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What to Buy Now as The US Loses Its Edge · Merryn Talks Money

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  Speaker 1: Bloomberg Audio Studios, Podcasts, Radio News.
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  Speaker 2: Welcome to Maren Talks Money, the podcast in which people
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  Speaker 2: who know the markets explain the markets. I'm Maren sumsat Web.
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  Speaker 2: This week i am speaking with Luca Paulini, chief strategist
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  Speaker 2: at Pictaate Asset Management.
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  Speaker 3: Now.
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  Speaker 2: We had Luca on the show back in January twenty
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  Speaker 2: twenty three when he made the case of things we're
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  Speaker 2: looking up for the global economy and not quite as
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  Speaker 2: bad as other people thought in terms of both inflation
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  Speaker 2: and recession risk. We wanted to bring him back saf
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  Speaker 2: his outlook has changed, and to talk to him about
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  Speaker 2: the end of American acceptionalism and the beginning of what
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  Speaker 2: he called the age of convergence. Luca, thank you so
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  Speaker 2: much for joining us today. We really appreciate it. It's
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  Speaker 2: nice to have you on again. We haven't had you on,
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  Speaker 2: we think for about two years, maybe more at this point,
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  Speaker 2: so we've got a lot to catch up on.
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  Speaker 3: Sure.
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  Speaker 2: When you put out your report at the beginning of
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  Speaker 2: the year about what you expect next, you talked about
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  Speaker 2: the three phases that we've been through and we're about
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  Speaker 2: to go through. The first was the Great Moderation, which
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  Speaker 2: we've talked about a lot on this podcast over the
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  Speaker 2: last few years. So that was the period from nineteen
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  Speaker 2: eighty to two thousand and seven, the end of the
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  Speaker 2: Cold War, the introduction of the Internet to our economies,
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  Speaker 2: disinflation and globalization or as a result of China entering
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  Speaker 2: the global economy that is long behind us now. And
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  Speaker 2: then you put down two thousand and eight post financial
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  Speaker 2: crisis to twenty twenty four as what you call the
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  Speaker 2: age of uncertainty, and that is the period of the
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  Speaker 2: euro crisis, of Brexit, of COVID, of the beginning of
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  Speaker 2: the war in Ukraine, and also of course this long,
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  Speaker 2: long period of US exceptionalism and super low interest rates.
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  Speaker 2: And you now say that we have moved from this
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  Speaker 2: age of uncertainty into what you called the Great convergence.
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  Speaker 2: So can we start by just talking about what you
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  Speaker 2: mean by this, what is taking out from the older
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  Speaker 2: age into when new age.
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  Speaker 3: Well let me say though, that the age of uncertainty,
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  Speaker 3: or let's really uncertainty, is still with us. We're not
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  Speaker 3: saying that the Great Conversion will imply, you know, a
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  Speaker 3: return to a golden age for financial markets and societies
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  Speaker 3: and the economy. What we are saying, is that the
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  Speaker 3: phase of exceptionalism where US outperform financially but also politically,
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  Speaker 3: is pretty much over. Europe may not see a boom,
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  Speaker 3: and it's difficult to imagine that, but Europe is i
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  Speaker 3: think going slowly as always in the right direction, and
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  Speaker 3: China is kind of stabilizing in a way. So you
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  Speaker 3: see the US from our point of view, we lose
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  Speaker 3: some of the kind of this kind of big performance
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  Speaker 3: that the US had in the past. China we stabilized.
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  Speaker 3: Europe will get better and this kind of environment is
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  Speaker 3: still very uncertain, right, very uncertain, but will not be
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  Speaker 3: kind of dominated by the US only. So it's a
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  Speaker 3: much more you know, with the convergence, talk about convention,
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  Speaker 3: it's more about the economics, economic growth, monetary policy, but
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  Speaker 3: also financial returns. It's not kind of we are well
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  Speaker 3: aware of the fact that when you look at political
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  Speaker 3: joe politically, you're going to see even more fragmentation. So
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  Speaker 3: in a way it's not a convergence there, but from
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  Speaker 3: a purely economic and financial point of view. Again, the
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  Speaker 3: era of this US our performance coming to an end.
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  Speaker 3: Europe is recovering Chinese stabiliaity, which is very different from obviously,
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  Speaker 3: let's say in the past five to ten years.
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  Speaker 2: But if we look at it like that, this is
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  Speaker 2: not about the US performing less well, it's about other
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  Speaker 2: areas performing better.
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  Speaker 3: Well. Yes and no, because you know it's interesting, you
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  Speaker 3: know that when you look at the performance of the
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  Speaker 3: past five, ten years or seven years, right, the initial
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  Speaker 3: of the starting point is critical. A lot of investors
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  Speaker 3: very surprised when I tell them the UK the UK
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  Speaker 3: equities eies are beaten US equities since the end of
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  Speaker 3: twenty twenties. It really depends when when you start your charge.
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  Speaker 3: In a way, right, what we are saying here is
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  Speaker 3: that again is financial returns on equitism bonds will be
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  Speaker 3: much lower than the low terme average. Effectively, everything will
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  Speaker 3: be kind of will be lower. And this, in a way,
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  Speaker 3: that's the conversion we are talking about. It's not that
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  Speaker 3: Europe would be the new US. It's more than most
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  Speaker 3: countries we go to a period of let's say we
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  Speaker 3: growth and relatively moderate returns. And so in that sense,
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  Speaker 3: that's what the conversions that were in mind now Europe
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  Speaker 3: and China becoming let's see the new US internal performance
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  Speaker 3: rather a convergence to a very low, relatively low level
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  Speaker 3: of economic growth, but also of financial returns.
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  Speaker 2: Okay, so we divide it up into two and look
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  Speaker 2: first at the economic growth bet and then move on
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  Speaker 2: to talking about the market reaction to that economic growth.
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  Speaker 2: So DUS is still growing faster than most of Europe,
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  Speaker 2: and we would still expect that to continue. Right hard
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  Speaker 2: to see the UK and much of Europe hitting growth
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  Speaker 2: rates above a couple of percent.
