WEBVTT - What to Buy Now as The US Loses Its Edge 0:00:02.720 --> 0:00:13.120 Bloomberg Audio Studios, Podcasts, Radio News. 0:00:14.000 --> 0:00:16.360 Welcome to Maren Talks Money, the podcast in which people 0:00:16.400 --> 0:00:19.880 who know the markets explain the markets. I'm Maren sumsat Web. 0:00:19.960 --> 0:00:23.400 This week i am speaking with Luca Paulini, chief strategist 0:00:23.400 --> 0:00:24.960 at Pictaate Asset Management. 0:00:25.120 --> 0:00:25.280 Now. 0:00:25.280 --> 0:00:27.440 We had Luca on the show back in January twenty 0:00:27.480 --> 0:00:29.720 twenty three when he made the case of things we're 0:00:29.760 --> 0:00:32.400 looking up for the global economy and not quite as 0:00:32.440 --> 0:00:35.480 bad as other people thought in terms of both inflation 0:00:35.720 --> 0:00:38.440 and recession risk. We wanted to bring him back saf 0:00:38.440 --> 0:00:41.040 his outlook has changed, and to talk to him about 0:00:41.080 --> 0:00:44.080 the end of American acceptionalism and the beginning of what 0:00:44.159 --> 0:00:48.640 he called the age of convergence. Luca, thank you so 0:00:48.720 --> 0:00:50.720 much for joining us today. We really appreciate it. It's 0:00:50.760 --> 0:00:52.800 nice to have you on again. We haven't had you on, 0:00:53.120 --> 0:00:55.280 we think for about two years, maybe more at this point, 0:00:55.560 --> 0:00:56.720 so we've got a lot to catch up on. 0:00:57.280 --> 0:00:57.600 Sure. 0:00:58.720 --> 0:01:00.440 When you put out your report at the beginning of 0:01:00.440 --> 0:01:03.400 the year about what you expect next, you talked about 0:01:03.400 --> 0:01:05.920 the three phases that we've been through and we're about 0:01:05.920 --> 0:01:08.080 to go through. The first was the Great Moderation, which 0:01:08.080 --> 0:01:09.880 we've talked about a lot on this podcast over the 0:01:09.959 --> 0:01:12.120 last few years. So that was the period from nineteen 0:01:12.200 --> 0:01:14.600 eighty to two thousand and seven, the end of the 0:01:14.640 --> 0:01:17.760 Cold War, the introduction of the Internet to our economies, 0:01:18.200 --> 0:01:21.520 disinflation and globalization or as a result of China entering 0:01:21.600 --> 0:01:25.240 the global economy that is long behind us now. And 0:01:25.280 --> 0:01:27.880 then you put down two thousand and eight post financial 0:01:27.920 --> 0:01:31.320 crisis to twenty twenty four as what you call the 0:01:31.480 --> 0:01:35.160 age of uncertainty, and that is the period of the 0:01:35.240 --> 0:01:38.520 euro crisis, of Brexit, of COVID, of the beginning of 0:01:38.520 --> 0:01:41.919 the war in Ukraine, and also of course this long, 0:01:42.200 --> 0:01:46.520 long period of US exceptionalism and super low interest rates. 0:01:46.600 --> 0:01:49.840 And you now say that we have moved from this 0:01:50.120 --> 0:01:54.960 age of uncertainty into what you called the Great convergence. 0:01:55.440 --> 0:01:57.960 So can we start by just talking about what you 0:01:58.360 --> 0:02:01.400 mean by this, what is taking out from the older 0:02:01.440 --> 0:02:02.400 age into when new age. 0:02:02.400 --> 0:02:05.320 Well let me say though, that the age of uncertainty, 0:02:05.680 --> 0:02:09.000 or let's really uncertainty, is still with us. We're not 0:02:09.040 --> 0:02:12.239 saying that the Great Conversion will imply, you know, a 0:02:12.360 --> 0:02:16.640 return to a golden age for financial markets and societies 0:02:16.760 --> 0:02:19.360 and the economy. What we are saying, is that the 0:02:19.400 --> 0:02:24.240 phase of exceptionalism where US outperform financially but also politically, 0:02:24.320 --> 0:02:28.360 is pretty much over. Europe may not see a boom, 0:02:28.440 --> 0:02:32.359 and it's difficult to imagine that, but Europe is i 0:02:32.400 --> 0:02:36.080 think going slowly as always in the right direction, and 0:02:36.160 --> 0:02:38.440 China is kind of stabilizing in a way. So you 0:02:38.480 --> 0:02:40.959 see the US from our point of view, we lose 0:02:41.560 --> 0:02:44.640 some of the kind of this kind of big performance 0:02:44.720 --> 0:02:47.720 that the US had in the past. China we stabilized. 