WEBVTT - Why This Is China’s Year in Markets 0:00:02.720 --> 0:00:17.960 Bloomberg Audio Studios, Podcasts, Radio News. Welcome to Maren Talk 0:00:18.000 --> 0:00:19.840 to Money, the podcast in which people who know the 0:00:19.880 --> 0:00:22.680 markets explain the markets. I'm Meren sums Thatt Web. This 0:00:22.800 --> 0:00:24.960 week I am speaking with Ed Cole, head of Multi 0:00:24.960 --> 0:00:28.920 Strategy Equities within Solutions at Man Group. Complicated titl. Ed, 0:00:29.000 --> 0:00:30.120 Thanks for joining us today. 0:00:30.320 --> 0:00:32.440 Thank you for having me Mere in complicated title, but 0:00:32.520 --> 0:00:33.760 a simple person. 0:00:33.720 --> 0:00:35.519 Okay, and hopefully everything you're going to tell us is 0:00:35.560 --> 0:00:38.040 also going to be really simple, straightforward and one hundred 0:00:38.040 --> 0:00:38.800 percent accurate. 0:00:39.120 --> 0:00:41.199 I won't make that promise, but let's see where we go. 0:00:41.320 --> 0:00:43.680 What we want is correct forecasts on this show to 0:00:43.680 --> 0:00:46.360 help us get through these difficult times. Listen, what I 0:00:46.400 --> 0:00:48.720 really want to talk about is equity markets as a whole. 0:00:48.920 --> 0:00:51.280 We've been writing a lot and talking a lot about 0:00:51.280 --> 0:00:53.800 whether there is a great rebalancing going on from the 0:00:53.880 --> 0:00:56.080 US equity market to effectively all of the rest of 0:00:56.120 --> 0:00:58.200 the world. I don't know whether you would consider what 0:00:58.240 --> 0:01:00.720 has been happening in the US market of the last 0:01:00.760 --> 0:01:03.080 year or so well before January this year, whether they're 0:01:03.080 --> 0:01:05.920 constituted a bubble or just a very expensive market. But 0:01:06.160 --> 0:01:09.880 one way or another, possibly it's not that surprising to 0:01:09.920 --> 0:01:13.200 see American exceptionalism begin to be questioned in the context 0:01:13.280 --> 0:01:16.080 of the US equity market and for there to begin 0:01:16.240 --> 0:01:19.040 to be flows into other markets, most obviously Europe at 0:01:19.040 --> 0:01:21.720 the moment. But big question for our listeners, particularly as 0:01:21.760 --> 0:01:23.640 we come up to the end of ice season, is 0:01:23.920 --> 0:01:26.720 if they're investing now, should they say, Okay, do you 0:01:26.760 --> 0:01:28.680 know what have made a lot of money in America 0:01:28.720 --> 0:01:31.880 over the last decade, and maybe it's time to look elsewhere? 0:01:32.319 --> 0:01:35.800 And if that is the case, where yeah, extac question 0:01:36.000 --> 0:01:39.880 a question of course that preoccupies those thinking about their ISA, 0:01:39.920 --> 0:01:43.760 but also those that are allocating large sovereign pools of 0:01:43.840 --> 0:01:46.800 money as well. I'd start with a bit of kind 0:01:46.800 --> 0:01:50.200 of common sense thinking, which is, whenever you hear terms 0:01:50.440 --> 0:01:55.960 like exceptional or uninvestable, it pays to think through whether 0:01:55.960 --> 0:01:58.680 there's another side to that, because typically those things you 0:01:58.800 --> 0:02:02.000 use the word bubble, but ply those types of words 0:02:02.040 --> 0:02:07.200 start to reverberate when consensuses are so strong that things 0:02:07.360 --> 0:02:10.480 are priced to some degree to perfection. You could take 0:02:10.520 --> 0:02:14.639 one side of the world today China allegedly uninvestable, where 0:02:14.639 --> 0:02:17.880 that's priced for uninvestibility, and you take the other side 0:02:17.880 --> 0:02:20.080 of the world, the US, which is exceptional, and in 0:02:20.120 --> 0:02:23.839 some parts of that market price for exceptionalism. I mean, 0:02:23.880 --> 0:02:26.200 I tend to think that it really does pay to 0:02:26.240 --> 0:02:29.120 think about the other side on that typically because that's 0:02:29.240 --> 0:02:33.320 normally a moment of complacency. And indeed, if you were 0:02:33.360 --> 0:02:37.680 to do something like Google trend search the word US exceptionalism, 0:02:37.760 --> 0:02:40.680 I suspect it would