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  Speaker 3: Yes, but you know, I think what we are missing
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  Speaker 3: here is that we look the last five years atriast
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  Speaker 3: on our analysis, roughly forty percent of US growth has
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  Speaker 3: come from an exceptionally loose physical monetary policy. You may say, well,
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  Speaker 3: in Europe has been the same, Not really, because in Europe,
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  Speaker 3: if you look at dept to GDP ratio, it's pretty
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  Speaker 3: much the same of five years ago. In the US
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  Speaker 3: is much much higher. So the US had a combination
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  Speaker 3: of factors and on the AI is also an incredibly
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  Speaker 3: loose and expansion in physical policy that is not, in
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  Speaker 3: our view, sustainable in the very long term. So if
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  Speaker 3: you remove let's say the policy aspect of that, you
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  Speaker 3: know the gap between Europe and US. It's significant, but
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  Speaker 3: not extremely so. So this is I think the starting point.
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  Speaker 3: The second is that Europe, with all the problems, I
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  Speaker 3: think it's fair to say that what's going on in Germany,
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  Speaker 3: especially the end of the day break, this is really
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  Speaker 3: like a kind of a game changer. Now we know,
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  Speaker 3: as always things in Europe will move very very slowly,
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  Speaker 3: but I think Germany embracing physical activism is something new
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  Speaker 3: and we have obviously consequences and split over also for
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  Speaker 3: other countries. Now we may say that this is not
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  Speaker 3: what Europe need. We need obviously in Europe a big
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  Speaker 3: boost to productive they may not come from physical activism,
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  Speaker 3: but you see there's a big change. So Europe in
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  Speaker 3: a way will reflate, while the US will face constraints
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  Speaker 3: politically economic in terms of the amount of stimulus that
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  Speaker 3: can provide. And this is actually the main difference. So
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  Speaker 3: when you look at the next five years, we expect
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  Speaker 3: Europe and the US to growth pretty much at the
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  Speaker 3: same level across to one point five. The difference though
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  Speaker 3: that at least in Europe we will have inflation back
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  Speaker 3: to normal, but in the US will remain higher. And
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  Speaker 3: I think the ratio between growth and inflation, the mix
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  Speaker 3: is will really matter for an markets would become much
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  Speaker 3: less favorable for the US and better for Europe. That's
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  Speaker 3: one of the things that we are saying about these
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  Speaker 3: conversion that we'll see in the next few years.
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  Speaker 2: Okay, So to agree that the US will be held
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  Speaker 2: back by its very high levels of debt and deficit
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  Speaker 2: and unable to push forward fiscally in the same way
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  Speaker 2: as Europe. But then when you look at and we
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  Speaker 2: talk about Germany and the end of the debt break,
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  Speaker 2: et cetera, but Germany has its own massive problem with
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  Speaker 2: it with debt and deficits, et cetera. And I saw
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  Speaker 2: something in the paper this morning and I hadn't realized
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  Speaker 2: it was quite so high. That German welfare payments including
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  Speaker 2: pensions are about thirty percent of GDP and that clearly unsustainable.
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  Speaker 2: And you look at a similar situation in the UK
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  Speaker 2: and France and do you think, well, the fiscal position
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  Speaker 2: of these countries is basically unsustainable even and you know,
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  Speaker 2: we might say previously we used to say unsustainable in
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  Speaker 2: the long term, Now we're going there kind of unsustainable
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  Speaker 2: in the short term. So these have got to be
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  Speaker 2: massive drags on growth and the ability of any of
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  Speaker 2: these countries to move forward unless they see massive gains
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  Speaker 2: in productivity.
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  Speaker 3: But I think I think one thing that is very
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  Speaker 3: important Twilight is demographics. We still have the idea that
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  Speaker 3: demographics in the US is great and in Europe is bad.
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  Speaker 3: When you look at the employment rate in euro US
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  Speaker 3: is pretty much the same. Population growth in the US
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  Speaker 3: is pretty much growing in line with Europe, mainly because
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  Speaker 3: again a decline in immigration. So again it's not that
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  Speaker 3: we're not saying that Europe will boom. What we are
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  Speaker 3: saying is that this gap that we have seen in
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  Speaker 3: the past we shrink. And again you're totally right in Europe,
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  Speaker 3: it's not. You know, what Europe need is first of all,
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  Speaker 3: a change in the mindset was resk taking and this
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  Speaker 3: requires also a change in the mindset exactly of European
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  Speaker 3: economic agents and an investor. It's not just you know,
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  Speaker 3: a few points of fiscal definity that can make a difference.
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  Speaker 3: But you know, the trend I think is in place.
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  Speaker 3: I think Europe is aware of the weaknesses. I think
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  Speaker 3: is moving very slowly. The US, i'm afraid, is going
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  Speaker 3: the opposite direction. And and I think again the crackdown
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  Speaker 3: on immigration is one I think and the fact that
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  Speaker 3: you know, we are even talking about the independence for
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  Speaker 3: this example of the fact, well the US is not
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  Speaker 3: in a way in such a solid place it was
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  Speaker 3: just a few years ago, and that's the difference. I
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  Speaker 3: think that that is for US very relevant.
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  Speaker 2: Is there evidence yet that the crackdown on immigration is
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  Speaker 2: affecting growth.
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  Speaker 3: We have seen a significant weakening on deliberate market in
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  Speaker 3: the US, but it's very difficult to say this it
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  Speaker 3: is down to immigration, is probably down to the impact
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  Speaker 3: of tariffs, and also the fact that the US economy
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  Speaker 3: has been very strong for five years, so a phase
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  Speaker 3: of weakness is inevitable. No, I don't think that it's
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  Speaker 3: too early to say there is an impact on that.
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  Speaker 3: But you know, the US, this access the ES was
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  Speaker 3: based on human capital and in few immigration faults and
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  Speaker 3: universities are not let's say US free to operate as
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  Speaker 3: before for a number of reasons. Well, you know, it's
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  Speaker 3: just an impact on on productive and impact on growth.