0:02:47.800 --> 0:02:50.480 Europe will get better and this kind of environment is 0:02:50.560 --> 0:02:53.760 still very uncertain, right, very uncertain, but will not be 0:02:54.520 --> 0:02:57.760 kind of dominated by the US only. So it's a 0:02:57.840 --> 0:03:00.640 much more you know, with the convergence, talk about convention, 0:03:00.720 --> 0:03:05.560 it's more about the economics, economic growth, monetary policy, but 0:03:05.639 --> 0:03:09.560 also financial returns. It's not kind of we are well 0:03:09.600 --> 0:03:12.359 aware of the fact that when you look at political 0:03:12.440 --> 0:03:15.200 joe politically, you're going to see even more fragmentation. So 0:03:15.200 --> 0:03:18.239 in a way it's not a convergence there, but from 0:03:18.280 --> 0:03:22.160 a purely economic and financial point of view. Again, the 0:03:22.200 --> 0:03:24.919 era of this US our performance coming to an end. 0:03:25.400 --> 0:03:28.600 Europe is recovering Chinese stabiliaity, which is very different from obviously, 0:03:28.720 --> 0:03:31.639 let's say in the past five to ten years. 0:03:31.800 --> 0:03:35.280 But if we look at it like that, this is 0:03:35.360 --> 0:03:39.680 not about the US performing less well, it's about other 0:03:39.760 --> 0:03:41.360 areas performing better. 0:03:43.240 --> 0:03:46.600 Well. Yes and no, because you know it's interesting, you 0:03:46.640 --> 0:03:48.680 know that when you look at the performance of the 0:03:48.720 --> 0:03:51.880 past five, ten years or seven years, right, the initial 0:03:51.880 --> 0:03:56.320 of the starting point is critical. A lot of investors 0:03:56.480 --> 0:03:59.200 very surprised when I tell them the UK the UK 0:03:59.320 --> 0:04:03.200 equities eies are beaten US equities since the end of 0:04:03.200 --> 0:04:06.320 twenty twenties. It really depends when when you start your charge. 0:04:06.360 --> 0:04:08.400 In a way, right, what we are saying here is 0:04:08.440 --> 0:04:13.760 that again is financial returns on equitism bonds will be 0:04:14.040 --> 0:04:17.680 much lower than the low terme average. Effectively, everything will 0:04:17.720 --> 0:04:20.320 be kind of will be lower. And this, in a way, 0:04:20.360 --> 0:04:22.840 that's the conversion we are talking about. It's not that 0:04:23.320 --> 0:04:26.599 Europe would be the new US. It's more than most 0:04:26.640 --> 0:04:28.719 countries we go to a period of let's say we 0:04:28.839 --> 0:04:34.000 growth and relatively moderate returns. And so in that sense, 0:04:34.040 --> 0:04:37.000 that's what the conversions that were in mind now Europe 0:04:37.120 --> 0:04:40.840 and China becoming let's see the new US internal performance 0:04:40.960 --> 0:04:45.040 rather a convergence to a very low, relatively low level 0:04:45.320 --> 0:04:48.400 of economic growth, but also of financial returns. 0:04:48.440 --> 0:04:50.480 Okay, so we divide it up into two and look 0:04:50.560 --> 0:04:52.920 first at the economic growth bet and then move on 0:04:52.960 --> 0:04:56.760 to talking about the market reaction to that economic growth. 0:04:57.040 --> 0:05:00.520 So DUS is still growing faster than most of Europe, 0:05:00.839 --> 0:05:04.000 and we would still expect that to continue. Right hard 0:05:04.000 --> 0:05:06.400 to see the UK and much of Europe hitting growth 0:05:06.480 --> 0:05:08.040 rates above a couple of percent. 