probably peak sometime after the US 0:02:40.760 --> 0:02:43.280 election in the fourth quarter last year, which was around 0:02:43.320 --> 0:02:47.520 the time the market peaked. Big picture, nothing's uninvestable and 0:02:47.560 --> 0:02:52.200 nothing's exceptional. It really markets and assets have values, and 0:02:52.240 --> 0:02:54.480 those values have to be connected to reality, and I 0:02:54.919 --> 0:02:56.480 think we could we should be thinking about things in 0:02:56.520 --> 0:03:00.120 those terms. I think that what the sort of extraordinary, 0:03:00.280 --> 0:03:03.640 if not exceptional, thing about US equities is the level 0:03:03.680 --> 0:03:06.000 of concentration. And of course you've had times in the 0:03:06.040 --> 0:03:09.320 past where equities have been highly concentrated. In nifty to 0:03:09.360 --> 0:03:11.400 fifty was in the sixties was a period where we 0:03:11.440 --> 0:03:15.000 saw kind of concentration in a broader basket of stocks 0:03:15.000 --> 0:03:18.320 them Today, though, and what's extraordinary about today is that 0:03:18.400 --> 0:03:21.240 if you take the S and P. Five hundred, you 0:03:21.320 --> 0:03:23.920 have one and a half percent of the constituents by 0:03:24.040 --> 0:03:27.720 number that account for thirty five percent of the index weight. 0:03:27.960 --> 0:03:29.359 And that's the Mega seven. 0:03:29.320 --> 0:03:34.200 And that's that that type of group that's problematic because 0:03:34.240 --> 0:03:36.840 it means you are not really investing in a broad index. 0:03:36.880 --> 0:03:40.440 You're investing in a kind of group of stocks. I 0:03:40.480 --> 0:03:43.640 think that we are huge believers in everything that we 0:03:43.680 --> 0:03:47.840 do in institutional portfolios at this company in diversification. And 0:03:47.880 --> 0:03:51.280 where you end up today thinking investing in an SMP 0:03:51.400 --> 0:03:53.080 tracker is I think you are in something that is 0:03:53.080 --> 0:03:56.600 pretty undiversified, both in terms of number of stocks, but also, 0:03:56.840 --> 0:04:00.560 and this is critical, in terms of the commonality of 0:04:00.600 --> 0:04:03.000 the drivers of those stocks. Call them the mag seven 0:04:03.200 --> 0:04:09.040 for example, are all broadly in a group technology, long 0:04:09.120 --> 0:04:12.320 duration cash flows, as in like big growthy type companies, 0:04:12.480 --> 0:04:15.120 high quality balance sheets. They've all got a certain type 0:04:15.120 --> 0:04:20.240 of attribute and those attributes respond to macroeconomic conditions in 0:04:20.279 --> 0:04:22.839 a very similar way. So if you're clustered into an 0:04:22.880 --> 0:04:26.440 investment that is overweight one type of style, you have 0:04:26.480 --> 0:04:28.279 to be prepared for the type to go out in 0:04:28.279 --> 0:04:31.039 that type of style. That's a long intro to your question, 0:04:31.120 --> 0:04:34.520 but in my mind, thinking about the medium term, let's 0:04:34.520 --> 0:04:37.560 say the sort of five year plus time horizon, we 0:04:37.680 --> 0:04:42.120 absolutely have to be thinking about diversifying holdings. It seems 0:04:42.880 --> 0:04:46.359 unlikely to me that at the level of valuation that 0:04:46.520 --> 0:04:48.760 US equities as a whole are to day and the 0:04:48.839 --> 0:04:51.520 concentration of that group of stocks is at in particular, 0:04:51.920 --> 0:04:55.279 that you're going to get super normal returns on a 0:04:55.360 --> 0:04:57.520 multi year time horizon looking forward. 