Speaker 1: Bloomberg Audio Studios, Podcasts, Radio News.
Speaker 2: Welcome to Maren Talks Money, the podcast in which people
Speaker 2: who know the markets explain the markets. I'm Maren sumsat Web.
Speaker 2: This week i am speaking with Luca Paulini, chief strategist
Speaker 2: at Pictaate Asset Management.
Speaker 3: Now.
Speaker 2: We had Luca on the show back in January twenty
Speaker 2: twenty three when he made the case of things we're
Speaker 2: looking up for the global economy and not quite as
Speaker 2: bad as other people thought in terms of both inflation
Speaker 2: and recession risk. We wanted to bring him back saf
Speaker 2: his outlook has changed, and to talk to him about
Speaker 2: the end of American acceptionalism and the beginning of what
Speaker 2: he called the age of convergence. Luca, thank you so
Speaker 2: much for joining us today. We really appreciate it. It's
Speaker 2: nice to have you on again. We haven't had you on,
Speaker 2: we think for about two years, maybe more at this point,
Speaker 2: so we've got a lot to catch up on.
Speaker 3: Sure.
Speaker 2: When you put out your report at the beginning of
Speaker 2: the year about what you expect next, you talked about
Speaker 2: the three phases that we've been through and we're about
Speaker 2: to go through. The first was the Great Moderation, which
Speaker 2: we've talked about a lot on this podcast over the
Speaker 2: last few years. So that was the period from nineteen
Speaker 2: eighty to two thousand and seven, the end of the
Speaker 2: Cold War, the introduction of the Internet to our economies,
Speaker 2: disinflation and globalization or as a result of China entering
Speaker 2: the global economy that is long behind us now. And
Speaker 2: then you put down two thousand and eight post financial
Speaker 2: crisis to twenty twenty four as what you call the
Speaker 2: age of uncertainty, and that is the period of the
Speaker 2: euro crisis, of Brexit, of COVID, of the beginning of
Speaker 2: the war in Ukraine, and also of course this long,
Speaker 2: long period of US exceptionalism and super low interest rates.
Speaker 2: And you now say that we have moved from this
Speaker 2: age of uncertainty into what you called the Great convergence.
Speaker 2: So can we start by just talking about what you
Speaker 2: mean by this, what is taking out from the older
Speaker 2: age into when new age.
Speaker 3: Well let me say though, that the age of uncertainty,
Speaker 3: or let's really uncertainty, is still with us. We're not
Speaker 3: saying that the Great Conversion will imply, you know, a
Speaker 3: return to a golden age for financial markets and societies
Speaker 3: and the economy. What we are saying, is that the
Speaker 3: phase of exceptionalism where US outperform financially but also politically,
Speaker 3: is pretty much over. Europe may not see a boom,
Speaker 3: and it's difficult to imagine that, but Europe is i
Speaker 3: think going slowly as always in the right direction, and
Speaker 3: China is kind of stabilizing in a way. So you
Speaker 3: see the US from our point of view, we lose
Speaker 3: some of the kind of this kind of big performance
Speaker 3: that the US had in the past. China we stabilized.
Speaker 3: Europe will get better and this kind of environment is
Speaker 3: still very uncertain, right, very uncertain, but will not be
Speaker 3: kind of dominated by the US only. So it's a
Speaker 3: much more you know, with the convergence, talk about convention,
Speaker 3: it's more about the economics, economic growth, monetary policy, but
Speaker 3: also financial returns. It's not kind of we are well
Speaker 3: aware of the fact that when you look at political
Speaker 3: joe politically, you're going to see even more fragmentation. So
Speaker 3: in a way it's not a convergence there, but from
Speaker 3: a purely economic and financial point of view. Again, the
Speaker 3: era of this US our performance coming to an end.
Speaker 3: Europe is recovering Chinese stabiliaity, which is very different from obviously,
Speaker 3: let's say in the past five to ten years.
Speaker 2: But if we look at it like that, this is
Speaker 2: not about the US performing less well, it's about other
Speaker 2: areas performing better.
Speaker 3: Well. Yes and no, because you know it's interesting, you
Speaker 3: know that when you look at the performance of the
Speaker 3: past five, ten years or seven years, right, the initial
Speaker 3: of the starting point is critical. A lot of investors
Speaker 3: very surprised when I tell them the UK the UK
Speaker 3: equities eies are beaten US equities since the end of
Speaker 3: twenty twenties. It really depends when when you start your charge.
Speaker 3: In a way, right, what we are saying here is
Speaker 3: that again is financial returns on equitism bonds will be
Speaker 3: much lower than the low terme average. Effectively, everything will
Speaker 3: be kind of will be lower. And this, in a way,
Speaker 3: that's the conversion we are talking about. It's not that
Speaker 3: Europe would be the new US. It's more than most
Speaker 3: countries we go to a period of let's say we
Speaker 3: growth and relatively moderate returns. And so in that sense,
Speaker 3: that's what the conversions that were in mind now Europe
Speaker 3: and China becoming let's see the new US internal performance
Speaker 3: rather a convergence to a very low, relatively low level
Speaker 3: of economic growth, but also of financial returns.