0:05:08.400 --> 0:05:11.040 Yes, but you know, I think what we are missing 0:05:11.120 --> 0:05:14.120 here is that we look the last five years atriast 0:05:14.160 --> 0:05:18.520 on our analysis, roughly forty percent of US growth has 0:05:18.560 --> 0:05:23.040 come from an exceptionally loose physical monetary policy. You may say, well, 0:05:23.080 --> 0:05:25.760 in Europe has been the same, Not really, because in Europe, 0:05:25.880 --> 0:05:28.640 if you look at dept to GDP ratio, it's pretty 0:05:28.680 --> 0:05:30.560 much the same of five years ago. In the US 0:05:30.680 --> 0:05:33.400 is much much higher. So the US had a combination 0:05:33.480 --> 0:05:36.840 of factors and on the AI is also an incredibly 0:05:37.160 --> 0:05:40.720 loose and expansion in physical policy that is not, in 0:05:40.760 --> 0:05:43.840 our view, sustainable in the very long term. So if 0:05:43.839 --> 0:05:46.640 you remove let's say the policy aspect of that, you 0:05:46.680 --> 0:05:49.120 know the gap between Europe and US. It's significant, but 0:05:49.200 --> 0:05:52.800 not extremely so. So this is I think the starting point. 0:05:52.960 --> 0:05:56.200 The second is that Europe, with all the problems, I 0:05:56.240 --> 0:05:59.120 think it's fair to say that what's going on in Germany, 0:05:59.480 --> 0:06:02.520 especially the end of the day break, this is really 0:06:02.640 --> 0:06:05.719 like a kind of a game changer. Now we know, 0:06:05.920 --> 0:06:08.880 as always things in Europe will move very very slowly, 0:06:09.520 --> 0:06:13.719 but I think Germany embracing physical activism is something new 0:06:14.200 --> 0:06:17.000 and we have obviously consequences and split over also for 0:06:17.400 --> 0:06:20.080 other countries. Now we may say that this is not 0:06:20.160 --> 0:06:25.200 what Europe need. We need obviously in Europe a big 0:06:25.240 --> 0:06:28.560 boost to productive they may not come from physical activism, 0:06:28.839 --> 0:06:31.159 but you see there's a big change. So Europe in 0:06:31.200 --> 0:06:35.360 a way will reflate, while the US will face constraints 0:06:36.040 --> 0:06:39.880 politically economic in terms of the amount of stimulus that 0:06:39.920 --> 0:06:42.440 can provide. And this is actually the main difference. So 0:06:42.480 --> 0:06:44.760 when you look at the next five years, we expect 0:06:44.800 --> 0:06:46.919 Europe and the US to growth pretty much at the 0:06:46.920 --> 0:06:49.800 same level across to one point five. The difference though 0:06:50.160 --> 0:06:52.480 that at least in Europe we will have inflation back 0:06:52.520 --> 0:06:54.919 to normal, but in the US will remain higher. And 0:06:54.960 --> 0:06:58.679 I think the ratio between growth and inflation, the mix 0:06:58.800 --> 0:07:01.360 is will really matter for an markets would become much 0:07:01.440 --> 0:07:05.080 less favorable for the US and better for Europe. That's 0:07:05.240 --> 0:07:08.120 one of the things that we are saying about these 0:07:08.320 --> 0:07:10.680 conversion that we'll see in the next few years. 0:07:11.520 --> 0:07:14.160 Okay, So to agree that the US will be held 0:07:14.240 --> 0:07:17.600 back by its very high levels of debt and deficit 0:07:17.680 --> 0:07:20.480 and unable to push forward fiscally in the same way 0:07:20.480 --> 0:07:22.640 as Europe. But then when you look at and we 0:07:22.680 --> 0:07:24.400 talk about Germany and the end of the debt break, 0:07:24.400 --> 0:07:27.920 et cetera, but Germany has its own massive problem with 0:07:28.000 --> 0:07:30.520 it with debt and deficits, et cetera. And I saw 0:07:30.520 --> 0:07:32.160 something in the paper this morning and I hadn't realized 0:07:32.160 --> 0:07:35.400 it was quite so high. That German welfare payments including 0:07:35.440 --> 0:07:39.760 pensions are about thirty percent of GDP and that clearly unsustainable. 0:07:39.760 --> 0:07:41.800 And you look at a similar situation in the UK 0:07:42.000 --> 0:07:44.520 and France and do you think, well, the fiscal position 0:07:44.560 --> 0:07:47.720 of these countries is basically unsustainable even and you know, 0:07:47.760 --> 0:07:50.120 we might say previously we used to say unsustainable in 0:07:50.160 --> 0:07:52.240 the long term, Now we're going there kind of unsustainable 0:07:52.240 --> 0:07:54.800 in the short term. So these have got to be 0:07:54.920 --> 0:07:57.520 massive drags on growth and the ability of any of 0:07:57.560 --> 0:07:59.920 these countries to move forward unless they see massive gains 0:08:00.160 --> 0:08:01.239 in productivity. 