Speaker 0:
welcome to Asset T. V's Global Multi Asset panel with me, Joanne Baham. Today it's quite exciting. I'm sitting here in Cape Town, filming while I have a whole host of panellists in London, and I'm really looking forward to it. So let's name them. We're sitting with Michael Devereaux, multi asset portfolio manager at Schroder

Speaker 0:
Common McKenzie Portfolio manager, Diversified Strategies Team within multi asset strategies, Black Rock and Peter Vincent, regional head of client investment Solutions. EM. A. Franklin Templeton Investment Solutions. Welcome to you three. And I'm really jealous. I'm not in the studio with you.

Speaker 0:
Um, but let's have some fun today because global multi acid is by far my favourite, most favourite panel. And I also think you guys are probably the best jobs in asset management because you're not wed to any one asset class or any kind of idea. So with that as a backdrop, Michael, I'm gonna kick off with you.

Speaker 0:
Inflation, inflation, inflation. It's all we've been talking about for the last couple of years. What is your view on the current inflation story and and where do you see it going?

Speaker 0:
Great topic to start off on Joanne. So inflation obviously was very frightening. Um, in 2022 this year, I think the base case for most people would be to expect a mechanical can climb down in inflation, at least towards the second half of this year. I think the the path of inflation in the first half is very straightforward. It's coming down because of base effects. And because we just had such a strong year in in 2022

Speaker 0:
I think where we go from 2020. Sorry, the back half of this year depends on how, uh, how quickly the drag from, I say, say, tightening financial conditions, higher rates, how quickly that comes to hurt economic growth. I think so far there's no um no suggestion from the data that inflation will be anywhere near central bank targets even at the second half of this year.

Speaker 0:
Um, I think it's more likely we will bottom easily, somewhere above 2%. Um, and then we will have to be extremely watchful for whether there is a that dreaded, uh, double dip and then increase again in inflation.

Speaker 0:
Or actually, inflation stays at that lower level somewhere somewhere above 2%. I think going forward. Then in 2024 there is a bigger question of well, can Can central banks live with a higher level of inflation and back off on tightening financial conditions? Or actually, um, they're going to press, press the pedal to the metal and crush the economy. I think it's highly likely it's the former.

Speaker 0:
OK, Peter, that's a backdrop. You know, inflation remains still tricky to call in the second half, and a lot of it's relying on economic growth, slowing, um, to Michael's point. Where do you see inflation going? Do you see the the Fed control inflation? Or do you think the Fed will say we're gonna sit with higher inflation numbers more like 3%? What do you think the Fed is thinking?

Speaker 0:
I think so. I mean, I broadly agree with with with what Michael said, and I and certainly you know, through through to June, probably just the disinflation, just because of base effects has relatively easy. So if I'm going from, you know, a headline of 10 to something like four, that's pretty. You know, that's the That's the easy part. Getting from 4 to 2 is gonna be is gonna be the challenge, and I I I mean, I think the, um you know, I think that the Fed is,

Speaker 0:
for now laser focused on that inflation number, and I I I think the I think the market is probably underestimating the Fed's determination to to to stick to that target. Um, So I you know, I do think that the market is generally a bit dovish. Um, but, you know, and we see that the, uh, the Fed

Speaker 0:
maybe, you know, slowing, slowing the economy. Um,

Speaker 0:
you know, it's a very fine balance. You know, I think a soft landing is almost impossible. Um, but we think probably a AAA relatively normal recession. Uh, maybe with a sort of a 1% contraction coming, um, towards the end of this year beginning of next year, Um, and then the the fed being able to manage that I don't think they're going to be overly accommodative. I don't think they're going to be quick to cut. Um, so we see a relatively sort of normal recession,

Speaker 0:
Um, maybe lasting most of next year, maybe 34 quarters, um, and then and then a gradual recovery. So we we think the feds sort of. At the moment, inflation is the key focus, and we think they can probably manage that that path. But we not without forcing a, you know, a minor recession.

Speaker 0:
OK, so Colin, let me ask you a question. Now, Soft Landing is somebody on Twitter who is the most lived place in the world at the moment. Do you think it's possible? Can we achieve a soft landing, or is it just ridiculous?

Speaker 1:
Well, I think it's clearly possible, as Michael and Peter have both said, and and I agree inflation has come down quite a long way, I think. A year ago it seemed very unlikely that we would achieve what economists call a soft landing. So this is inflation going from these very, very high numbers we had last year 89 10% coming back down to target without causing a recession. At the same time, this is very hard to engineer, but so far the signs have been relatively promising.