Speaker 2: Okay, so we divide it up into two and look
Speaker 2: first at the economic growth bet and then move on
Speaker 2: to talking about the market reaction to that economic growth.
Speaker 2: So DUS is still growing faster than most of Europe,
Speaker 2: and we would still expect that to continue. Right hard
Speaker 2: to see the UK and much of Europe hitting growth
Speaker 2: rates above a couple of percent.
Speaker 3: Yes, but you know, I think what we are missing
Speaker 3: here is that we look the last five years atriast
Speaker 3: on our analysis, roughly forty percent of US growth has
Speaker 3: come from an exceptionally loose physical monetary policy. You may say, well,
Speaker 3: in Europe has been the same, Not really, because in Europe,
Speaker 3: if you look at dept to GDP ratio, it's pretty
Speaker 3: much the same of five years ago. In the US
Speaker 3: is much much higher. So the US had a combination
Speaker 3: of factors and on the AI is also an incredibly
Speaker 3: loose and expansion in physical policy that is not, in
Speaker 3: our view, sustainable in the very long term. So if
Speaker 3: you remove let's say the policy aspect of that, you
Speaker 3: know the gap between Europe and US. It's significant, but
Speaker 3: not extremely so. So this is I think the starting point.
Speaker 3: The second is that Europe, with all the problems, I
Speaker 3: think it's fair to say that what's going on in Germany,
Speaker 3: especially the end of the day break, this is really
Speaker 3: like a kind of a game changer. Now we know,
Speaker 3: as always things in Europe will move very very slowly,
Speaker 3: but I think Germany embracing physical activism is something new
Speaker 3: and we have obviously consequences and split over also for
Speaker 3: other countries. Now we may say that this is not
Speaker 3: what Europe need. We need obviously in Europe a big
Speaker 3: boost to productive they may not come from physical activism,
Speaker 3: but you see there's a big change. So Europe in
Speaker 3: a way will reflate, while the US will face constraints
Speaker 3: politically economic in terms of the amount of stimulus that
Speaker 3: can provide. And this is actually the main difference. So
Speaker 3: when you look at the next five years, we expect
Speaker 3: Europe and the US to growth pretty much at the
Speaker 3: same level across to one point five. The difference though
Speaker 3: that at least in Europe we will have inflation back
Speaker 3: to normal, but in the US will remain higher. And
Speaker 3: I think the ratio between growth and inflation, the mix
Speaker 3: is will really matter for an markets would become much
Speaker 3: less favorable for the US and better for Europe. That's
Speaker 3: one of the things that we are saying about these
Speaker 3: conversion that we'll see in the next few years.
Speaker 2: Okay, So to agree that the US will be held
Speaker 2: back by its very high levels of debt and deficit
Speaker 2: and unable to push forward fiscally in the same way
Speaker 2: as Europe. But then when you look at and we
Speaker 2: talk about Germany and the end of the debt break,
Speaker 2: et cetera, but Germany has its own massive problem with
Speaker 2: it with debt and deficits, et cetera. And I saw
Speaker 2: something in the paper this morning and I hadn't realized
Speaker 2: it was quite so high. That German welfare payments including
Speaker 2: pensions are about thirty percent of GDP and that clearly unsustainable.
Speaker 2: And you look at a similar situation in the UK
Speaker 2: and France and do you think, well, the fiscal position
Speaker 2: of these countries is basically unsustainable even and you know,
Speaker 2: we might say previously we used to say unsustainable in
Speaker 2: the long term, Now we're going there kind of unsustainable
Speaker 2: in the short term. So these have got to be
Speaker 2: massive drags on growth and the ability of any of
Speaker 2: these countries to move forward unless they see massive gains
Speaker 2: in productivity.
Speaker 3: But I think I think one thing that is very
Speaker 3: important Twilight is demographics. We still have the idea that
Speaker 3: demographics in the US is great and in Europe is bad.
Speaker 3: When you look at the employment rate in euro US
Speaker 3: is pretty much the same. Population growth in the US
Speaker 3: is pretty much growing in line with Europe, mainly because
Speaker 3: again a decline in immigration. So again it's not that
Speaker 3: we're not saying that Europe will boom. What we are
Speaker 3: saying is that this gap that we have seen in
Speaker 3: the past we shrink. And again you're totally right in Europe,
Speaker 3: it's not. You know, what Europe need is first of all,
Speaker 3: a change in the mindset was resk taking and this
Speaker 3: requires also a change in the mindset exactly of European
Speaker 3: economic agents and an investor. It's not just you know,
Speaker 3: a few points of fiscal definity that can make a difference.
Speaker 3: But you know, the trend I think is in place.