0:04:58.320 --> 0:05:01.560 But does that interrupt you briefly? Is that even the 0:05:01.640 --> 0:05:04.760 case if these companies were to meet their long term 0:05:04.839 --> 0:05:07.000 earnings forecasts. So if you look at some of the 0:05:07.040 --> 0:05:09.240 forecasts for earnings for those huge companies there, I mean, 0:05:09.240 --> 0:05:12.480 they're extraordinary, expecting earnings to grow twenty twenty five percent 0:05:12.600 --> 0:05:14.800 five years out, et cetera. Look at that kind of thing, 0:05:14.800 --> 0:05:16.800 and you say, well, if that was true, maybe these 0:05:16.839 --> 0:05:19.160 valuations are justified. I wouldn't, by the way, but other 0:05:19.200 --> 0:05:19.839 people mind. 0:05:20.160 --> 0:05:22.719 I would probably say, you need them to beat those 0:05:22.800 --> 0:05:26.400 numbers to do well. So the bar's set high. That's 0:05:26.440 --> 0:05:28.480 one thing. The bar is already set high. And that's 0:05:28.520 --> 0:05:30.479 back to that point really about when you start getting 0:05:30.520 --> 0:05:34.560 language like exceptionalism, it tells you that people are bought in. 0:05:35.040 --> 0:05:37.920 There's a thematic or a narrative that starts to explain 0:05:37.960 --> 0:05:39.520 things that you have to be a little bit skeptical 0:05:39.560 --> 0:05:42.600 of the other side of it, though, quite simply, is 0:05:42.640 --> 0:05:45.919 not the company earnings, which of course matter enormously for 0:05:46.040 --> 0:05:48.840 the discrete stock if you buy that stock, but it's 0:05:48.880 --> 0:05:53.920 also about the macroeconomic environment, and there are enormous cross 0:05:53.960 --> 0:05:56.480 currents today in the global economy. I want to get 0:05:56.480 --> 0:05:59.960 to inflation in a moment, but because it's critically important 0:06:00.040 --> 0:06:02.400 and I think we're in a world today that's not 0:06:02.640 --> 0:06:06.000 like one that any of us have really experienced in 0:06:06.040 --> 0:06:10.120 our professional lifetimes. You could even just start with Europe 0:06:10.200 --> 0:06:12.719 and what Europe today is intending to do with its 0:06:13.160 --> 0:06:16.760 plan to rearm itself. Europe has been the big European 0:06:16.760 --> 0:06:20.359 economies have been moribund for a long time, very stagnant, 0:06:20.560 --> 0:06:23.400 very much lacking industrial policy in any form at all, 0:06:23.920 --> 0:06:27.080 saddled with a lot of debt, low productivity growth. And 0:06:27.120 --> 0:06:29.320 what you're talking about today, particularly coming out of Germany, 0:06:29.320 --> 0:06:32.000 which she was an economy with plenty of fiscal room, 0:06:32.560 --> 0:06:37.159 is something that I think dramatically changes the nominal growth 0:06:37.480 --> 0:06:42.000 profile of that country, and in doing so, dramatically changes 0:06:42.120 --> 0:06:46.200 the earnings growth potential of the companies in that country. 0:06:46.320 --> 0:06:48.440 On a multi year view. Some estimates this is a 0:06:48.440 --> 0:06:51.520 bigger stimulus for Germany than reunification for those who can 0:06:51.560 --> 0:06:55.040 remember it, which was a big deal. So let's without 0:06:55.040 --> 0:06:58.400 even necessarily having to wonder whether that group of exceptional 0:06:58.480 --> 0:07:01.360 quote unquote exceptional US are going to beat their earnings, 0:07:01.360 --> 0:07:02.680 you can start to think about the fact that there 0:07:02.680 --> 0:07:04.320 are things moving in other parts of the world that 0:07:04.400 --> 0:07:07.320 are probably not particularly well understood. 0:07:07.800 --> 0:07:09.760 The key thing to say is that they are alternatives 0:07:09.920 --> 0:07:12.880 that until very recently, most equity investors will look around 0:07:12.880 --> 0:07:14.640 the world and say, well, it's looking a little pricey, 0:07:14.680 --> 0:07:17.320 But the truth is there isn't any alternative. And they 0:07:17.320 --> 0:07:21.160 would also have believed, until relatively recently that all the 0:07:21.160 --> 0:07:25.640 big gains in technology in AI and space and evs, etcetera, etcetera, 0:07:25.680 --> 0:07:27.800 are all going to come from the US, not from China. 0:07:28.200 --> 0:07:31.080 And maybe deepsek with the catalyst to say, do you 0:07:31.080 --> 0:07:32.920 know what, Actually there's quite a lot going on in 0:07:32.960 --> 0:07:35.400 AA and China. Maybe it's not uninvestable, maybe it is 0:07:35.440 --> 0:07:38.920 an alternative. So Germany and China are two sides of 0:07:39.000 --> 0:07:41.760 this beginning of an idea that there is an alternative. 