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  Speaker 2: But I guess you could still afire. We're still looking
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  Speaker 2: for a way to explain the future for the US
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  Speaker 2: and say well, exceptionalism is still there. They're very much
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  Speaker 2: ahead of US and of Europe in terms of AI
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  Speaker 2: for example, and in terms of the cheap energy required
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  Speaker 2: to drive the AI revolution, So that is something that
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  Speaker 2: still remains specific to the US.
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  Speaker 3: There is no question that the US is economically more competitive
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  Speaker 3: than Europe. You mentioned the cost of energy is totally right,
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  Speaker 3: but bear in mind that we are going into a
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  Speaker 3: phase where a lot of energy we come from basically
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  Speaker 3: solar panels, and that would be renewables, which obviously makes
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  Speaker 3: Europe less dependent on energy import and make the US
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  Speaker 3: in a way less exceptional because if all the energy
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  Speaker 3: is produced locally solar panel for example, then obviously the
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  Speaker 3: energy dominus the US become less less relevant. On tech,
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  Speaker 3: you're totally right. The question though on tech is that,
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  Speaker 3: especially what's going on AAAI, there is a clear advantage
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  Speaker 3: of the US in terms of spending. We see that
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  Speaker 3: on a daily basis. The question though, is that is
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  Speaker 3: this kind of all this investment pay off or not
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  Speaker 3: is the US and all US overspending on AI. This
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  Speaker 3: is really an open question. I don't have an answer
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  Speaker 3: for that, but there is no question that if there
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  Speaker 3: is one element that makes the US still an economy
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  Speaker 3: which is much more kind of than am the Europe.
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  Speaker 3: So the right is tech, but it's not you know,
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  Speaker 3: it's not just tech. When you look also the US market,
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  Speaker 3: right or the global market, tech is only only twenty
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  Speaker 3: seven percent of the market. It's not one hundred percent.
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  Speaker 3: There are other elements if you have to take into consideration.
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  Speaker 3: But yeah, we don't expect the tech gap between US
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  Speaker 3: and Europe to close, but maybe again would be less dramatic,
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  Speaker 3: less visible than it is now.
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  Speaker 2: So you say, the question, the real question is whether
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  Speaker 2: all this investment in AI pays off or not? What
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  Speaker 2: is what is your view there there's a great AI
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  Speaker 2: bubble that's going to collapse and leave a lot of
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  Speaker 2: people like it' slightly red faced or something else.
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  Speaker 3: Well, you know, there is some elements of a bubble.
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  Speaker 3: First of all, bubbles also need a macrocroonomy outlook the
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  Speaker 3: allow bubble to happen, typically abundant liquidity, financial deregulation, and
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  Speaker 3: a strong kind of narrative. I think probably all three
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  Speaker 3: are there. I don't think the evaluation is so extreme
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  Speaker 3: for AI stocks to say, well, that's a bubble. But
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  Speaker 3: it's almost inevitable when you have such a big increase
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  Speaker 3: in spending, some of this money will be wasted. It's
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  Speaker 3: inevitable that happened all the time. I don't know when
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  Speaker 3: this will materialize. There could be a second wave. It
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  Speaker 3: was with the internet. You know, you have a bubble,
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  Speaker 3: then you have a period of in a thousand, then
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  Speaker 3: there was the real kind of boom also for the
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  Speaker 3: economy later on. No, look, I am a strong believer
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  Speaker 3: in A. I my worry here is that what happened,
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  Speaker 3: for example, with deep sick, the risk is that I
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  Speaker 3: will be commody time is sooner rather than later. And
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  Speaker 3: so all this advantage the US has as a first
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  Speaker 3: mover will at the end not this disappear, but may
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  Speaker 3: be actually reduced. And this again, this is really what
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  Speaker 3: matters for financial returns, right, is the rate of change,
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  Speaker 3: not the level. And I think in this sense, I
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  Speaker 3: think I see that again this advantage of the US,
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  Speaker 3: even in tech, may not last forever, at least not
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  Speaker 3: in the same extent.
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  Speaker 2: Okay, so does that suggest to you that a large
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  Speaker 2: part of the US market is very overvalued?
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  Speaker 3: You know, we always think about tech talks, and you know,
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  Speaker 3: I think, what is I think not well known that Walmart,
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  Speaker 3: which is you know, it was actually an early adopter
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  Speaker 3: of A but Walmart is the biggest return in the world.
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  Speaker 3: Is not a tech company's trading and a higher multiple
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  Speaker 3: than Amazon costco is trading and a multiple or peer
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  Speaker 3: ratio of fifty start US more than thirty. So it's
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  Speaker 3: not just tech. Actually tech, when you look at the
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  Speaker 3: growth rates, I think it's almost fairly valued. Is part
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  Speaker 3: of the US market is I think, much more expensive,
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  Speaker 3: and nobody's talking about it. Again. It made down to
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  Speaker 3: a you know, too much liquidity in the system, too
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  Speaker 3: much optimism. Also the fact that, let's be very honest,
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  Speaker 3: some of these companies are incredibly good, incredibly efficient, and
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  Speaker 3: so maybe they deserve this kind of multiple when I
• 14:18
  Speaker 3: see kind of retailers start trading a fifty time for earnings.
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  Speaker 3: But I start to feel that it is a little bit stretched.
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  Speaker 3: So it's not just tech, it's the overall mark in
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  Speaker 3: the US, which I think is quite expensive. Considering the
• 14:33
  Speaker 3: gross is not five it's two five percent. If you're
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  Speaker 3: not in the nineties right when gross was five percent,
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  Speaker 3: inflation was one percent, is a very different environment which
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  Speaker 3: I think will require multiples and need to be lower
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  Speaker 3: than the current levels.
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  Speaker 2: It's interesting, isn't At first? I love that. I love
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  Speaker 2: the phrase a little bit stretched, which is a great
• 14:52
  Speaker 2: financial markets usemism for screamingly expensive, getat while you still can.