0:08:01.320 --> 0:08:03.080 But I think I think one thing that is very 0:08:03.120 --> 0:08:06.560 important Twilight is demographics. We still have the idea that 0:08:06.600 --> 0:08:09.200 demographics in the US is great and in Europe is bad. 0:08:09.280 --> 0:08:11.840 When you look at the employment rate in euro US 0:08:11.880 --> 0:08:14.880 is pretty much the same. Population growth in the US 0:08:15.360 --> 0:08:18.800 is pretty much growing in line with Europe, mainly because 0:08:18.880 --> 0:08:22.880 again a decline in immigration. So again it's not that 0:08:22.920 --> 0:08:25.080 we're not saying that Europe will boom. What we are 0:08:25.080 --> 0:08:27.080 saying is that this gap that we have seen in 0:08:27.120 --> 0:08:31.440 the past we shrink. And again you're totally right in Europe, 0:08:31.520 --> 0:08:35.480 it's not. You know, what Europe need is first of all, 0:08:35.480 --> 0:08:38.280 a change in the mindset was resk taking and this 0:08:38.440 --> 0:08:42.319 requires also a change in the mindset exactly of European 0:08:42.880 --> 0:08:46.080 economic agents and an investor. It's not just you know, 0:08:46.240 --> 0:08:49.120 a few points of fiscal definity that can make a difference. 0:08:49.360 --> 0:08:51.280 But you know, the trend I think is in place. 0:08:51.720 --> 0:08:54.320 I think Europe is aware of the weaknesses. I think 0:08:54.520 --> 0:08:57.800 is moving very slowly. The US, i'm afraid, is going 0:08:57.840 --> 0:09:01.840 the opposite direction. And and I think again the crackdown 0:09:01.840 --> 0:09:05.040 on immigration is one I think and the fact that 0:09:05.080 --> 0:09:07.360 you know, we are even talking about the independence for 0:09:07.400 --> 0:09:10.520 this example of the fact, well the US is not 0:09:11.000 --> 0:09:15.880 in a way in such a solid place it was 0:09:16.200 --> 0:09:17.960 just a few years ago, and that's the difference. I 0:09:18.000 --> 0:09:20.600 think that that is for US very relevant. 0:09:21.559 --> 0:09:24.160 Is there evidence yet that the crackdown on immigration is 0:09:24.200 --> 0:09:25.079 affecting growth. 0:09:26.000 --> 0:09:29.079 We have seen a significant weakening on deliberate market in 0:09:29.120 --> 0:09:31.240 the US, but it's very difficult to say this it 0:09:31.280 --> 0:09:34.280 is down to immigration, is probably down to the impact 0:09:34.280 --> 0:09:37.559 of tariffs, and also the fact that the US economy 0:09:37.559 --> 0:09:40.280 has been very strong for five years, so a phase 0:09:40.320 --> 0:09:43.240 of weakness is inevitable. No, I don't think that it's 0:09:43.240 --> 0:09:46.320 too early to say there is an impact on that. 0:09:46.520 --> 0:09:48.360 But you know, the US, this access the ES was 0:09:48.360 --> 0:09:52.200 based on human capital and in few immigration faults and 0:09:52.400 --> 0:09:55.520 universities are not let's say US free to operate as 0:09:55.559 --> 0:09:58.960 before for a number of reasons. Well, you know, it's 0:09:58.960 --> 0:10:02.080 just an impact on on productive and impact on growth. 0:10:04.120 --> 0:10:06.280 But I guess you could still afire. We're still looking 0:10:06.280 --> 0:10:09.040 for a way to explain the future for the US 0:10:09.080 --> 0:10:11.800 and say well, exceptionalism is still there. They're very much 0:10:11.840 --> 0:10:15.360 ahead of US and of Europe in terms of AI 0:10:15.520 --> 0:10:18.280 for example, and in terms of the cheap energy required 0:10:18.320 --> 0:10:21.080 to drive the AI revolution, So that is something that 0:10:21.320 --> 0:10:24.360 still remains specific to the US. 0:10:24.760 --> 0:10:29.719 There is no question that the US is economically more competitive 0:10:29.720 --> 0:10:32.480 than Europe. You mentioned the cost of energy is totally right, 0:10:32.920 --> 0:10:34.800 but bear in mind that we are going into a 0:10:34.840 --> 0:10:38.080 phase where a lot of energy we come from basically 0:10:38.240 --> 0:10:41.880 solar panels, and that would be renewables, which obviously makes 0:10:41.920 --> 0:10:46.320 Europe less dependent on energy import and make the US 0:10:46.320 --> 0:10:49.120 in a way less exceptional because if all the energy 0:10:49.320 --> 0:10:52.920 is produced locally solar panel for example, then obviously the 0:10:53.080 --> 0:10:56.679 energy dominus the US become less less relevant. On tech, 0:10:56.760 --> 0:11:00.640 you're totally right. The question though on tech is that, 0:11:00.960 --> 0:11:04.080 especially what's going on AAAI, there is a clear advantage 0:11:04.080 --> 0:11:06.640 of the US in terms of spending. We see that 0:11:06.679 --> 0:11:09.800 on a daily basis. The question though, is that is 0:11:09.840 --> 0:11:13.600 this kind of all this investment pay off or not 0:11:14.320 --> 0:11:16.800 is the US and all US overspending on AI. This 0:11:16.880 --> 0:11:19.040 is really an open question. I don't have an answer 0:11:19.040 --> 0:11:21.319 for that, but there is no question that if there 0:11:21.360 --> 0:11:24.720 is one element that makes the US still an economy 0:11:24.720 --> 0:11:27.760 which is much more kind of than am the Europe. 0:11:28.120 --> 0:11:30.640 So the right is tech, but it's not you know, 0:11:31.000 --> 0:11:34.280 it's not just tech. When you look also the US market, 0:11:34.360 --> 0:11:36.880 right or the global market, tech is only only twenty 0:11:36.920 --> 0:11:38.920 seven percent of the market. It's not one hundred percent. 0:11:39.160 --> 0:11:41.640 There are other elements if you have to take into consideration. 0:11:42.000 --> 0:11:44.640 But yeah, we don't expect the tech gap between US 0:11:44.679 --> 0:11:49.319 and Europe to close, but maybe again would be less dramatic, 0:11:50.360 --> 0:11:53.080 less visible than it is now. 0:11:54.040 --> 0:11:56.160 So you say, the question, the real question is whether 0:11:56.200 --> 0:11:58.560 all this investment in AI pays off or not? What 0:11:58.640 --> 0:12:00.920 is what is your view there there's a great AI 0:12:01.000 --> 0:12:02.559 bubble that's going to collapse and leave a lot of 0:12:02.600 --> 0:12:05.440 people like it' slightly red faced or something else. 0:12:05.480 --> 0:12:07.840 Well, you know, there is some elements of a bubble. 0:12:07.880 --> 0:12:12.199 First of all, bubbles also need a macrocroonomy outlook the 0:12:12.240 --> 0:12:19.040 allow bubble to happen, typically abundant liquidity, financial deregulation, and 0:12:19.080 --> 0:12:21.960 a strong kind of narrative. I think probably all three 0:12:22.000 --> 0:12:25.240 are there. I don't think the evaluation is so extreme 0:12:25.360 --> 0:12:28.280 for AI stocks to say, well, that's a bubble. But 0:12:28.360 --> 0:12:31.440 it's almost inevitable when you have such a big increase 0:12:31.480 --> 0:12:34.079 in spending, some of this money will be wasted. It's 0:12:34.120 --> 0:12:37.120 inevitable that happened all the time. I don't know when 0:12:37.240 --> 0:12:40.760 this will materialize. There could be a second wave. It 0:12:40.840 --> 0:12:42.440 was with the internet. You know, you have a bubble, 0:12:42.760 --> 0:12:44.640 then you have a period of in a thousand, then 0:12:44.679 --> 0:12:46.719 there was the real kind of boom also for the 0:12:46.760 --> 0:12:50.959 economy later on. No, look, I am a strong believer 0:12:51.040 --> 0:12:54.680 in A. I my worry here is that what happened, 0:12:54.720 --> 0:12:58.679 for example, with deep sick, the risk is that I 0:12:58.880 --> 0:13:01.880 will be commody time is sooner rather than later. And 0:13:01.920 --> 0:13:04.760 so all this advantage the US has as a first 0:13:04.760 --> 0:13:08.800 mover will at the end not this disappear, but may 0:13:08.840 --> 0:13:11.320 be actually reduced. And this again, this is really what 0:13:11.440 --> 0:13:15.400 matters for financial returns, right, is the rate of change, 0:13:15.840 --> 0:13:17.840 not the level. And I think in this sense, I 0:13:17.880 --> 0:13:21.480 think I see that again this advantage of the US, 0:13:21.520 --> 0:13:24.520 even in tech, may not last forever, at least not 0:13:24.640 --> 0:13:25.400 in the same extent. 