0:07:42.000 --> 0:07:44.480 I think you're so spot on China. I think the 0:07:44.680 --> 0:07:47.440 markets have this kind of tendency to have a sort 0:07:47.440 --> 0:07:50.320 of single narrative that they latch onto, and the single 0:07:50.400 --> 0:07:55.040 narrative on China has been deflationary bust. This is a 0:07:55.080 --> 0:07:58.760 deflationary bust economy. And actually what you can see with 0:07:58.800 --> 0:08:01.080 the emergence of deep sea with the news this week 0:08:01.120 --> 0:08:04.840 about BYD's ultra fast battery charging for the electric vehicles, 0:08:05.560 --> 0:08:09.080 is that actually, during this period of attempted containment of 0:08:09.120 --> 0:08:13.280 the Chinese economy over the last almost decade, that China 0:08:13.360 --> 0:08:16.200 has really learned to do more with less. This has 0:08:16.240 --> 0:08:20.840 been an innovative catalyst for China, not a headwind, and 0:08:20.880 --> 0:08:22.840 so I think that's an excellent point. But it's also, 0:08:22.920 --> 0:08:25.240 by the way, just one part of what's going on 0:08:25.280 --> 0:08:29.520 in China. Conviction has been building for some time that 0:08:30.040 --> 0:08:34.040 the Chinese authorities, the policymakers there are really starting to 0:08:34.120 --> 0:08:39.199 understand how to fix their deflationary risk. That there are 0:08:39.240 --> 0:08:43.439 several pillars to this. The technology and innovation part is 0:08:43.480 --> 0:08:45.640 of course a key one, but actually the really important 0:08:45.640 --> 0:08:48.360 thing here, and we think we're probably likely to see 0:08:48.360 --> 0:08:51.640 some much more concrete announcements on this later this year. 0:08:52.440 --> 0:08:55.120 If the US and China do some kind of trade deal. 0:08:55.960 --> 0:08:59.320 Is that we think we're moving into an environment where 0:08:59.360 --> 0:09:02.160 the Chinese, as you makers, are going to reform their 0:09:02.160 --> 0:09:06.040 social security system quite materially, and that's incredibly important because 0:09:06.160 --> 0:09:10.079 China has a massive savings rate. In essence, what happens 0:09:10.080 --> 0:09:12.880 in China is if you're a migrant worker, your social 0:09:12.920 --> 0:09:16.000 security benefits are payable in the place that you were born, 0:09:16.400 --> 0:09:18.080 not the place that you live, and that requires you 0:09:18.120 --> 0:09:21.199 to save, and that means that consumption is repressed by that. 0:09:21.760 --> 0:09:24.360 And the plan that's taking shape, we think, is one 0:09:24.520 --> 0:09:29.079 which will allow social security benefits to follow your domicile 0:09:29.160 --> 0:09:32.120 or your residence and will allow people to save less 0:09:32.120 --> 0:09:36.640 and spend more. Which sounds boring, it will be enormous 0:09:36.720 --> 0:09:39.080 for the Chinese economy, and actually we think we're on That's. 0:09:39.000 --> 0:09:41.640 Interesting because there's been talk for years about the Chinese 0:09:41.640 --> 0:09:43.839 authorities understanding that they need to try and shift to 0:09:43.880 --> 0:09:47.080 a more consumption based economy but finding it incredibly difficult 0:09:47.080 --> 0:09:49.080 to do, not being able to find the route through 0:09:49.400 --> 0:09:52.040 to make people start spending. But obviously this makes sense. 0:09:52.080 --> 0:09:55.120 If you have a security net wherever you live, you're 0:09:55.160 --> 0:09:56.880 much more likely to spend the money that you do have. 0:09:57.080 --> 0:10:00.439 Yes, and it's a different flavor to China. Let's say, 0:10:00.440 --> 0:10:02.920 the one that people have been used to from the 0:10:02.960 --> 0:10:06.040 twenty tens onwards has been a sort of luxury obsessed 0:10:06.160 --> 0:10:09.720 China conspicuous consumption. And let's not forget that g was very, 0:10:10.200 --> 0:10:13.360 very vocal about common prosperity. And we think that probably 0:10:13.400 --> 0:10:16.199 the way this takes place is actually mass consumption, that 0:10:16.240 --> 0:10:18.920 the shape of consumption in China will have changed. All 0:10:19.000 --> 0:10:21.000 of which is just to say there are really interesting 0:10:21.000 --> 0:10:24.600 opportunities outside the US. That