Speaker 3: I think Europe is aware of the weaknesses. I think
Speaker 3: is moving very slowly. The US, i'm afraid, is going
Speaker 3: the opposite direction. And and I think again the crackdown
Speaker 3: on immigration is one I think and the fact that
Speaker 3: you know, we are even talking about the independence for
Speaker 3: this example of the fact, well the US is not
Speaker 3: in a way in such a solid place it was
Speaker 3: just a few years ago, and that's the difference. I
Speaker 3: think that that is for US very relevant.
Speaker 2: Is there evidence yet that the crackdown on immigration is
Speaker 2: affecting growth.
Speaker 3: We have seen a significant weakening on deliberate market in
Speaker 3: the US, but it's very difficult to say this it
Speaker 3: is down to immigration, is probably down to the impact
Speaker 3: of tariffs, and also the fact that the US economy
Speaker 3: has been very strong for five years, so a phase
Speaker 3: of weakness is inevitable. No, I don't think that it's
Speaker 3: too early to say there is an impact on that.
Speaker 3: But you know, the US, this access the ES was
Speaker 3: based on human capital and in few immigration faults and
Speaker 3: universities are not let's say US free to operate as
Speaker 3: before for a number of reasons. Well, you know, it's
Speaker 3: just an impact on on productive and impact on growth.
Speaker 2: But I guess you could still afire. We're still looking
Speaker 2: for a way to explain the future for the US
Speaker 2: and say well, exceptionalism is still there. They're very much
Speaker 2: ahead of US and of Europe in terms of AI
Speaker 2: for example, and in terms of the cheap energy required
Speaker 2: to drive the AI revolution, So that is something that
Speaker 2: still remains specific to the US.
Speaker 3: There is no question that the US is economically more competitive
Speaker 3: than Europe. You mentioned the cost of energy is totally right,
Speaker 3: but bear in mind that we are going into a
Speaker 3: phase where a lot of energy we come from basically
Speaker 3: solar panels, and that would be renewables, which obviously makes
Speaker 3: Europe less dependent on energy import and make the US
Speaker 3: in a way less exceptional because if all the energy
Speaker 3: is produced locally solar panel for example, then obviously the
Speaker 3: energy dominus the US become less less relevant. On tech,
Speaker 3: you're totally right. The question though on tech is that,
Speaker 3: especially what's going on AAAI, there is a clear advantage
Speaker 3: of the US in terms of spending. We see that
Speaker 3: on a daily basis. The question though, is that is
Speaker 3: this kind of all this investment pay off or not
Speaker 3: is the US and all US overspending on AI. This
Speaker 3: is really an open question. I don't have an answer
Speaker 3: for that, but there is no question that if there
Speaker 3: is one element that makes the US still an economy
Speaker 3: which is much more kind of than am the Europe.
Speaker 3: So the right is tech, but it's not you know,
Speaker 3: it's not just tech. When you look also the US market,
Speaker 3: right or the global market, tech is only only twenty
Speaker 3: seven percent of the market. It's not one hundred percent.
Speaker 3: There are other elements if you have to take into consideration.
Speaker 3: But yeah, we don't expect the tech gap between US
Speaker 3: and Europe to close, but maybe again would be less dramatic,
Speaker 3: less visible than it is now.
Speaker 2: So you say, the question, the real question is whether
Speaker 2: all this investment in AI pays off or not? What
Speaker 2: is what is your view there there's a great AI
Speaker 2: bubble that's going to collapse and leave a lot of
Speaker 2: people like it' slightly red faced or something else.
Speaker 3: Well, you know, there is some elements of a bubble.
Speaker 3: First of all, bubbles also need a macrocroonomy outlook the
Speaker 3: allow bubble to happen, typically abundant liquidity, financial deregulation, and
Speaker 3: a strong kind of narrative. I think probably all three
Speaker 3: are there. I don't think the evaluation is so extreme
Speaker 3: for AI stocks to say, well, that's a bubble. But
Speaker 3: it's almost inevitable when you have such a big increase
Speaker 3: in spending, some of this money will be wasted. It's
Speaker 3: inevitable that happened all the time. I don't know when
Speaker 3: this will materialize. There could be a second wave. It
Speaker 3: was with the internet. You know, you have a bubble,
Speaker 3: then you have a period of in a thousand, then
Speaker 3: there was the real kind of boom also for the
Speaker 3: economy later on. No, look, I am a strong believer
Speaker 3: in A. I my worry here is that what happened,
Speaker 3: for example, with deep sick, the risk is that I
Speaker 3: will be commody time is sooner rather than later. And
Speaker 3: so all this advantage the US has as a first
Speaker 3: mover will at the end not this disappear, but may
Speaker 3: be actually reduced. And this again, this is really what
Speaker 3: matters for financial returns, right, is the rate of change,
Speaker 3: not the level. And I think in this sense, I
Speaker 3: think I see that again this advantage of the US,
Speaker 3: even in tech, may not last forever, at least not
Speaker 3: in the same extent.
Speaker 2: Okay, so does that suggest to you that a large
Speaker 2: part of the US market is very overvalued?
Speaker 3: You know, we always think about tech talks, and you know,
Speaker 3: I think, what is I think not well known that Walmart,
Speaker 3: which is you know, it was actually an early adopter
Speaker 3: of A but Walmart is the biggest return in the world.