0:13:27.000 --> 0:13:29.520 Okay, so does that suggest to you that a large 0:13:29.520 --> 0:13:31.599 part of the US market is very overvalued? 0:13:32.160 --> 0:13:34.600 You know, we always think about tech talks, and you know, 0:13:34.720 --> 0:13:37.599 I think, what is I think not well known that Walmart, 0:13:37.640 --> 0:13:41.079 which is you know, it was actually an early adopter 0:13:41.200 --> 0:13:44.000 of A but Walmart is the biggest return in the world. 0:13:44.160 --> 0:13:47.200 Is not a tech company's trading and a higher multiple 0:13:47.200 --> 0:13:50.800 than Amazon costco is trading and a multiple or peer 0:13:50.880 --> 0:13:53.960 ratio of fifty start US more than thirty. So it's 0:13:54.000 --> 0:13:56.960 not just tech. Actually tech, when you look at the 0:13:57.000 --> 0:14:00.400 growth rates, I think it's almost fairly valued. Is part 0:14:00.480 --> 0:14:03.280 of the US market is I think, much more expensive, 0:14:03.320 --> 0:14:06.160 and nobody's talking about it. Again. It made down to 0:14:06.280 --> 0:14:09.000 a you know, too much liquidity in the system, too 0:14:09.040 --> 0:14:11.640 much optimism. Also the fact that, let's be very honest, 0:14:11.880 --> 0:14:15.960 some of these companies are incredibly good, incredibly efficient, and 0:14:16.040 --> 0:14:18.520 so maybe they deserve this kind of multiple when I 0:14:18.559 --> 0:14:24.840 see kind of retailers start trading a fifty time for earnings. 0:14:24.880 --> 0:14:27.400 But I start to feel that it is a little bit stretched. 0:14:27.400 --> 0:14:29.760 So it's not just tech, it's the overall mark in 0:14:29.800 --> 0:14:33.000 the US, which I think is quite expensive. Considering the 0:14:33.120 --> 0:14:35.960 gross is not five it's two five percent. If you're 0:14:35.960 --> 0:14:38.760 not in the nineties right when gross was five percent, 0:14:38.960 --> 0:14:42.080 inflation was one percent, is a very different environment which 0:14:42.120 --> 0:14:45.440 I think will require multiples and need to be lower 0:14:45.960 --> 0:14:47.200 than the current levels. 0:14:48.520 --> 0:14:50.400 It's interesting, isn't At first? I love that. I love 0:14:50.400 --> 0:14:52.600 the phrase a little bit stretched, which is a great 0:14:52.640 --> 0:14:56.400 financial markets usemism for screamingly expensive, getat while you still can. 0:14:56.880 --> 0:14:59.240 So there are there will be an over lot of 0:14:59.560 --> 0:15:02.440 people and invested in the US. You think that because 0:15:02.480 --> 0:15:05.560 they have a track of fund of some kind, they're diversified, 0:15:05.880 --> 0:15:08.120 so they feel that they're holding lots of different companies 0:15:08.160 --> 0:15:10.320 and therefore they're diversified across the board. But of course 0:15:10.360 --> 0:15:14.280 they kind of not because they're still very overexposed to 0:15:14.360 --> 0:15:17.240 the expensive end of the US. So it's one of 0:15:17.280 --> 0:15:21.000 those occasions when the idea that you're diversified is untrue 0:15:21.040 --> 0:15:23.640 because you're effectively exposed to the same type of companies 0:15:23.680 --> 0:15:24.360 across the board. 