the US is a dynamic market, 0:10:24.640 --> 0:10:28.120 it's a phenomenal economy, It innovates brilliantly. It has a 0:10:28.120 --> 0:10:31.280 place in everyone's portfolio. But there are opportunities today to 0:10:31.280 --> 0:10:35.880 think about proper allocations outside the US before, if I may, 0:10:36.000 --> 0:10:39.280 before we come onto inflation, which is really important. One 0:10:39.320 --> 0:10:41.600 other thing, just so that I don't end up with 0:10:41.640 --> 0:10:44.800 egg on my face. There is I think a real 0:10:45.640 --> 0:10:49.480 possibility in the near term, call it the next few months, 0:10:50.360 --> 0:10:54.600 that actually all this fear about the end of US 0:10:54.679 --> 0:10:58.720 exceptionalism disappears. I think it's entirely possible. We've had this 0:10:58.920 --> 0:11:02.200 big wobble in markets recently which has been very much 0:11:02.200 --> 0:11:06.600 focused on the US, has been centered around unpredictable policy 0:11:07.240 --> 0:11:11.040 around whether or not the economy will stay out of recession, 0:11:11.600 --> 0:11:15.040 and it's I think reasonable to assume that actually, as 0:11:15.040 --> 0:11:17.760 we get more clarity over policy, and it's entirely reasonable 0:11:17.840 --> 0:11:19.880 for some of that risk premium to come back out again, 0:11:20.000 --> 0:11:22.840 and we may well find ourselves in three months time 0:11:22.840 --> 0:11:26.000 looking back at or near all time highs in US equities, 0:11:26.040 --> 0:11:29.360 and people will think that's all over. It is not 0:11:29.440 --> 0:11:31.719 to say that the earlier conversation about there being other 0:11:31.720 --> 0:11:35.160 opportunities is wrong. It's just that actually these fears dissipate 0:11:35.240 --> 0:11:36.840 quite quickly as prices change. 0:11:36.960 --> 0:11:39.160 I agree with you that could well happen. But I 0:11:39.200 --> 0:11:42.679 also think that the perlavas over the last few months 0:11:42.679 --> 0:11:45.800 and the shifts in the other markets relative to the 0:11:45.960 --> 0:11:48.160 US might mean just a little bit of the spell 0:11:48.280 --> 0:11:50.120 is broken. A little bit of the spell is broken, 0:11:50.280 --> 0:11:53.040 and pretty much any global allocator sitting down now or 0:11:53.080 --> 0:11:55.520 in three months or in six months is going to 0:11:55.559 --> 0:11:57.880 have in mind that the US is not the only 0:11:57.920 --> 0:12:00.400 market in the world, and have in mind that perhaps 0:12:00.440 --> 0:12:03.080 they were far too concentrated in that market in a 0:12:03.120 --> 0:12:04.000 fragmenting world. 0:12:04.200 --> 0:12:05.240 I don't disagree a soul. 0:12:05.400 --> 0:12:07.040 All right, I'm going to let you lose on inflation. 0:12:07.480 --> 0:12:08.760 I know that's where you really want to go. 0:12:09.720 --> 0:12:12.040 I'm a child of the seventies in my blood, even 0:12:12.080 --> 0:12:14.960 though I didn't know it. Inflation, yes, so inflation is 0:12:15.440 --> 0:12:19.160 really important to markets. We have all through our professional 0:12:19.200 --> 0:12:22.560 lives lived through this period that we call the Great Moderation, 0:12:22.760 --> 0:12:25.079 which was really from the late eighties onwards. I think 0:12:25.120 --> 0:12:27.200 the time was only coined in the early two thousands, 0:12:27.240 --> 0:12:30.760 but it describes this environment that once central bankers in 0:12:30.800 --> 0:12:33.839 the eighties and supply side reform in the US and 0:12:33.880 --> 0:12:37.640 the UK and other countries had tamed inflation, we moved 0:12:37.640 --> 0:12:41.640 to a much less volatile macroeconomic environment, and it was 0:12:41.679 --> 0:12:45.160 a period in which asset prices obviously have done extraordinarily well, 0:12:45.320 --> 0:12:49.000 and the world has grown tremendously through that period. What 0:12:49.040 --> 0:12:52.959 we see in that time is that central banks explicitly 0:12:53.000 --> 0:12:57.160 targeted inflation. Inflation has been very well behaved in general. 