Speaker 3: Is not a tech company's trading and a higher multiple
Speaker 3: than Amazon costco is trading and a multiple or peer
Speaker 3: ratio of fifty start US more than thirty. So it's
Speaker 3: not just tech. Actually tech, when you look at the
Speaker 3: growth rates, I think it's almost fairly valued. Is part
Speaker 3: of the US market is I think, much more expensive,
Speaker 3: and nobody's talking about it. Again. It made down to
Speaker 3: a you know, too much liquidity in the system, too
Speaker 3: much optimism. Also the fact that, let's be very honest,
Speaker 3: some of these companies are incredibly good, incredibly efficient, and
Speaker 3: so maybe they deserve this kind of multiple when I
Speaker 3: see kind of retailers start trading a fifty time for earnings.
Speaker 3: But I start to feel that it is a little bit stretched.
Speaker 3: So it's not just tech, it's the overall mark in
Speaker 3: the US, which I think is quite expensive. Considering the
Speaker 3: gross is not five it's two five percent. If you're
Speaker 3: not in the nineties right when gross was five percent,
Speaker 3: inflation was one percent, is a very different environment which
Speaker 3: I think will require multiples and need to be lower
Speaker 3: than the current levels.
Speaker 2: It's interesting, isn't At first? I love that. I love
Speaker 2: the phrase a little bit stretched, which is a great
Speaker 2: financial markets usemism for screamingly expensive, getat while you still can.
Speaker 2: So there are there will be an over lot of
Speaker 2: people and invested in the US. You think that because
Speaker 2: they have a track of fund of some kind, they're diversified,
Speaker 2: so they feel that they're holding lots of different companies
Speaker 2: and therefore they're diversified across the board. But of course
Speaker 2: they kind of not because they're still very overexposed to
Speaker 2: the expensive end of the US. So it's one of
Speaker 2: those occasions when the idea that you're diversified is untrue
Speaker 2: because you're effectively exposed to the same type of companies
Speaker 2: across the board.
Speaker 3: Yeah, and I think Marian, it's what is also important
Speaker 3: is that let's say you are European investors that invest passively,
Speaker 3: but you have almost seventy percent of your wealth in
Speaker 3: the US. You're taking on the evaluation risk but also
Speaker 3: the currency risk, and you know you know what I mean,
Speaker 3: as we have seen it recently. So again we're not
Speaker 3: saying that the US talks are terrible. Not. What we
Speaker 3: are saying is that, especially if you're not in US
Speaker 3: investor holding so much in a market which is heavily concentrated,
Speaker 3: it's expensively expensive currency with all the political risks, I
Speaker 3: think is a risk that is not worth taking. And
Speaker 3: so yeah, that we have is to reduce these explosions
Speaker 3: on term in the US and adding to either domestic stocks,
Speaker 3: but even the bond market. Obviously very few people want
Speaker 3: to invest in, and I think it's almost time to
Speaker 3: reconsider that.
Speaker 2: So if you're moving money out of the US, and
Speaker 2: you're moving it, where where do you move into? I mean,
Speaker 2: is it still oky to by German stocks, by Spanish dogs?
Speaker 2: They've gone up so much over the last year, the
Speaker 2: UK slightly less, but nonetheless we've performed reasonably well. Where
Speaker 2: where is the safest equity market to move into?
Speaker 3: Well, safest is a tricky one because we know that
Speaker 3: when things go wrong, the correlation goes to one right,
Speaker 3: and this is this is one actually one of the
Speaker 3: reasons why investors still like the SMP We have stocked
Speaker 3: because we say, well, everything goes down, maybe I lose
Speaker 3: less in the US than in Europe. No, our view
Speaker 3: is that again it depends where you First of all,
Speaker 3: where you are, So let's say if you are in
Speaker 3: the UK, I think the choice for us pretty straightforward.
Speaker 3: You should invest and know that we discussed this before.
Speaker 3: You should invest a little bit more in UK stocks,
Speaker 3: so in domestic stock similar for Europe, right, But also
Speaker 3: I think what our approach is is try to think
Speaker 3: more inequal weighted terms. So let's say instead of having
Speaker 3: seventy percent in the US and thirty percent elsewhere, I
Speaker 3: think fifty percent, say in the US and fifty percent
Speaker 3: no US. It makes sense. It really depends where you are.
Speaker 3: If you are in the UK Switzerland, for example, you
Speaker 3: should have probably more in the domestic stocks. You should
Speaker 3: also add to emerging market where they're doing very well,
Speaker 3: not because there is anything dramatic happening, just because the
Speaker 3: dollar is getting weaker and the dollar will continue to
Speaker 3: get weak, emerging market will rate. So again it's a
Speaker 3: little bit of everything, but really depends on where you're from.