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  Speaker 2: So there are there will be an over lot of
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  Speaker 2: people and invested in the US. You think that because
• 15:02
  Speaker 2: they have a track of fund of some kind, they're diversified,
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  Speaker 2: so they feel that they're holding lots of different companies
• 15:08
  Speaker 2: and therefore they're diversified across the board. But of course
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  Speaker 2: they kind of not because they're still very overexposed to
• 15:14
  Speaker 2: the expensive end of the US. So it's one of
• 15:17
  Speaker 2: those occasions when the idea that you're diversified is untrue
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  Speaker 2: because you're effectively exposed to the same type of companies
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  Speaker 2: across the board.
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  Speaker 3: Yeah, and I think Marian, it's what is also important
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  Speaker 3: is that let's say you are European investors that invest passively,
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  Speaker 3: but you have almost seventy percent of your wealth in
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  Speaker 3: the US. You're taking on the evaluation risk but also
• 15:38
  Speaker 3: the currency risk, and you know you know what I mean,
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  Speaker 3: as we have seen it recently. So again we're not
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  Speaker 3: saying that the US talks are terrible. Not. What we
• 15:45
  Speaker 3: are saying is that, especially if you're not in US
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  Speaker 3: investor holding so much in a market which is heavily concentrated,
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  Speaker 3: it's expensively expensive currency with all the political risks, I
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  Speaker 3: think is a risk that is not worth taking. And
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  Speaker 3: so yeah, that we have is to reduce these explosions
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  Speaker 3: on term in the US and adding to either domestic stocks,
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  Speaker 3: but even the bond market. Obviously very few people want
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  Speaker 3: to invest in, and I think it's almost time to
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  Speaker 3: reconsider that.
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  Speaker 2: So if you're moving money out of the US, and
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  Speaker 2: you're moving it, where where do you move into? I mean,
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  Speaker 2: is it still oky to by German stocks, by Spanish dogs?
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  Speaker 2: They've gone up so much over the last year, the
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  Speaker 2: UK slightly less, but nonetheless we've performed reasonably well. Where
• 16:46
  Speaker 2: where is the safest equity market to move into?
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  Speaker 3: Well, safest is a tricky one because we know that
• 16:52
  Speaker 3: when things go wrong, the correlation goes to one right,
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  Speaker 3: and this is this is one actually one of the
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  Speaker 3: reasons why investors still like the SMP We have stocked
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  Speaker 3: because we say, well, everything goes down, maybe I lose
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  Speaker 3: less in the US than in Europe. No, our view
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  Speaker 3: is that again it depends where you First of all,
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  Speaker 3: where you are, So let's say if you are in
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  Speaker 3: the UK, I think the choice for us pretty straightforward.
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  Speaker 3: You should invest and know that we discussed this before.
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  Speaker 3: You should invest a little bit more in UK stocks,
• 17:22
  Speaker 3: so in domestic stock similar for Europe, right, But also
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  Speaker 3: I think what our approach is is try to think
• 17:30
  Speaker 3: more inequal weighted terms. So let's say instead of having
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  Speaker 3: seventy percent in the US and thirty percent elsewhere, I
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  Speaker 3: think fifty percent, say in the US and fifty percent
• 17:41
  Speaker 3: no US. It makes sense. It really depends where you are.
• 17:44
  Speaker 3: If you are in the UK Switzerland, for example, you
• 17:47
  Speaker 3: should have probably more in the domestic stocks. You should
• 17:50
  Speaker 3: also add to emerging market where they're doing very well,
• 17:53
  Speaker 3: not because there is anything dramatic happening, just because the
• 17:57
  Speaker 3: dollar is getting weaker and the dollar will continue to
• 17:59
  Speaker 3: get weak, emerging market will rate. So again it's a
• 18:02
  Speaker 3: little bit of everything, but really depends on where you're from.
• 18:05
  Speaker 3: For UK investors, I think that's I think a good
• 18:08
  Speaker 3: time to invest in UK stocks. But we also have
• 18:11
  Speaker 3: the view that you should have a second look at
• 18:15
  Speaker 3: mid caps, small caps that have been a little bit
• 18:17
  Speaker 3: lagging even in the UK, and so they have I
• 18:21
  Speaker 3: think good valuation, the kind of I think a recent
• 18:24
  Speaker 3: outlook for earnings. So I think again diversification not for
• 18:28
  Speaker 3: the because the usual thing you have to diversify, know,
• 18:31
  Speaker 3: is the evaluation element. The market economy out look point
• 18:34
  Speaker 3: to a more diversified but let's see equally weighted kind
• 18:40
  Speaker 3: of approach.
• 18:41
  Speaker 2: Yeah, so diversify and part across the valuations and the UK.
• 18:44
  Speaker 2: You said, put a little bit more into the UK.
• 18:47
  Speaker 2: But the UK is really very cheap relative to most
• 18:49
  Speaker 2: other markets still, so it would seem a perfectly reasonab place.
• 18:53
  Speaker 3: I mean, evaluation is not everything, right, well, it's quite
• 18:55
  Speaker 3: a lot everything, but you know it's the UK market
• 18:59
  Speaker 3: trade at the same level of emerging markets right in
• 19:01
  Speaker 3: term before earn. Now you can say there is less
• 19:04
  Speaker 3: growth and you can emerging market, that's true, but the
• 19:06
  Speaker 3: risk still is still less. So I do think that
• 19:10
  Speaker 3: again investors should focus a little bit more on their
• 19:13
  Speaker 3: domestic market and also move away from just simply investing
• 19:17
  Speaker 3: in large caps. Look at me caps. There are some
• 19:20
  Speaker 3: great stocks there, even small caps. So that's that's the
• 19:22
  Speaker 3: strategy that we have.
• 19:24
  Speaker 2: Okay, let's go back then to the bond market. You're say,
• 19:26
  Speaker 2: no one really feels most like investing in bones at
• 19:28
  Speaker 2: the moment, which is fair. They kind of don't. So
• 19:31
  Speaker 2: what's the reasoning.