0:12:57.240 --> 0:12:59.920 In fact, it's tended that the risks have been to 0:13:00.080 --> 0:13:02.360 the downside, not the upside. So you would go through 0:13:02.360 --> 0:13:05.280 a period like the dot Com bust, or the Great 0:13:05.280 --> 0:13:08.439 Financial Crisis, or the Eurozone debt crisis, and central bankers 0:13:08.480 --> 0:13:14.320 were always primed to act to defend against deflation, not 0:13:14.440 --> 0:13:17.840 worrying about inflation. And we talk in markets about the 0:13:17.880 --> 0:13:20.880 FED put this idea that the FED is there to 0:13:20.920 --> 0:13:24.440 protect you. That comes from the fact that the Federal 0:13:24.520 --> 0:13:27.880 Reserve the most important policy making central bank in the world, 0:13:28.520 --> 0:13:31.160 even for us here in the UK, that when they 0:13:31.200 --> 0:13:33.520 don't have to worry about inflation risks on the upside, 0:13:33.520 --> 0:13:36.079 they can concentrate entirely on growth. So that's what that's 0:13:36.120 --> 0:13:38.720 the world we've lived in. And what that's done for 0:13:38.880 --> 0:13:44.079 markets and for savers is it's created this beautiful environment 0:13:44.240 --> 0:13:50.200 where bond prices and stock prices are uncorrelated against each other. 0:13:50.960 --> 0:13:52.760 And I'll explain a little bit what I mean by that. 0:13:53.160 --> 0:13:55.680 It would mean that when you're in an environment like 0:13:56.320 --> 0:13:59.160 the GFS either Great Financial Crisis twenty eight two thousand 0:13:59.160 --> 0:14:04.760 and nine, as your equity allocation sold off on fears 0:14:04.800 --> 0:14:12.160 of recession and systemic crisis, your bond portfolio performed extremely 0:14:12.200 --> 0:14:17.479 well because the world could have conviction that central bankers 0:14:18.640 --> 0:14:21.720 had your back. Effectively, they would cut rates and stimulate 0:14:21.760 --> 0:14:25.600 policy sufficiently to rescue the economy, and in cutting rates 0:14:26.400 --> 0:14:29.080 bonds would appreciate, bond values would go up on that. 0:14:29.600 --> 0:14:31.840 So that was a world where to put some numbers 0:14:31.840 --> 0:14:34.760 on it. In two thousand and eight or two thousand 0:14:34.760 --> 0:14:37.200 and nine, by the trough of the Great Financial Crisis, 0:14:37.760 --> 0:14:41.640 equities in the world had lost forty percent, but a 0:14:41.720 --> 0:14:45.560 sixty to forty portfolio of bonds and equities had lost 0:14:45.600 --> 0:14:50.840 about ten to twelve percent, really mitigated by having inverse 0:14:50.840 --> 0:14:55.760 correlations opposite behavior of these two asset classes. What happened 0:14:55.800 --> 0:15:00.000 in twenty twenty two when inflation came back is that 0:15:01.160 --> 0:15:05.720 the conviction that central banks would be able to protect 0:15:05.760 --> 0:15:13.760 you from disaster inequities dissipated. Suddenly, this policy goal that 0:15:13.800 --> 0:15:16.520 no one had worried about for thirty five years came back. 0:15:16.720 --> 0:15:19.440 So what we found was that actually, as equity prices 0:15:19.480 --> 0:15:23.080 came down, central bankers not only didn't have our back, 0:15:23.520 --> 0:15:26.600 they were making things worse by hiking interest rates, quote unquote, 0:15:26.640 --> 0:15:28.920 making things worse. They were dealing with an inflation problem. 0:15:29.080 --> 0:15:32.400 And what that did at that point in your portfolio 0:15:32.600 --> 0:15:36.160 was it meant you lost money in both equities and bonds. 0:15:36.720 --> 0:15:39.960 And that was a real shock, I think, to the industry, 0:15:40.240 --> 0:15:43.120 and I guess what we worry about with inflation is 0:15:43.200 --> 0:15:46.640 that it's a little bit a case that once the 0:15:46.720 --> 0:15:49.000 genie's out of the bottle, it's quite hard to get 0:15:49.000 --> 0:15:52.800 it back in again. Inflation expectations get very sticky. We 0:15:52.880 --> 0:15:55.840 see this everywhere in the world. Japan, which has been 0:15:55.880 --> 0:15:57.800 a good equity market story for the last couple of years. 