Speaker 3: For UK investors, I think that's I think a good
Speaker 3: time to invest in UK stocks. But we also have
Speaker 3: the view that you should have a second look at
Speaker 3: mid caps, small caps that have been a little bit
Speaker 3: lagging even in the UK, and so they have I
Speaker 3: think good valuation, the kind of I think a recent
Speaker 3: outlook for earnings. So I think again diversification not for
Speaker 3: the because the usual thing you have to diversify, know,
Speaker 3: is the evaluation element. The market economy out look point
Speaker 3: to a more diversified but let's see equally weighted kind
Speaker 3: of approach.
Speaker 2: Yeah, so diversify and part across the valuations and the UK.
Speaker 2: You said, put a little bit more into the UK.
Speaker 2: But the UK is really very cheap relative to most
Speaker 2: other markets still, so it would seem a perfectly reasonab place.
Speaker 3: I mean, evaluation is not everything, right, well, it's quite
Speaker 3: a lot everything, but you know it's the UK market
Speaker 3: trade at the same level of emerging markets right in
Speaker 3: term before earn. Now you can say there is less
Speaker 3: growth and you can emerging market, that's true, but the
Speaker 3: risk still is still less. So I do think that
Speaker 3: again investors should focus a little bit more on their
Speaker 3: domestic market and also move away from just simply investing
Speaker 3: in large caps. Look at me caps. There are some
Speaker 3: great stocks there, even small caps. So that's that's the
Speaker 3: strategy that we have.
Speaker 2: Okay, let's go back then to the bond market. You're say,
Speaker 2: no one really feels most like investing in bones at
Speaker 2: the moment, which is fair. They kind of don't. So
Speaker 2: what's the reasoning.
Speaker 3: There, Well, you know, a few years ago, I remember
Speaker 3: you remember that the assumption was there is nothing safer
Speaker 3: than German bones, you remember, right, Yeah, Well, you know,
Speaker 3: in real terms you would have lost almost seventy percent
Speaker 3: in a couple of years. So now if you are investors,
Speaker 3: and you know and and you lose so much on
Speaker 3: an asset class that's supposed to be safe, well I
Speaker 3: can understand they're quite investor reluctant to be invested in it.
Speaker 3: But again, it's not just valuation. But let's look at valuation, right,
Speaker 3: what is the anchor? What is the right value for
Speaker 3: you know, a domestic government bonds? I mean historically but
Speaker 3: also in theory, the yield that you get from let's
Speaker 3: say guilds or bones or treasure should be more or
Speaker 3: less in live with trend growth. This is the valuation
Speaker 3: anchor for bonds. And you know a few years ago
Speaker 3: when boones was negative, very close to zero, close to zero,
Speaker 3: clearly there was an evaluation program. And now we're in
Speaker 3: a situation where roughly speaking, roughly speaking, bone yields, government
Speaker 3: bond yields are more or less in line with the
Speaker 3: trend growth rate of their respective economy. So you ask
Speaker 3: close to four percent. You know in the UK is
Speaker 3: all higher because of inflation. So we are in a
Speaker 3: position where you know, bonds are not particularly cheap, but
Speaker 3: they're not as expensive and ecreites are not as good.
Speaker 3: To say, well adjust in that inequities forget about bonds.
Speaker 3: You have to be selective, though. I think there is
Speaker 3: I think value guilds very good value, and I think
Speaker 3: especially in inflation protected bonds because if you're wrong on
Speaker 3: inflation and inflation goes through the roof, at least we
Speaker 3: have the inflation protection if you go into a recession,
Speaker 3: which is possible globally, well, inflation protected bones are bones,
Speaker 3: so they will all perform. So we like inflation protective bonds.
Speaker 3: We also like credit because you know, we have spreads
Speaker 3: are very very close to historical law, but the balance
Speaker 3: sheet of the private sector or company is incredibly strong,
Speaker 3: and so we do believe that, you know, there is
Speaker 3: still value in credit, especially in Europe and emerging markets.
Speaker 3: You know, emerging markets this year done fifteen percent emerging
Speaker 3: market debt. Why because again they tend to benefit from
Speaker 3: from the dollar. Inflation is folding great cuts and good valuation.
Speaker 3: You know, Brazilian bonds will give you a real, kind
Speaker 3: of real close to ten percent. So I think that
Speaker 3: investors should forget the past. In a way. The reason
Speaker 3: why bond of so much was a combination of what
Speaker 3: incredibly expensive saluation because of QE. If you want an
Speaker 3: inflation shocked then nobody expected. Now inflation may remain sticky,
Speaker 3: but I don't think we're going to see what was
Speaker 3: twententy twenty two in terms of inflation spike. And you
Speaker 3: know we're getting older, all of us. And when again,
Speaker 3: you need income when you invest in US equities, you
Speaker 3: know you may get the upside from capital gains, but
Speaker 3: you don't get any income. So I think there is
Speaker 3: an underlying demand for bonds of fixing and coming from aging,
Speaker 3: which I think I'm afraid we cannot change. And this
Speaker 3: is this is I think one of the factors which
Speaker 3: I think we support bond markets going forward.
Speaker 2: And what's the risk to that view? What would make
Speaker 2: inflation suddenly go much higher than you might expect?