• 19:34
  Speaker 3: There, Well, you know, a few years ago, I remember
• 19:39
  Speaker 3: you remember that the assumption was there is nothing safer
• 19:43
  Speaker 3: than German bones, you remember, right, Yeah, Well, you know,
• 19:46
  Speaker 3: in real terms you would have lost almost seventy percent
• 19:49
  Speaker 3: in a couple of years. So now if you are investors,
• 19:52
  Speaker 3: and you know and and you lose so much on
• 19:56
  Speaker 3: an asset class that's supposed to be safe, well I
• 19:59
  Speaker 3: can understand they're quite investor reluctant to be invested in it.
• 20:04
  Speaker 3: But again, it's not just valuation. But let's look at valuation, right,
• 20:08
  Speaker 3: what is the anchor? What is the right value for
• 20:11
  Speaker 3: you know, a domestic government bonds? I mean historically but
• 20:13
  Speaker 3: also in theory, the yield that you get from let's
• 20:18
  Speaker 3: say guilds or bones or treasure should be more or
• 20:20
  Speaker 3: less in live with trend growth. This is the valuation
• 20:24
  Speaker 3: anchor for bonds. And you know a few years ago
• 20:27
  Speaker 3: when boones was negative, very close to zero, close to zero,
• 20:31
  Speaker 3: clearly there was an evaluation program. And now we're in
• 20:35
  Speaker 3: a situation where roughly speaking, roughly speaking, bone yields, government
• 20:39
  Speaker 3: bond yields are more or less in line with the
• 20:42
  Speaker 3: trend growth rate of their respective economy. So you ask
• 20:46
  Speaker 3: close to four percent. You know in the UK is
• 20:48
  Speaker 3: all higher because of inflation. So we are in a
• 20:50
  Speaker 3: position where you know, bonds are not particularly cheap, but
• 20:54
  Speaker 3: they're not as expensive and ecreites are not as good.
• 20:58
  Speaker 3: To say, well adjust in that inequities forget about bonds.
• 21:02
  Speaker 3: You have to be selective, though. I think there is
• 21:04
  Speaker 3: I think value guilds very good value, and I think
• 21:07
  Speaker 3: especially in inflation protected bonds because if you're wrong on
• 21:10
  Speaker 3: inflation and inflation goes through the roof, at least we
• 21:13
  Speaker 3: have the inflation protection if you go into a recession,
• 21:16
  Speaker 3: which is possible globally, well, inflation protected bones are bones,
• 21:20
  Speaker 3: so they will all perform. So we like inflation protective bonds.
• 21:23
  Speaker 3: We also like credit because you know, we have spreads
• 21:27
  Speaker 3: are very very close to historical law, but the balance
• 21:30
  Speaker 3: sheet of the private sector or company is incredibly strong,
• 21:34
  Speaker 3: and so we do believe that, you know, there is
• 21:36
  Speaker 3: still value in credit, especially in Europe and emerging markets.
• 21:40
  Speaker 3: You know, emerging markets this year done fifteen percent emerging
• 21:43
  Speaker 3: market debt. Why because again they tend to benefit from
• 21:48
  Speaker 3: from the dollar. Inflation is folding great cuts and good valuation.
• 21:53
  Speaker 3: You know, Brazilian bonds will give you a real, kind
• 21:56
  Speaker 3: of real close to ten percent. So I think that
• 21:59
  Speaker 3: investors should forget the past. In a way. The reason
• 22:02
  Speaker 3: why bond of so much was a combination of what
• 22:06
  Speaker 3: incredibly expensive saluation because of QE. If you want an
• 22:10
  Speaker 3: inflation shocked then nobody expected. Now inflation may remain sticky,
• 22:14
  Speaker 3: but I don't think we're going to see what was
• 22:16
  Speaker 3: twententy twenty two in terms of inflation spike. And you
• 22:19
  Speaker 3: know we're getting older, all of us. And when again,
• 22:22
  Speaker 3: you need income when you invest in US equities, you
• 22:25
  Speaker 3: know you may get the upside from capital gains, but
• 22:28
  Speaker 3: you don't get any income. So I think there is
• 22:30
  Speaker 3: an underlying demand for bonds of fixing and coming from aging,
• 22:34
  Speaker 3: which I think I'm afraid we cannot change. And this
• 22:37
  Speaker 3: is this is I think one of the factors which
• 22:39
  Speaker 3: I think we support bond markets going forward.
• 22:42
  Speaker 2: And what's the risk to that view? What would make
• 22:45
  Speaker 2: inflation suddenly go much higher than you might expect?
• 22:49
  Speaker 3: Well, I think you know what is amazing of what
• 22:51
  Speaker 3: we have seen in the past few years is that
• 22:53
  Speaker 3: we were all shocked by this increase in inflation, right
• 22:56
  Speaker 3: we were, Even if looking back you may say, well,
• 22:59
  Speaker 3: it was obvious, right, big increase in demand loss apply
• 23:02
  Speaker 3: a lot of money, but it's very easy to say,
• 23:05
  Speaker 3: you know, looking back, what hasn't changed is that inflation expectations,
• 23:10
  Speaker 3: the long term inflation expectations hasn't changed. So if you look,
• 23:14
  Speaker 3: we look at seven eight measured inflation expectations in the US,
• 23:18
  Speaker 3: and apart from the consumer expectations, they tend to be,
• 23:21
  Speaker 3: by the way, the one that tend to be more
• 23:23
  Speaker 3: less reliable in the long term. All the market based
• 23:28
  Speaker 3: measure of expecting infliction in the US are all between
• 23:30
  Speaker 3: two point one and two point five, so they haven't moved.
• 23:34
  Speaker 3: And I think what can change completely the picture is
• 23:37
  Speaker 3: that if there is a second wave of inflation, potentially
• 23:40
  Speaker 3: because the FED loser is independence, then you start to
• 23:44
  Speaker 3: see a significant inflation premium being priced in the bond market.