0:15:24.440 --> 0:15:26.960 Yeah, and I think Marian, it's what is also important 0:15:27.080 --> 0:15:30.520 is that let's say you are European investors that invest passively, 0:15:31.240 --> 0:15:35.280 but you have almost seventy percent of your wealth in 0:15:35.440 --> 0:15:38.560 the US. You're taking on the evaluation risk but also 0:15:38.640 --> 0:15:40.480 the currency risk, and you know you know what I mean, 0:15:40.520 --> 0:15:42.480 as we have seen it recently. So again we're not 0:15:42.560 --> 0:15:45.360 saying that the US talks are terrible. Not. What we 0:15:45.400 --> 0:15:48.120 are saying is that, especially if you're not in US 0:15:48.160 --> 0:15:51.880 investor holding so much in a market which is heavily concentrated, 0:15:52.200 --> 0:15:55.520 it's expensively expensive currency with all the political risks, I 0:15:55.560 --> 0:15:59.120 think is a risk that is not worth taking. And 0:15:59.160 --> 0:16:02.360 so yeah, that we have is to reduce these explosions 0:16:02.480 --> 0:16:05.480 on term in the US and adding to either domestic stocks, 0:16:05.720 --> 0:16:08.280 but even the bond market. Obviously very few people want 0:16:08.280 --> 0:16:10.280 to invest in, and I think it's almost time to 0:16:10.400 --> 0:16:11.240 reconsider that. 0:16:29.760 --> 0:16:32.160 So if you're moving money out of the US, and 0:16:32.160 --> 0:16:35.040 you're moving it, where where do you move into? I mean, 0:16:35.200 --> 0:16:39.080 is it still oky to by German stocks, by Spanish dogs? 0:16:39.080 --> 0:16:42.000 They've gone up so much over the last year, the 0:16:42.120 --> 0:16:46.000 UK slightly less, but nonetheless we've performed reasonably well. Where 0:16:46.040 --> 0:16:49.160 where is the safest equity market to move into? 0:16:50.080 --> 0:16:52.480 Well, safest is a tricky one because we know that 0:16:52.520 --> 0:16:55.160 when things go wrong, the correlation goes to one right, 0:16:55.880 --> 0:16:58.760 and this is this is one actually one of the 0:16:58.800 --> 0:17:02.200 reasons why investors still like the SMP We have stocked 0:17:02.240 --> 0:17:05.400 because we say, well, everything goes down, maybe I lose 0:17:05.480 --> 0:17:07.880 less in the US than in Europe. No, our view 0:17:07.920 --> 0:17:10.880 is that again it depends where you First of all, 0:17:11.280 --> 0:17:13.919 where you are, So let's say if you are in 0:17:13.960 --> 0:17:17.160 the UK, I think the choice for us pretty straightforward. 0:17:17.160 --> 0:17:20.240 You should invest and know that we discussed this before. 0:17:20.320 --> 0:17:22.359 You should invest a little bit more in UK stocks, 0:17:22.359 --> 0:17:26.679 so in domestic stock similar for Europe, right, But also 0:17:26.960 --> 0:17:30.480 I think what our approach is is try to think 0:17:30.560 --> 0:17:34.399 more inequal weighted terms. So let's say instead of having 0:17:34.640 --> 0:17:38.160 seventy percent in the US and thirty percent elsewhere, I 0:17:38.160 --> 0:17:41.119 think fifty percent, say in the US and fifty percent 0:17:41.240 --> 0:17:43.960 no US. It makes sense. It really depends where you are. 0:17:44.280 --> 0:17:47.200 If you are in the UK Switzerland, for example, you 0:17:47.200 --> 0:17:50.760 should have probably more in the domestic stocks. You should 0:17:50.760 --> 0:17:53.240 also add to emerging market where they're doing very well, 0:17:53.359 --> 0:17:57.280 not because there is anything dramatic happening, just because the 0:17:57.320 --> 0:17:59.639 dollar is getting weaker and the dollar will continue to 0:17:59.640 --> 0:18:02.919 get weak, emerging market will rate. So again it's a 0:18:02.920 --> 0:18:05.520 little bit of everything, but really depends on where you're from. 0:18:05.880 --> 0:18:08.440 For UK investors, I think that's I think a good 0:18:08.440 --> 0:18:11.280 time to invest in UK stocks. But we also have 0:18:11.720 --> 0:18:14.960 the view that you should have a second look at 0:18:15.200 --> 0:18:17.639 mid caps, small caps that have been a little bit 0:18:17.720 --> 0:18:21.359 lagging even in the UK, and so they have I 0:18:21.400 --> 0:18:24.359 think good valuation, the kind of I think a recent 0:18:24.400 --> 0:18:28.640 outlook for earnings. So I think again diversification not for 0:18:28.680 --> 0:18:30.840 the because the usual thing you have to diversify, know, 0:18:31.040 --> 0:18:34.399 is the evaluation element. The market economy out look point 0:18:34.480 --> 0:18:40.240 to a more diversified but let's see equally weighted kind 0:18:40.280 --> 0:18:40.800 of approach. 