Speaker 1:
Headline. Inflation in most developed markets has halved since the peaks last year, and core inflation within that has also come down. The bad news, I think, is that most of the disinflation that Peter is referring to just now has come through more volatile components of inflation so through energy prices through food prices.

Speaker 1:
And those can only take inflation down So far. So literally 15 minutes ago, we had the inflation numbers released in the United States, and they show that, um, what's called core C p I. So excluding volatile components, is still running at 0.4% month on month. Now that's too high for the Federal Reserve. So I think the early stages of engineering that soft landing do seem to have happened. Um, but I think the latter bit, um, bringing,

Speaker 1:
uh, bringing the rocket back down onto the pad successfully. Uh, that's the hardest bit. And that's bringing that core inflation back down to the 0.2% or so. That's going to be consistent with, uh, with inflation targets. So we've had some success in that so far, and I think central banks deserve some some credit for the success they've had so far. But the hardest bit is still in front of us. OK,

Speaker 0:
so why do markets care about inflation? They care about inflation because they care about interest rates.

Speaker 0:
So, Michael, let's go back to kind of what we've been discussing here. And you're all saying, Broadly speaking, the easy part's been done. The hardest part is still to come in terms of where inflation is going

Speaker 0:
and just take on a question comment that Peter just made, you know, the markets, perhaps being too optimistic about Fed cuts. What's your opinion on what the central bank can do? Do you think the Fed can cut as much as the markets pricing in who's right, the Fed or the markets in terms of interest rate policy right now?

Speaker 0:
Yeah. So a lot of people have this impression that the market, you know, leads the Fed and the market is usually right. But I saw this great chart yesterday showing you, you know, at any point in time over the last couple of years, what has the market been pricing in for the Fed? And it's also pretty outrageous how much the market has wrong, Um, as to what the Fed will do next. They call it a Medusa like chart because you get all these, um,

Speaker 0:
you get these upshots in rate increases compared to where the Fed is doing. So it's really out there. Um, I also want to thank Conan for telling me what the c p I numbers were because that was something that was heavily on my mind, Uh, for most of this day as well. And, of course as Conan said, the fact that core inflation is still at 0.4% month on month is far too high for the Fed's comfort.

Speaker 0:
But I may be a bit more of an optimistic take on this. Is that that is that was well within expectations. Uh, for core C p I. This, uh, over last month. So I I think one of the reasons why markets were so jittery last year is because we just had no idea what was going to happen with inflation, how far the Fed was going to go. I think this year we have a much better handle on how inflation and interest rates are evolving. So

Speaker 0:
even though I think the market is absolutely wrong to price and rate cuts, um, nothing is absolute, but I think it's a very good chance that we won't see rate cuts this year. The Fed will hike and pause. Um,

Speaker 0:
you know, and if I was a betting man. I would have bet on those December 2023 interest rate futures, Um, that we saw at the depths of March, but yeah, so I don't think the Fed will cut. I think it will take a lot, a lot of pain and things that we don't see in store for the economy for that to happen.

Speaker 0:
OK, Michael. So you don't think the Fed will cut? And you said the Fed will possibly hike and then pause, um, and ask you the same question, Peter, because I I think I know your answer. What do you think Fed policy is?

Speaker 0:
Well, I So I was actually gonna just chip in. Um, you know, when we talk about the market being right or wrong I mean, the market is quite a big thing, and the the the beauty of being a multi asset investor is You know, you look at lots of different markets. Um, and some of the sometimes the the decisions you have to make are more relative than absolute in terms of so

Speaker 0:
you know. And right now we probably think that the the equity market is more wrong than the bond market. Um, so, you know, So we would be underweight equities. And we might actually, you know, we've actually been reasonably, um, slightly overweight, even on duration, Uh, up until recently. So, um, it's it's more a question of of, you know, looking across all of the different asset classes and and and working out where you think the best, uh, or the least wrong, uh, position position? Might be, um,

Speaker 0:
but, um, but yeah, I mean, I think I mean, I I certainly agree with Michael in a sense, you know, we we see, um, you know, we see rate the fed sort of peaking at five and a quarter. Um, I don't think there's anything anything particularly unusual in in in that view. Um, and we don't see them cutting. Um, we we we think that one of the key one of the key determinants for inflation in the Fed in the US rather is gonna be, uh, it's gonna be the labour market.