• 23:48
  Speaker 3: For now, you don't really see it. You don't see
• 23:50
  Speaker 3: it because central banks they have maintained their inflation credibility,
• 23:56
  Speaker 3: but this can go. I think what is going on
• 23:59
  Speaker 3: in the US. I think it's particularly dangerous in a way.
• 24:02
  Speaker 3: Right now the FED is cutting rates, that's fine, but
• 24:06
  Speaker 3: the idea that potentially the White House can dictate the
• 24:09
  Speaker 3: monetary policy at some point. Well, that obviously is very
• 24:13
  Speaker 3: dangerous for the bone mark. That's to me is the
• 24:16
  Speaker 3: risk that the anchoring of inflation expectation in the US
• 24:20
  Speaker 3: is the risk number one for bond markets globally.
• 24:24
  Speaker 2: Is that. Do you think the reason why the goal
• 24:26
  Speaker 2: price is so high? Is it that concern of the
• 24:30
  Speaker 2: risk of high inflation or is it simply to do
• 24:33
  Speaker 2: with central bank buying.
• 24:36
  Speaker 3: No, it's not just the central bank buying. I think
• 24:39
  Speaker 3: the critical factory here is, Yes, investors still want to
• 24:43
  Speaker 3: have an edge against the risk over inflation. There is
• 24:46
  Speaker 3: still demand for real assets, and gold offer pretty much
• 24:51
  Speaker 3: all of them, even bit coin in a way that's
• 24:54
  Speaker 3: going to happen party for the same reason. So I
• 24:56
  Speaker 3: think there is demand for real acids and because they really,
• 25:01
  Speaker 3: let's be very honest, your political risk has sitting incredibly high,
• 25:04
  Speaker 3: and so you look around and you know gold is
• 25:07
  Speaker 3: probably one of the few options that you have, and
• 25:09
  Speaker 3: you know, we are overweight gold, They've been overweight gold. Yes,
• 25:13
  Speaker 3: the price is very elevated in nominal and real terms,
• 25:17
  Speaker 3: but as long as the as the fundamental study hasn't changed,
• 25:21
  Speaker 3: I think that the trend is still higher and I
• 25:23
  Speaker 3: think that's what we have been saying in our in
• 25:26
  Speaker 3: our second outrook this year.
• 25:28
  Speaker 2: Yeah, look, what do you mean by overweight gold? Overweight
• 25:31
  Speaker 2: relative to what?
• 25:33
  Speaker 3: Yeah? I think I think you know, it's a good
• 25:34
  Speaker 3: question because you know, when you ask the portfolio, there's
• 25:37
  Speaker 3: a lot of surveys and what what is your weight
• 25:40
  Speaker 3: in gold in your portfolios? You always get numbers between
• 25:43
  Speaker 3: four and five percent, sometimes three. This is kind of
• 25:46
  Speaker 3: let's say, the average weight of gold in in institutional
• 25:52
  Speaker 3: funds if you want, But also what in general if
• 25:55
  Speaker 3: you look at the market as well, this is kind of, uh,
• 25:58
  Speaker 3: the implied weight of gold in the total in the
• 26:02
  Speaker 3: global if you want the market, right, we have actually
• 26:05
  Speaker 3: close to ten percent in our fund, So in that sense,
• 26:07
  Speaker 3: we have much more than the average portfolio manager has.
• 26:11
  Speaker 3: Again based on the fact that we expect the dollar
• 26:13
  Speaker 3: to depreciate, to really interest rate to be weaken and
• 26:16
  Speaker 3: these geobilitical risks will not go away. So I think
• 26:19
  Speaker 3: I still believe the goal that's abside from here.
• 26:22
  Speaker 2: Okay, and you say that that coin fulfilled the same role,
• 26:25
  Speaker 2: does that have a place in a retail investors portfolio?
• 26:28
  Speaker 3: Do you think, well, that's a tricky question. Mary. You
• 26:30
  Speaker 3: know that I'm not a big fan of bitcoin.
• 26:32
  Speaker 2: Oh I didn't know that.
• 26:33
  Speaker 3: I respect the market. I respect the market. I still
• 26:36
  Speaker 3: don't see an obvious economic logic beyond b coin, but
• 26:40
  Speaker 3: the coin has proved to be incredibly resident with higher
• 26:44
  Speaker 3: inflation fed acting rates and all these kind of things. Well,
• 26:48
  Speaker 3: we know that. You know, in the US, roughly twenty
• 26:50
  Speaker 3: five percent of investors on the Rector Director is some
• 26:54
  Speaker 3: kind of cryptocurrency. So crypto has become more accepted. And
• 27:00
  Speaker 3: what I'm saying is that we don't really invest in
• 27:02
  Speaker 3: bigcoin right now. We prefer gold. But obviously, especially if
• 27:05
  Speaker 3: you're much younger than me, I can understand that you know,
• 27:08
  Speaker 3: bigcoin could be an alternative, but I can see the
• 27:10
  Speaker 3: logic of those that are willing to have a very
• 27:14
  Speaker 3: small share of their wealth in bitcoin.
• 27:17
  Speaker 2: Very small. Okay. One of the things that you have
• 27:20
  Speaker 2: on your list is sticking with it roughly in this topic.
• 27:22
  Speaker 2: One of the things on your list of things that
• 27:24
  Speaker 2: we will see happen in the Great Convergence to twenty
• 27:27
  Speaker 2: twenty five onwards is asset tokenization. Will you just explain
• 27:30
  Speaker 2: to us what does you mean by that and how
• 27:32
  Speaker 2: that will affect us.
• 27:33
  Speaker 3: You know, when we look at the out over the
• 27:36
  Speaker 3: next five years or ten, it's not just you know,
• 27:39
  Speaker 3: equitis bond, but it's also important to understand what's going
• 27:42
  Speaker 3: on in the industry. Right, we had you know, the ETFs,
• 27:46
  Speaker 3: we had bigcoin, and so we're trying to see who
• 27:49
  Speaker 3: would be the next thing. So I think asset organization
• 27:52
  Speaker 3: is going to be probably the big thing for the
• 27:54
  Speaker 3: next five years. It's already happening now is early stages,
• 27:58
  Speaker 3: but I can see this hell helping especially kind of
• 28:02
  Speaker 3: investor to take positions in asset classes that are less liquid.