0:18:41.400 --> 0:18:44.560 Yeah, so diversify and part across the valuations and the UK. 0:18:44.840 --> 0:18:46.960 You said, put a little bit more into the UK. 0:18:47.040 --> 0:18:49.680 But the UK is really very cheap relative to most 0:18:49.720 --> 0:18:53.480 other markets still, so it would seem a perfectly reasonab place. 0:18:53.600 --> 0:18:55.880 I mean, evaluation is not everything, right, well, it's quite 0:18:55.880 --> 0:18:59.359 a lot everything, but you know it's the UK market 0:18:59.359 --> 0:19:01.639 trade at the same level of emerging markets right in 0:19:01.720 --> 0:19:04.400 term before earn. Now you can say there is less 0:19:04.400 --> 0:19:06.399 growth and you can emerging market, that's true, but the 0:19:06.520 --> 0:19:10.080 risk still is still less. So I do think that 0:19:10.119 --> 0:19:13.159 again investors should focus a little bit more on their 0:19:13.200 --> 0:19:17.400 domestic market and also move away from just simply investing 0:19:17.440 --> 0:19:19.920 in large caps. Look at me caps. There are some 0:19:20.119 --> 0:19:22.960 great stocks there, even small caps. So that's that's the 0:19:22.960 --> 0:19:23.920 strategy that we have. 0:19:24.160 --> 0:19:26.679 Okay, let's go back then to the bond market. You're say, 0:19:26.760 --> 0:19:28.760 no one really feels most like investing in bones at 0:19:28.800 --> 0:19:31.639 the moment, which is fair. They kind of don't. So 0:19:31.960 --> 0:19:34.360 what's the reasoning. 0:19:34.000 --> 0:19:39.480 There, Well, you know, a few years ago, I remember 0:19:39.520 --> 0:19:43.080 you remember that the assumption was there is nothing safer 0:19:43.119 --> 0:19:46.520 than German bones, you remember, right, Yeah, Well, you know, 0:19:46.680 --> 0:19:48.960 in real terms you would have lost almost seventy percent 0:19:49.000 --> 0:19:52.639 in a couple of years. So now if you are investors, 0:19:52.680 --> 0:19:56.119 and you know and and you lose so much on 0:19:56.240 --> 0:19:59.000 an asset class that's supposed to be safe, well I 0:19:59.000 --> 0:20:03.680 can understand they're quite investor reluctant to be invested in it. 0:20:04.640 --> 0:20:07.960 But again, it's not just valuation. But let's look at valuation, right, 0:20:08.160 --> 0:20:10.800 what is the anchor? What is the right value for 0:20:11.200 --> 0:20:13.879 you know, a domestic government bonds? I mean historically but 0:20:13.920 --> 0:20:18.120 also in theory, the yield that you get from let's 0:20:18.160 --> 0:20:20.840 say guilds or bones or treasure should be more or 0:20:20.920 --> 0:20:24.040 less in live with trend growth. This is the valuation 0:20:24.240 --> 0:20:27.600 anchor for bonds. And you know a few years ago 0:20:27.760 --> 0:20:30.960 when boones was negative, very close to zero, close to zero, 0:20:31.000 --> 0:20:35.040 clearly there was an evaluation program. And now we're in 0:20:35.080 --> 0:20:39.119 a situation where roughly speaking, roughly speaking, bone yields, government 0:20:39.119 --> 0:20:41.680 bond yields are more or less in line with the 0:20:42.359 --> 0:20:46.040 trend growth rate of their respective economy. So you ask 0:20:46.119 --> 0:20:48.480 close to four percent. You know in the UK is 0:20:48.480 --> 0:20:50.800 all higher because of inflation. So we are in a 0:20:50.880 --> 0:20:54.320 position where you know, bonds are not particularly cheap, but 0:20:54.640 --> 0:20:58.400 they're not as expensive and ecreites are not as good. 0:20:58.640 --> 0:21:01.680 To say, well adjust in that inequities forget about bonds. 0:21:02.040 --> 0:21:04.000 You have to be selective, though. I think there is 0:21:04.240 --> 0:21:07.520 I think value guilds very good value, and I think 0:21:07.600 --> 0:21:10.480 especially in inflation protected bonds because if you're wrong on 0:21:10.560 --> 0:21:13.000 inflation and inflation goes through the roof, at least we 0:21:13.040 --> 0:21:16.040 have the inflation protection if you go into a recession, 0:21:16.040 --> 0:21:19.800