Speaker 3: Well, I think you know what is amazing of what
Speaker 3: we have seen in the past few years is that
Speaker 3: we were all shocked by this increase in inflation, right
Speaker 3: we were, Even if looking back you may say, well,
Speaker 3: it was obvious, right, big increase in demand loss apply
Speaker 3: a lot of money, but it's very easy to say,
Speaker 3: you know, looking back, what hasn't changed is that inflation expectations,
Speaker 3: the long term inflation expectations hasn't changed. So if you look,
Speaker 3: we look at seven eight measured inflation expectations in the US,
Speaker 3: and apart from the consumer expectations, they tend to be,
Speaker 3: by the way, the one that tend to be more
Speaker 3: less reliable in the long term. All the market based
Speaker 3: measure of expecting infliction in the US are all between
Speaker 3: two point one and two point five, so they haven't moved.
Speaker 3: And I think what can change completely the picture is
Speaker 3: that if there is a second wave of inflation, potentially
Speaker 3: because the FED loser is independence, then you start to
Speaker 3: see a significant inflation premium being priced in the bond market.
Speaker 3: For now, you don't really see it. You don't see
Speaker 3: it because central banks they have maintained their inflation credibility,
Speaker 3: but this can go. I think what is going on
Speaker 3: in the US. I think it's particularly dangerous in a way.
Speaker 3: Right now the FED is cutting rates, that's fine, but
Speaker 3: the idea that potentially the White House can dictate the
Speaker 3: monetary policy at some point. Well, that obviously is very
Speaker 3: dangerous for the bone mark. That's to me is the
Speaker 3: risk that the anchoring of inflation expectation in the US
Speaker 3: is the risk number one for bond markets globally.
Speaker 2: Is that. Do you think the reason why the goal
Speaker 2: price is so high? Is it that concern of the
Speaker 2: risk of high inflation or is it simply to do
Speaker 2: with central bank buying.
Speaker 3: No, it's not just the central bank buying. I think
Speaker 3: the critical factory here is, Yes, investors still want to
Speaker 3: have an edge against the risk over inflation. There is
Speaker 3: still demand for real assets, and gold offer pretty much
Speaker 3: all of them, even bit coin in a way that's
Speaker 3: going to happen party for the same reason. So I
Speaker 3: think there is demand for real acids and because they really,
Speaker 3: let's be very honest, your political risk has sitting incredibly high,
Speaker 3: and so you look around and you know gold is
Speaker 3: probably one of the few options that you have, and
Speaker 3: you know, we are overweight gold, They've been overweight gold. Yes,
Speaker 3: the price is very elevated in nominal and real terms,
Speaker 3: but as long as the as the fundamental study hasn't changed,
Speaker 3: I think that the trend is still higher and I
Speaker 3: think that's what we have been saying in our in
Speaker 3: our second outrook this year.
Speaker 2: Yeah, look, what do you mean by overweight gold? Overweight
Speaker 2: relative to what?
Speaker 3: Yeah? I think I think you know, it's a good
Speaker 3: question because you know, when you ask the portfolio, there's
Speaker 3: a lot of surveys and what what is your weight
Speaker 3: in gold in your portfolios? You always get numbers between
Speaker 3: four and five percent, sometimes three. This is kind of
Speaker 3: let's say, the average weight of gold in in institutional
Speaker 3: funds if you want, But also what in general if
Speaker 3: you look at the market as well, this is kind of, uh,
Speaker 3: the implied weight of gold in the total in the
Speaker 3: global if you want the market, right, we have actually
Speaker 3: close to ten percent in our fund, So in that sense,
Speaker 3: we have much more than the average portfolio manager has.
Speaker 3: Again based on the fact that we expect the dollar
Speaker 3: to depreciate, to really interest rate to be weaken and
Speaker 3: these geobilitical risks will not go away. So I think
Speaker 3: I still believe the goal that's abside from here.
Speaker 2: Okay, and you say that that coin fulfilled the same role,
Speaker 2: does that have a place in a retail investors portfolio?
Speaker 3: Do you think, well, that's a tricky question. Mary. You
Speaker 3: know that I'm not a big fan of bitcoin.
Speaker 2: Oh I didn't know that.
Speaker 3: I respect the market. I respect the market. I still
Speaker 3: don't see an obvious economic logic beyond b coin, but
Speaker 3: the coin has proved to be incredibly resident with higher
Speaker 3: inflation fed acting rates and all these kind of things. Well,
Speaker 3: we know that. You know, in the US, roughly twenty
Speaker 3: five percent of investors on the Rector Director is some
Speaker 3: kind of cryptocurrency. So crypto has become more accepted. And
Speaker 3: what I'm saying is that we don't really invest in
Speaker 3: bigcoin right now. We prefer gold. But obviously, especially if
Speaker 3: you're much younger than me, I can understand that you know,
Speaker 3: bigcoin could be an alternative, but I can see the
Speaker 3: logic of those that are willing to have a very
Speaker 3: small share of their wealth in bitcoin.
