you know, it's 154 00:08:51.861 --> 00:08:53.861 actually been fairly modest. 155 00:08:53.861 --> 00:08:57.423 The US is trading at something just over 20 times 12 months forward earnings. 156 00:08:58.984 --> 00:09:00.764 Germany is on 14.8. 157 00:09:01.245 --> 00:09:02.645 The UK is 12.2. 158 00:09:03.265 --> 00:09:04.466 And China is 12. 159 00:09:04.646 --> 00:09:07.007 So there is still a very significant gap. 160 00:09:08.047 --> 00:09:14.770 and that will not fully close, I don't believe, but there's clearly scope for it 161 00:09:14.770 --> 00:09:16.770 to sort of normalise from where we are at the 162 00:09:16.770 --> 00:09:18.770 moment. 163 00:09:18.770 --> 00:09:20.770 OK, let's go from equities now. 164 00:09:20.770 --> 00:09:22.770 Final question. 165 00:09:22.770 --> 00:09:22.914 US bonds, German bonds and the euro-dollar exchange rate. 166 00:09:22.934 --> 00:09:28.516 I mean, the euro-dollar exchange rate is terribly, terribly important when you've 167 00:09:28.516 --> 00:09:30.516 got two massive trading blocks. 168 00:09:30.516 --> 00:09:33.859 Is it important that the US dollar has weakened so significantly against the 169 00:09:33.859 --> 00:09:34.199 euro? 170 00:09:34.219 --> 00:09:40.987 and is it terribly important that the German Bund yields have been rising 171 00:09:40.987 --> 00:09:42.987 because as many people say simplistically because they want to 172 00:09:42.987 --> 00:09:44.031 spend so much on military stuff. 173 00:09:44.919 --> 00:09:51.242 Yeah, well, I think we can debate whether or not the productivity impact of spending 174 00:09:51.242 --> 00:09:53.242 on defence is 175 00:09:53.242 --> 00:09:54.483 worth it, but it's happening. 176 00:09:55.144 --> 00:09:59.506 And European industry needs a catalyst, 177 00:10:00.146 --> 00:10:05.508 because basically the Chinese are now extremely competitive in many areas that 178 00:10:05.508 --> 00:10:07.508 Germany particularly used to dominate. 179 00:10:07.508 --> 00:10:11.091 And energy costs, because of the sort of green initiatives, have... 180 00:10:12.167 --> 00:10:13.268 have become very significant. 181 00:10:13.288 --> 00:10:17.390 So in many senses, basic Germany has become less competitive as a result of 182 00:10:17.390 --> 00:10:17.570 that. 183 00:10:18.390 --> 00:10:23.853 And so, you know, defence spending is sort of classic industrial spending. 184 00:10:24.514 --> 00:10:31.217 And, you know, that has pretty significant multiplier effects, at least in the sort 185 00:10:31.217 --> 00:10:33.217 of short to medium term. 186 00:10:33.217 --> 00:10:34.639 So I think that is potentially a bit of a game changer for Europe. 187 00:10:35.760 --> 00:10:41.723 And it means that, you know, a recovery that, you know, is showing signs of coming 188 00:10:41.723 --> 00:10:41.803 through it. 189 00:10:41.803 --> 00:10:46.647 at any rate, ends up basically getting a sort of fiscal shot in the arm as well. 190 00:10:47.348 --> 00:10:51.891 And so that means that the growth trajectory in Europe, you know, 191 00:10:52.031 --> 00:10:57.776 whilst not spectacular on a sort of medium to longer term basis, at least on a 192 00:10:57.776 --> 00:10:59.776 cyclical horizon, you know, 193 00:10:59.776 --> 00:11:03.601 looks significantly better than it looked, say, sort of six to 12 months ago. 194 00:11:04.461 --> 00:11:11.067 And that is significant because it's coming at a time when U.S. growth 195 00:11:11.067 --> 00:11:13.067 expectations, having been very robust, 196 00:11:13.067 --> 00:11:15.212 are actually being revised down. 197 00:11:16.152 --> 00:11:20.013 So that relative position, 198 00:11:20.914 --> 00:11:27.395 relative market performance tends to be pretty sensitive to that, particularly if 199 00:11:27.395 --> 00:11:29.395 it's backed up by positioning differences, which we believe it is. 200 00:11:29.395 --> 00:11:34.977 I said that was the final question, but it wasn't the final question because I want 201 00:11:34.977 --> 00:11:36.977 to know if 91 has changed its position slightly, 202 00:11:36.977 --> 00:11:38.238 even the smallest little tweak, Philip. 