Speaker 0:
Um, I think it's very hard to see the the inflation getting under control until, uh, until employment is is is a lot looser. Uh, the employ the labour market is much is much less tight. Put it that way. Um,

Speaker 0:
and that only really comes with slower growth. And we think we'll see, you know? So we think we we we do expect the Fed to be, you know, laser focused on that. They're going to be very data data dependent, and I don't think they're gonna be quick to cut a Do you have AAA similar view? Different view, The same view.

Speaker 1:
Well, I think they're in a very difficult position. So as Peter says, um, high interest rates slow the economy. Um, now that sounds pretty benign, but the way it plays out in practise can look unpredictable and pretty scary. And I think we've seen that very recently with the banking stress in the US and also in in Europe,

Speaker 1:
um, where higher rates have, um, driven some regional banks in the US into real financial stress and in some cases, insolvency.

Speaker 1:
And so everyone in the Federal Reserve will be thinking On the one hand, the inflation numbers say we need to carry on hiking because, as Peter says, the labour market is still running too hot. Inflation is still too high, but they don't know what the effects will be if they do, and it's been a couple of, um, smaller, more regional banks. This time, maybe a larger corporation will run into, uh, will run into severe difficulties if they carry on hiking from here. So it's a very, very difficult balancing act for them. Um,

Speaker 1:
I do think Peter and Michael are both very wise to point out that the expected path of interest rates in the second half of this year in the US looks very aggressively dovish rates. Traders seem to be expecting the Federal Reserve to cut rates several times over the second half of this year.

Speaker 1:
Um, that view was really baked in once we started seeing that banking stress come into the US market. What's happened over the last few weeks has actually been the banking system has started to look a little more secure, so I think they may have. The Federal Reserve may have scope to hold those higher interest rates for longer than the markets were thinking a few weeks ago, and in fact are still thinking today because they'll be a little bit more confident in the strength and resilience of the US

Speaker 1:
financial system to withstand those rates. So I think I broadly share Peter and Michael's views that those higher rates in the US might persist for a little bit longer than most markets. Um, lots of market participants expect. And that clearly has implications for, for example, equity markets. Do they really? Are they priced at the correct level? Um, if interest rates at the end of the year might be the same or even higher than we have now,

Speaker 0:
OK, so let's talk about equities. We've had the NASDAQ have a fantastic quarter. The markets pretty much bottomed around October last year, but NASDAQ looks like nothing compared to what's happened to Bitcoin in the Cryptocurrency realm. I presume you guys don't necessarily invest in crypto, but it does talk to the animal spirits. So let's talk about valuations here, Michael. We've had a fantastic quarter for the for almost everything that went down in 2022.

Speaker 0:
What's your take on where we are currently? We're sitting here in April after the March quarter. We've just had What do you think of the equity markets?

Speaker 0:
Yes, So I think it's hard to say that markets look cheap. Um, you know. I think even if even if you're not thinking about the absolute PE SI think what is extremely interesting is always thinking about that

Speaker 0:
Opportunity costs compared to cash, especially for US on the US side, where you have this fantastic, you know, almost 5% cash investment compared to what you're getting in fixed income and earnings yields or dividend yields, whatever it it looks terrible. So valuations in that sense don't look amazing.

Speaker 0:
However, I also think it's fair to say that there are great opportunities outside of the US. Um, I was reviewing some some work internally yesterday. And, you know, within emerging markets, for example, you actually have quite substantial opportunities in Latin America. So I was I I'm interested in that segment. Um, I'm interested in Asia, but I'm also I'm a little wary there because of the, uh, political risk that comes with investing in, uh, in China

Speaker 0:
and and Hong Kong. And I'm also a little concerned by what's going on in semiconductors. Um, as you mentioned Joanne, semiconductors have a massive bull run in the first quarter, and now they've just sort of drifted lower. As I think people are starting to get to grips with reality. With slowing export growth, slowing chip demand around the world. Just another sign of, um, the recession that's approaching at at at some point.

Speaker 0:
So valuations certainly in the US don't look great. But I think equities outside are much more interesting.

Speaker 0:
OK, so, Peter, you also made that comment. You know, they're not all the same markets. I mean, you referred to equities versus bonds, but equally there's other equity markets outside the US. Do you have the same view that there is opportunities outside America that are looking a lot cheaper? What do you think about equities at the moment?