Speaker 2: Very small. Okay. One of the things that you have
Speaker 2: on your list is sticking with it roughly in this topic.
Speaker 2: One of the things on your list of things that
Speaker 2: we will see happen in the Great Convergence to twenty
Speaker 2: twenty five onwards is asset tokenization. Will you just explain
Speaker 2: to us what does you mean by that and how
Speaker 2: that will affect us.
Speaker 3: You know, when we look at the out over the
Speaker 3: next five years or ten, it's not just you know,
Speaker 3: equitis bond, but it's also important to understand what's going
Speaker 3: on in the industry. Right, we had you know, the ETFs,
Speaker 3: we had bigcoin, and so we're trying to see who
Speaker 3: would be the next thing. So I think asset organization
Speaker 3: is going to be probably the big thing for the
Speaker 3: next five years. It's already happening now is early stages,
Speaker 3: but I can see this hell helping especially kind of
Speaker 3: investor to take positions in asset classes that are less liquid.
Speaker 3: So I can see the positive side of that. There
Speaker 3: is obviously a risk again of bubbles and things, but
Speaker 3: again we have to embrace innovation be scared about it.
Speaker 3: And I think this is probably the next big thing
Speaker 3: after basically ETFs, and if one blockchain and cryptocurrency, that's
Speaker 3: for us. What will be the big thing for the
Speaker 3: next five to ten years.
Speaker 2: When you say it, love us get exposed to less
Speaker 2: liquid assets or help ordinary investors get exposure to less
Speaker 2: liquid acids. Are you thinking about private markets?
Speaker 3: Yeah, exactly, be private marketing. It's not only that, right,
Speaker 3: I mean, because now as the organization will affect pretty
Speaker 3: much everything. What I can see that this is probably
Speaker 3: the air which is most interesting, could be private market
Speaker 3: are everything, a lot of asset classes that for a
Speaker 3: number of reasons are very difficult to get exposed to.
Speaker 3: And this week again we increase significantly the investor base
Speaker 3: if you want, of a lot of these things make
Speaker 3: also transaction much faster. As you know, again early stages,
Speaker 3: but things can go very quickly, and I'm pretty sure
Speaker 3: in five years time we will be here again Mary
Speaker 3: in talking about and what has the implication? Again early stages,
Speaker 3: but we are very confident this is the next big.
Speaker 2: Thing interesting And would it make you would it make
Speaker 2: you uncomfortable to feel that ordinary private investors were ending
Speaker 2: up via somethings such as as a organization or all
Speaker 2: the other ways that are being discussed at the moment,
Speaker 2: long term, at the funds, et cetera, that ordinary investors
Speaker 2: were ending up with quite high levels of exposure to
Speaker 2: unlisted companies.
Speaker 3: We have to strike a balance between the regulation and
Speaker 3: protection of the investor. Is very difficult because technology is
Speaker 3: going very fast, regulation is always falling behind. I think
Speaker 3: there is a risk, there is no question about it.
Speaker 3: As there is a risk for cryptocurrencies, and I also
Speaker 3: feel that there would be at some point some financial
Speaker 3: accident that will make us question. You know, all this,
Speaker 3: but that's the so story of financial markets, you know,
Speaker 3: it's and I think it's very important also to alight Merin.
Speaker 3: Then if you're right to expect very low returns in
Speaker 3: the next five to ten years, all these kind of
Speaker 3: financial innovations will help potentially to increase the rate of
Speaker 3: return of what we can achieve in our savings. But
Speaker 3: that's really important. So every small thing matters in this sense.
Speaker 2: Yeah, Although interestingly, if you can use tokenization trading tokens
Speaker 2: that represent parts of companies or assets or whatever, if
Speaker 2: you can use tokenization to make the ill liquid liquid,
Speaker 2: it might help us significantly with price discovery. For example,
Speaker 2: in private equity, where price discovery because of the very
Speaker 2: long term holdings and the illiquidity, can be quite difficult.
Speaker 2: If you suddenly you can trade your your private equity
Speaker 2: stake with tokens, we may find that the returns to
Speaker 2: private equity are slightly different, possibly lower, then we might
Speaker 2: have felt previously.
Speaker 3: Don't forget that. Yeah, we talked about this. Actually I
Speaker 3: mentioned myself but I think the ac organization is happening
Speaker 3: also on mutual funds, on bond so it's not just
Speaker 3: for the liquid acid. They say, one area where I
Speaker 3: think I can see the biggest potential, And yeah, we
Speaker 3: do believe that investors are probably still, at least individual
Speaker 3: investors under invested in private assets, especially private debt. But
Speaker 3: again we have to be very careful because I think
Speaker 3: this is an asset, an area where you need the expertise,
Speaker 3: and I think investing, you know, even passively in a
Speaker 3: way doesn't make a lot of sense for us. So
Speaker 3: I think it's an area where we have to look
Speaker 3: at all.
Speaker 2: Right, anything we've missed, do you think, Luca, anything that
Speaker 2: we must tell people that we haven't told them.