203 00:11:38.938 --> 00:11:40.619 Yeah, so we, in... 204 00:11:41.399 --> 00:11:46.340 our sort of outlook piece that we discussed earlier on in January, 205 00:11:47.801 --> 00:11:54.443 we made the case that it was time to be moving away from this excessive 206 00:11:54.523 --> 00:11:56.263 bias towards US assets. 207 00:11:57.304 --> 00:12:01.325 And timing is always difficult, but by and large, 208 00:12:01.365 --> 00:12:07.447 you'd have too much concentration and the relative valuation differentials were just 209 00:12:07.447 --> 00:12:09.447 simply too high, 210 00:12:09.447 --> 00:12:11.447 at least on a medium term basis. 211 00:12:11.447 --> 00:12:14.637 Now, the Trump effect obviously sort of continued this sort of, you know, 212 00:12:15.478 --> 00:12:19.779 continued this relative outperformance up until relatively recently. 213 00:12:20.520 --> 00:12:23.121 But that now seems to be seems to have turned. 214 00:12:23.121 --> 00:12:24.781 And I think that turn is turn is it. 215 00:12:25.462 --> 00:12:32.285 So having more diversified portfolios, reducing dollar exposure, reducing U.S. 216 00:12:32.365 --> 00:12:36.906 equity exposure, which, of course, is being as the U.S. 217 00:12:36.987 --> 00:12:37.907 outperformed. 218 00:12:38.507 --> 00:12:41.849 something like the MSCA Global Index, Equity Index, 219 00:12:43.569 --> 00:12:47.791 the allocation to the US becomes higher and higher. 220 00:12:48.871 --> 00:12:54.714 And back in the 1980s, I mean, Japanese equities got up to something like 221 00:12:55.254 --> 00:12:58.455 45% of the global index, which of course was ridiculous. 222 00:12:59.696 --> 00:13:03.077 Now, obviously, depending on which index you look at, you know, 223 00:13:03.217 --> 00:13:07.439 US equity allocations sort of get up into the sort of 65 plus. 224 00:13:08.187 --> 00:13:10.749 percent mark, which of course is, you know, 225 00:13:10.829 --> 00:13:17.695 really doesn't make sense in terms of so more diversified approach at these kind of 226 00:13:17.695 --> 00:13:19.695 relative valuation levels 227 00:13:19.695 --> 00:13:21.695 made a lot of sense to us. 228 00:13:21.695 --> 00:13:21.919 And it's better to be too early than too late. 229 00:13:22.519 --> 00:13:23.219 Always. 230 00:13:23.219 --> 00:13:24.981 Philip, thank you very much for your analysis. 231 00:13:25.261 --> 00:13:29.445 Philip Saunders is Director, Investment Institute at 91 in London. 232 00:13:31.166 --> 00:13:36.491 The views and opinions expressed in these podcasts are those of Lindsay Williams and 233 00:13:36.491 --> 00:13:38.491 various contributors. 234 00:13:38.491 --> 00:13:42.615 and do not reflect the policy, position, or opinion of any other agency, 235 00:13:42.615 --> 00:13:44.615 organization, employer, 236 00:13:44.615 --> 00:13:46.798 or company associated with StrictlyBusinessPodcast.com. 237 00:13:47.259 --> 00:13:54.224 Assumptions made on the analyses are not reflective of the position of any other 238 00:13:54.224 --> 00:13:56.224 entity other than the speaker or the author. 239 00:13:56.224 --> 00:14:00.408 And since we are critically thinking human beings, these views are always subject to 240 00:14:00.408 --> 00:14:02.408 change, revision, 241 00:14:02.408 --> 00:14:02.550 and rethinking at any time. 242 00:14:02.870 --> 00:14:05.272 Please do not hold us to them in perpetuity.