0:15:57.800 --> 0:16:00.960 In particular, Japan has had some central bank surveys on 0:16:01.040 --> 0:16:05.000 inflation and they show almost unprecedented expectations of inflation, both 0:16:05.000 --> 0:16:09.640 by households and businesses. In the UK here last week, 0:16:09.720 --> 0:16:12.560 I think it was we had wage data private sector 0:16:12.600 --> 0:16:15.360 earnings which are growing at about six percent. So you 0:16:15.400 --> 0:16:17.440 think about the fact that this economy is really not 0:16:17.560 --> 0:16:19.720 growing very much today at all, but there is an 0:16:19.880 --> 0:16:23.440 entrenched expectation of wage growth and there isn't very much 0:16:23.440 --> 0:16:26.040 productivity growth in the UK to support that. That's a 0:16:26.080 --> 0:16:29.320 problem because that's starting to demonstrate that actually inflation is 0:16:29.360 --> 0:16:33.800 becoming systemic to some extent, which is problematic. Now that 0:16:33.840 --> 0:16:37.640 doesn't mean we believe that you're going to experience inflation 0:16:37.760 --> 0:16:39.600 going back up to double digits again, as it did 0:16:39.600 --> 0:16:42.160 in twenty twenty one twenty twenty two, but what it 0:16:42.280 --> 0:16:45.360 may well mean is that we're in an environment where 0:16:46.080 --> 0:16:48.840 it's a bit above target for quite a long time, 0:16:49.000 --> 0:16:51.440 and if we find ourselves in a situation where growth 0:16:51.520 --> 0:16:54.880 starts to disappoint, central banks will be constrained on how 0:16:54.960 --> 0:16:55.840 much they can cut. 0:16:56.320 --> 0:16:58.800 Yeah. Well, there was an interesting survey that we talked 0:16:58.800 --> 0:17:00.960 about at the time. You may have seen when inflation 0:17:01.080 --> 0:17:03.600 was worth very high in the UK feedback that once 0:17:03.680 --> 0:17:06.600 inflation goes over eight percent, it's really hard to get 0:17:06.640 --> 0:17:08.679 it back to target. You know, it takes I think 0:17:08.680 --> 0:17:10.720 it was an average of fourteen years from that sebect. 0:17:10.720 --> 0:17:12.359 It doesn't mean that you get hyper inflation, doesn't mean 0:17:12.359 --> 0:17:14.239 it goes fifteen percent. Just means that once you go 0:17:14.359 --> 0:17:18.040 over eighty eight percent, people really notice. There's a new 0:17:18.200 --> 0:17:21.240 generational understanding that this can happen to prices, and people 0:17:21.240 --> 0:17:23.400 fight it. So it's hard to get it back down 0:17:23.560 --> 0:17:25.200 to two. Maybe you can get it to four, and 0:17:25.240 --> 0:17:27.080 maybe you can get it to three, two point eight, 0:17:27.119 --> 0:17:29.040 two point nine. Man to get it back down to 0:17:29.080 --> 0:17:30.240 two very hard. 0:17:30.600 --> 0:17:32.560 I think that's absolutely right. I think that's absolutely right. 0:17:32.760 --> 0:17:34.680 I think it just tying it back to your very 0:17:34.680 --> 0:17:37.200 first question, which is about US equity markets. The other 0:17:37.240 --> 0:17:40.800 thing in all of this is that the companies today 0:17:41.000 --> 0:17:45.479 that are the biggest, most successful, best performing companies in 0:17:45.960 --> 0:17:49.200 US equities over the last five to ten years are 0:17:49.240 --> 0:17:52.840 actually the ones that are most sensitive to inflation. We 0:17:52.920 --> 0:17:56.199 have this concept that we think about, which is a 0:17:56.200 --> 0:17:59.359 bit technical, but the duration of cash flows. And what 0:17:59.400 --> 0:18:02.560 we mean by that is if you're a really growthy company, 0:18:02.960 --> 0:18:06.600 if you're an AI company that's got a runway of 0:18:06.640 --> 0:18:11.280 growth for the next twenty years, the market will award 0:18:11.359 --> 0:18:14.320 you a really high multiple. Your valuation will be high 0:18:14.600 --> 0:18:17.800 on the expectation of that incredibly long runway for growth. 0:18:18.240 --> 0:18:21.440 In contrast, if you're a company that has a bunch 0:18:21.520 --> 0:18:24.840 of factories that make ball bearings, and you know exactly 0:18:25.080 --> 0:18:26.919 how many ball bearings are coming out every year and 0:18:26.920 --> 0:18:28.840 what the price of those ball bearings will be, you've 0:18:28.880 --> 0:18:31.359 got what we think of its short duration cash flows. 