• 28:05
  Speaker 3: So I can see the positive side of that. There
• 28:08
  Speaker 3: is obviously a risk again of bubbles and things, but
• 28:12
  Speaker 3: again we have to embrace innovation be scared about it.
• 28:16
  Speaker 3: And I think this is probably the next big thing
• 28:18
  Speaker 3: after basically ETFs, and if one blockchain and cryptocurrency, that's
• 28:23
  Speaker 3: for us. What will be the big thing for the
• 28:27
  Speaker 3: next five to ten years.
• 28:28
  Speaker 2: When you say it, love us get exposed to less
• 28:30
  Speaker 2: liquid assets or help ordinary investors get exposure to less
• 28:33
  Speaker 2: liquid acids. Are you thinking about private markets?
• 28:35
  Speaker 3: Yeah, exactly, be private marketing. It's not only that, right,
• 28:38
  Speaker 3: I mean, because now as the organization will affect pretty
• 28:41
  Speaker 3: much everything. What I can see that this is probably
• 28:43
  Speaker 3: the air which is most interesting, could be private market
• 28:47
  Speaker 3: are everything, a lot of asset classes that for a
• 28:50
  Speaker 3: number of reasons are very difficult to get exposed to.
• 28:54
  Speaker 3: And this week again we increase significantly the investor base
• 28:58
  Speaker 3: if you want, of a lot of these things make
• 29:00
  Speaker 3: also transaction much faster. As you know, again early stages,
• 29:04
  Speaker 3: but things can go very quickly, and I'm pretty sure
• 29:07
  Speaker 3: in five years time we will be here again Mary
• 29:09
  Speaker 3: in talking about and what has the implication? Again early stages,
• 29:14
  Speaker 3: but we are very confident this is the next big.
• 29:16
  Speaker 2: Thing interesting And would it make you would it make
• 29:19
  Speaker 2: you uncomfortable to feel that ordinary private investors were ending
• 29:23
  Speaker 2: up via somethings such as as a organization or all
• 29:26
  Speaker 2: the other ways that are being discussed at the moment,
• 29:28
  Speaker 2: long term, at the funds, et cetera, that ordinary investors
• 29:31
  Speaker 2: were ending up with quite high levels of exposure to
• 29:33
  Speaker 2: unlisted companies.
• 29:35
  Speaker 3: We have to strike a balance between the regulation and
• 29:38
  Speaker 3: protection of the investor. Is very difficult because technology is
• 29:41
  Speaker 3: going very fast, regulation is always falling behind. I think
• 29:45
  Speaker 3: there is a risk, there is no question about it.
• 29:47
  Speaker 3: As there is a risk for cryptocurrencies, and I also
• 29:51
  Speaker 3: feel that there would be at some point some financial
• 29:53
  Speaker 3: accident that will make us question. You know, all this,
• 29:58
  Speaker 3: but that's the so story of financial markets, you know,
• 30:02
  Speaker 3: it's and I think it's very important also to alight Merin.
• 30:06
  Speaker 3: Then if you're right to expect very low returns in
• 30:10
  Speaker 3: the next five to ten years, all these kind of
• 30:13
  Speaker 3: financial innovations will help potentially to increase the rate of
• 30:18
  Speaker 3: return of what we can achieve in our savings. But
• 30:21
  Speaker 3: that's really important. So every small thing matters in this sense.
• 30:24
  Speaker 2: Yeah, Although interestingly, if you can use tokenization trading tokens
• 30:29
  Speaker 2: that represent parts of companies or assets or whatever, if
• 30:32
  Speaker 2: you can use tokenization to make the ill liquid liquid,
• 30:35
  Speaker 2: it might help us significantly with price discovery. For example,
• 30:38
  Speaker 2: in private equity, where price discovery because of the very
• 30:41
  Speaker 2: long term holdings and the illiquidity, can be quite difficult.
• 30:44
  Speaker 2: If you suddenly you can trade your your private equity
• 30:46
  Speaker 2: stake with tokens, we may find that the returns to
• 30:50
  Speaker 2: private equity are slightly different, possibly lower, then we might
• 30:53
  Speaker 2: have felt previously.
• 30:54
  Speaker 3: Don't forget that. Yeah, we talked about this. Actually I
• 30:57
  Speaker 3: mentioned myself but I think the ac organization is happening
• 31:00
  Speaker 3: also on mutual funds, on bond so it's not just
• 31:04
  Speaker 3: for the liquid acid. They say, one area where I
• 31:06
  Speaker 3: think I can see the biggest potential, And yeah, we
• 31:10
  Speaker 3: do believe that investors are probably still, at least individual
• 31:13
  Speaker 3: investors under invested in private assets, especially private debt. But
• 31:17
  Speaker 3: again we have to be very careful because I think
• 31:19
  Speaker 3: this is an asset, an area where you need the expertise,
• 31:23
  Speaker 3: and I think investing, you know, even passively in a
• 31:26
  Speaker 3: way doesn't make a lot of sense for us. So
• 31:29
  Speaker 3: I think it's an area where we have to look
• 31:30
  Speaker 3: at all.
• 31:31
  Speaker 2: Right, anything we've missed, do you think, Luca, anything that
• 31:35
  Speaker 2: we must tell people that we haven't told them.