Speaker 3: Yeah, something, it's interesting, right, we didn't talk about China,
Speaker 3: and this is something that when I need our clients,
Speaker 3: I'm always surprised by the fact China was for a
Speaker 3: long time. Maybe not the first question, but the second question,
Speaker 3: what's going on in China? A cheap And I'm wondering
Speaker 3: if this lack of interest in Chinese because investors, given
Speaker 3: what's going on, especially on the refront, they effectively treat
Speaker 3: China as pretty speculative, potentially and investable because simply they
Speaker 3: don't see a lot of potential there. And it's a
Speaker 3: tricky one because if you look at the performance of
Speaker 3: Chinese tech companies this year has been fantastic. China is
Speaker 3: not booming. In fact, the latest data has been very,
Speaker 3: very weak. But I think after a few years off
Speaker 3: I think of political and policy mistakes, I think China
Speaker 3: is slowly going into the right directions try to recreate
Speaker 3: a more business friendly climate. I think in some areas
Speaker 3: China as well out of the US in a lot
Speaker 3: of areas. So I started to think, and China trades
Speaker 3: thirteen times forward earnings, right, So I'm just wondering if
Speaker 3: this lack of interest is because of the uncertainty around
Speaker 3: targets or it's something more secular. And I do believe
Speaker 3: and that we believe that China being the second biggest
Speaker 3: economy in the world, you cannot just stay out of China,
Speaker 3: you know, obviously, and you can invest in possibly you
Speaker 3: need to look at which sectors get the support from
Speaker 3: the government. You have to be more tactical in nature,
Speaker 3: you have to be there on the ground. But I
Speaker 3: do believe that emerging markets in China may have they
Speaker 3: may kind of become popular again, and hopefully this will happen,
Speaker 3: not because the US is doing very badly, but because
Speaker 3: they're doing the reforms, the things that I think they
Speaker 3: should do. So I think it's there's something that to me,
Speaker 3: it's again surprising, this lack of interest, apparent lack of
Speaker 3: interest in China overall, not only in Chinese as but
Speaker 3: also in the Chinese economy. It seems like now with
Speaker 3: tarists is a completely different world. It doesn't really affect us,
Speaker 3: and it's wrong because it's such a big part of
Speaker 3: the global economy that you have to look at China
Speaker 3: as well.
Speaker 2: It's interesting, is a conversation that comes up quite a
Speaker 2: lot on the podcast. But it's so you know, and
Speaker 2: I think such a binary conversation. For half the people
Speaker 2: it's as well, that's an investable there we won't be
Speaker 2: doing with that. And for the other half as well,
Speaker 2: it's very cheap, so you know, you're compensated, but it's
Speaker 2: not quite so cheap anymore after the performance of the
Speaker 2: tech sector of the last year, isn't.
Speaker 3: Yeah, And to be honest with you, you know, when
Speaker 3: you look at the tarist thing, it's incredibly difficult, right,
Speaker 3: we don't know if the tar will be ten percent
Speaker 3: or one hundred percent. It's incredibly difficult. But again that's
Speaker 3: normally where the good money has been made. If you
Speaker 3: always wait to know everything, well, then obviously we'll be
Speaker 3: already in the price. The fact that the Chinese assets
Speaker 3: are doing very well, to me, is already a sign
Speaker 3: that probably the worst of the tarist is behind us.
Speaker 3: The market is feeling that the Trump administration will kind
Speaker 3: of find a compromise that actually is not that I'm
Speaker 3: bad for China, and I think the market is already
Speaker 3: reacting to that.
Speaker 2: So there is one last thing I want to ask you.
Speaker 2: What are you reading that's interesting you might recommend to
Speaker 2: our reader.
Speaker 3: I'm reading a book on the Story of Ideas, which explore,
Speaker 3: you know, the philosophical aspect of equality, justice and democracy.
Speaker 3: And I think for me, you know, after a long
Speaker 3: day at work, you want to have something different. I
Speaker 3: struggled to read books on economics on the tube after
Speaker 3: you know, ten hours of work.
Speaker 2: Yeah, no, fair enough. Can you remember the author of
Speaker 2: your book, History of Ideas?
Speaker 3: Yes, someone called David ran Siman, and it's called the
Speaker 3: History of Ideas. So it's a very good book, very good.
Speaker 2: Book, excellent. We'll all read that. Look.
Speaker 3: Thank you, very muche, Thank you, thanks for.
Speaker 2: Listening to this week's Marin Talok's Money. If you like
Speaker 2: our show, rate review, and subscribe wherever you listen to podcasts,
Speaker 2: I keep telling your questions or comments The Merrin Money
Speaker 2: at Bloomberg dot net. You can also follow me and
Speaker 2: John on Twitter or x. I'm at Marinus w and
Speaker 2: John is John Underscore Step. This episode is hosted by
Speaker 2: Me Maren Sumset Web. It was produced by Samasadi and
Speaker 2: Moses and sound designed by Blake Naples and Kelly Gary.
Speaker 2: Special thanks to Luca Paulini.