0:18:32.280 --> 0:18:35.280 The latter is not very sensitive to interest rates because 0:18:35.320 --> 0:18:37.879 it's very predictable and short in nature, so when you 0:18:37.960 --> 0:18:41.159 discount it, the impact is not very much the former. 0:18:41.800 --> 0:18:44.760 When you put interest rates up into your model on 0:18:44.800 --> 0:18:47.359 how you value that incredibly long stream of earnings and 0:18:47.359 --> 0:18:49.760 cash flows, it has a much much bigger impact and 0:18:49.800 --> 0:18:53.120 so guess what, no surprise. In twenty twenty two, when 0:18:53.200 --> 0:18:56.360 this inflation thing really bit, one of the worst performing 0:18:56.400 --> 0:18:59.920 equity markets was the US relative terms of the UK, 0:19:00.080 --> 0:19:01.680 which is a value market, did really well. 0:19:02.600 --> 0:19:02.719 Right. 0:19:02.760 --> 0:19:05.119 So there's two big implications for this. I think one 0:19:05.160 --> 0:19:07.639 is your first question, which is we've got to think about, 0:19:07.720 --> 0:19:11.280 if inflation is sticky, how we allocate in the world. 0:19:11.680 --> 0:19:15.160 And the other is in thinking about multi asset portfolios, 0:19:15.240 --> 0:19:18.399 which is a really sensible way to save, particularly depending 0:19:18.440 --> 0:19:21.000 on where you are in your time of life, but 0:19:21.160 --> 0:19:23.720 that multi asset portfolios may well not give you the 0:19:23.760 --> 0:19:26.520 protection today that they have done for such a long 0:19:26.560 --> 0:19:28.200 period of time in the past. 0:19:28.560 --> 0:19:30.399 Let's be the first bit of that. First, in a 0:19:30.680 --> 0:19:35.800 global inflationary environment, in an equity sense, which markets look 0:19:35.840 --> 0:19:36.679 the most attractive. 0:19:37.080 --> 0:19:37.639 Cheap ones? 0:19:38.760 --> 0:19:40.600 Yeah, cheap one one for the UK. 0:19:42.440 --> 0:19:44.920 Yeah, Look, there's certainly a case for it. I think 0:19:45.000 --> 0:19:46.960 we have a lot of high quality assets in the 0:19:47.040 --> 0:19:49.639 UK that trade it discounts. And I think there's also 0:19:49.720 --> 0:19:52.120 this extraordinary thing that we've seen both of the UK 0:19:52.240 --> 0:19:54.840 and continental Europe, which is what we think of as 0:19:54.880 --> 0:19:58.040 the postcode phenomenon, which is you can have a business 0:19:58.080 --> 0:20:03.199 that's domiciled in Europe or the UK, that trades at 0:20:03.200 --> 0:20:07.159 a material discount to a US peer, even if it 0:20:07.240 --> 0:20:12.440 has a large proportion of its assets or earnings coming 0:20:12.440 --> 0:20:15.840 from the US, And that just speaks to the way 0:20:15.840 --> 0:20:19.640 that capital is allocated, that it's been moving perhaps passively or. 0:20:19.760 --> 0:20:21.159 Yeah, I was going to say, it's a function of 0:20:21.160 --> 0:20:24.040 passive investment. Right, People invest with an allocation into the 0:20:24.119 --> 0:20:26.159 US and a very small allocation to the UK. So 0:20:26.600 --> 0:20:29.919 the automatic result is that American companies will be more 0:20:29.960 --> 0:20:32.440 highly valued than UK companies, regardless of what it is 0:20:32.480 --> 0:20:34.480 that they do. A should be a great opportunity for 0:20:34.480 --> 0:20:36.840 the stock pick or the individual investor, just hasn't worked 0:20:36.840 --> 0:20:37.760 out that way recently. 0:20:37.920 --> 0:20:40.040 If you have a long enough time horizon, or even 0:20:40.080 --> 0:20:42.959 a medium term time horizon, I think there is now 0:20:43.400 --> 0:20:46.200 There are now tailwinds for that valuation gap to close 0:20:46.280 --> 0:20:47.960 that there probably haven't been before. 0:20:48.480 --> 0:20:52.560 You say, cheap we said the UK, China, Japan, certain 0:20:52.600 --> 0:20:53.920 emerging markets. 0:20:54.440 --> 0:20:55.240 Yeah, all of those. 0:20:55.280 --> 0:20:57.399 Basically everywhere except for America. 0:20:57.800 --> 0:21:01.040 And within the US, there are plenty of good companies 0:21:01.080 --> 0:21:05.960