• 31:37
  Speaker 3: Yeah, something, it's interesting, right, we didn't talk about China,
• 31:41
  Speaker 3: and this is something that when I need our clients,
• 31:44
  Speaker 3: I'm always surprised by the fact China was for a
• 31:46
  Speaker 3: long time. Maybe not the first question, but the second question,
• 31:49
  Speaker 3: what's going on in China? A cheap And I'm wondering
• 31:54
  Speaker 3: if this lack of interest in Chinese because investors, given
• 31:58
  Speaker 3: what's going on, especially on the refront, they effectively treat
• 32:02
  Speaker 3: China as pretty speculative, potentially and investable because simply they
• 32:09
  Speaker 3: don't see a lot of potential there. And it's a
• 32:13
  Speaker 3: tricky one because if you look at the performance of
• 32:16
  Speaker 3: Chinese tech companies this year has been fantastic. China is
• 32:20
  Speaker 3: not booming. In fact, the latest data has been very,
• 32:22
  Speaker 3: very weak. But I think after a few years off
• 32:25
  Speaker 3: I think of political and policy mistakes, I think China
• 32:29
  Speaker 3: is slowly going into the right directions try to recreate
• 32:34
  Speaker 3: a more business friendly climate. I think in some areas
• 32:37
  Speaker 3: China as well out of the US in a lot
• 32:40
  Speaker 3: of areas. So I started to think, and China trades
• 32:44
  Speaker 3: thirteen times forward earnings, right, So I'm just wondering if
• 32:48
  Speaker 3: this lack of interest is because of the uncertainty around
• 32:52
  Speaker 3: targets or it's something more secular. And I do believe
• 32:55
  Speaker 3: and that we believe that China being the second biggest
• 32:58
  Speaker 3: economy in the world, you cannot just stay out of China,
• 33:03
  Speaker 3: you know, obviously, and you can invest in possibly you
• 33:06
  Speaker 3: need to look at which sectors get the support from
• 33:09
  Speaker 3: the government. You have to be more tactical in nature,
• 33:11
  Speaker 3: you have to be there on the ground. But I
• 33:14
  Speaker 3: do believe that emerging markets in China may have they
• 33:18
  Speaker 3: may kind of become popular again, and hopefully this will happen,
• 33:23
  Speaker 3: not because the US is doing very badly, but because
• 33:27
  Speaker 3: they're doing the reforms, the things that I think they
• 33:30
  Speaker 3: should do. So I think it's there's something that to me,
• 33:33
  Speaker 3: it's again surprising, this lack of interest, apparent lack of
• 33:37
  Speaker 3: interest in China overall, not only in Chinese as but
• 33:40
  Speaker 3: also in the Chinese economy. It seems like now with
• 33:43
  Speaker 3: tarists is a completely different world. It doesn't really affect us,
• 33:46
  Speaker 3: and it's wrong because it's such a big part of
• 33:48
  Speaker 3: the global economy that you have to look at China
• 33:52
  Speaker 3: as well.
• 33:53
  Speaker 2: It's interesting, is a conversation that comes up quite a
• 33:55
  Speaker 2: lot on the podcast. But it's so you know, and
• 33:57
  Speaker 2: I think such a binary conversation. For half the people
• 34:00
  Speaker 2: it's as well, that's an investable there we won't be
• 34:03
  Speaker 2: doing with that. And for the other half as well,
• 34:04
  Speaker 2: it's very cheap, so you know, you're compensated, but it's
• 34:07
  Speaker 2: not quite so cheap anymore after the performance of the
• 34:10
  Speaker 2: tech sector of the last year, isn't.
• 34:12
  Speaker 3: Yeah, And to be honest with you, you know, when
• 34:15
  Speaker 3: you look at the tarist thing, it's incredibly difficult, right,
• 34:19
  Speaker 3: we don't know if the tar will be ten percent
• 34:21
  Speaker 3: or one hundred percent. It's incredibly difficult. But again that's
• 34:24
  Speaker 3: normally where the good money has been made. If you
• 34:28
  Speaker 3: always wait to know everything, well, then obviously we'll be
• 34:32
  Speaker 3: already in the price. The fact that the Chinese assets
• 34:34
  Speaker 3: are doing very well, to me, is already a sign
• 34:38
  Speaker 3: that probably the worst of the tarist is behind us.
• 34:40
  Speaker 3: The market is feeling that the Trump administration will kind
• 34:45
  Speaker 3: of find a compromise that actually is not that I'm
• 34:49
  Speaker 3: bad for China, and I think the market is already
• 34:51
  Speaker 3: reacting to that.
• 34:53
  Speaker 2: So there is one last thing I want to ask you.
• 34:54
  Speaker 2: What are you reading that's interesting you might recommend to
• 34:56
  Speaker 2: our reader.
• 34:57
  Speaker 3: I'm reading a book on the Story of Ideas, which explore,
• 35:02
  Speaker 3: you know, the philosophical aspect of equality, justice and democracy.
• 35:08
  Speaker 3: And I think for me, you know, after a long
• 35:10
  Speaker 3: day at work, you want to have something different. I
• 35:13
  Speaker 3: struggled to read books on economics on the tube after
• 35:17
  Speaker 3: you know, ten hours of work.
• 35:18
  Speaker 2: Yeah, no, fair enough. Can you remember the author of
• 35:21
  Speaker 2: your book, History of Ideas?
• 35:23
  Speaker 3: Yes, someone called David ran Siman, and it's called the
• 35:29
  Speaker 3: History of Ideas. So it's a very good book, very good.
• 35:33
  Speaker 2: Book, excellent. We'll all read that. Look.
• 35:36
  Speaker 3: Thank you, very muche, Thank you, thanks for.
• 35:43
  Speaker 2: Listening to this week's Marin Talok's Money. If you like
• 35:45
  Speaker 2: our show, rate review, and subscribe wherever you listen to podcasts,
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  Speaker 2: I keep telling your questions or comments The Merrin Money
• 35:50
  Speaker 2: at Bloomberg dot net. You can also follow me and
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  Speaker 2: John on Twitter or x. I'm at Marinus w and
• 35:56
  Speaker 2: John is John Underscore Step. This episode is hosted by
• 35:59
  Speaker 2: Me Maren Sumset Web. It was produced by Samasadi and
• 36:02
  Speaker 2: Moses and sound designed by Blake Naples and Kelly Gary.
• 36:06
  Speaker 2: Special thanks to Luca Paulini.