Speaker 0:
Yeah. So we're, um

Speaker 0:
I mean, generally US equities, we are pretty neutral on. I mean, I think we we we still we still have. You know, we still want to have exposure to the US, mainly because of the, uh, access to sort of the quality factor. Um, so I mean, sort of head, you know, if you know, in our view, heading into recession, um,

Speaker 0:
you know, we're pretty neutral on value growth, Um, perspective, but we want to be, uh we want to be fairly high high on quality going into recession. So So we we we still are. Um, we're not We're certainly not overweight. US. Um, but but we are we we're we're neither. Neither are we underweight. Um, outside of you know, what we're seeing, really is a, um it's a bit of an east west divide. Um,

Speaker 0:
so, you know, when we look at at earnings, uh, and margins, you know, in the developed world, generally we're seeing, you know, margins having come from in the last year, being, you know, at all time highs. Um, you know, and and they're definitely reversing back towards the mean, um, and maybe and maybe below mean. Um, whereas if you look, uh, if you look eastwards, particularly in china,

Speaker 0:
uh, you have margins have been have been very tight, have been below below average. Uh, And as China opens out, this is an opportunity, maybe for chinese equities to, uh, to actually outperform. So from a macro perspective, we you know, we actually think China,

Speaker 0:
um, is probably our most preferred region right now now, But that's, you know, not withstanding Michael's point about some of the some of the political risks. Um, obviously, you know, one has to be very careful when investing when investing in China. Michael, would you like to add something to that?

Speaker 0:
Thank you. I just want to add to something. Peter said earlier he touched on a really important point. And something I'm thinking a lot about in the portfolios is quality, you know, forgetting about value versus growth. Actually, quality is probably where you want to be in the face of an incoming slowdown and recession.

Speaker 0:
So I think the challenge on our side is we We want exposure to quality. But we also don't want over exposure to tech either because of the headwinds that we're seeing in the tech sector right now, Uh, mainly on the semiconductor side. So that's the challenge we're looking at internally. Um, but this factor quality thematic is 100% where we want to be.

Speaker 0:
OK, so staying on the subject of quality kind of a question for you. When I think of quality, I think of rock solid balance sheets, fantastic cash flow, margin of safety, Mos. Well, that's a number of very large tech companies today, So just taking on from what Michael's just said, when you guys think of quality

Speaker 0:
How are you looking at that? And is, and is it something that you're also wanting to look to increase way things,

Speaker 1:
too?

Speaker 1:
I think that's a very good point, Joanne, when I think lots of us were first learning about investment and doing our investment training. Um, probably a couple of decades ago, quality and growth were thought of as opposites. You can buy a safe company with a strong balance sheet and and dependable earnings, or you can buy a racy, high growth company. But they're very different.

Speaker 1:
And I think today, in many cases that has converged. Some of the safest companies with the most dependable earnings are the very, very large tech companies, which are also growing very rapidly.

Speaker 1:
And I think that has been especially the case so far in 2023 where in the US equity market, something like 90% of the gains we've had year to date have come from a very, very small handful of only about 20 in most cases, very, very large tech companies. And in fact, the majority of of the gains in the index have come probably just from the top five companies, most of which of which are in the tech sector. So we've had a very, very concentrated market,

Speaker 1:
and those high quality but also high growth companies have driven a large part of of the out performance. They're doing that because they throw off enormous amounts of cash because they've been very aggressive in cost control so far this year. Um, and because their revenue continues to grow because of the secular drivers, the shift towards, um people conducting more and more of their lives online. So I think

Speaker 1:
quality is a factor does in fact look very different to what most of us would have been used to, um, only a few years ago. And I think it's better to,

Speaker 1:
uh, accept that and embrace it. Then try to look to the old sectors, uh, which we used to call quality 10 or 20 years ago, some of which have come under a lot of stress. That said, there are other sectors where you can find this as well. Um, prominence among those in in Europe perhaps, is, um, the luxury goods industry, which has seen a huge

Speaker 1:
expansion of its margins and of its revenues as they successfully brought consumers in emerging markets and persuaded them to pay premium amounts for heritage. European brands and Driven shown they have real pricing power while doing that, putting up prices in some cases by double digit amounts year on year and continuing to drive revenue growth from that.

Speaker 1:
So I think it's a really good point. That quality has been an enormously important factor to have in your portfolios so far this year and in most of the last few years. Uh, but where you find that quality looks very different from what most of our textbooks would have pointed you towards 10 or 20 years ago.

Speaker 1:
Peter, Do you agree

Speaker 0:
with that? Because I read a number of comments for the first quarter of this year. I think it was long duration assets that were doing most of the running because there was anticipation of a Fed cut, which arguably none of you really seem to think is going to happen this year. So do you think it's the quality driver that drove these tech shares in the first quarter? Or do you think it was an anticipation of rate cuts and how do you look at the tech sector from a quality perspective.

Speaker 0:
Yeah, I I I think, um

Speaker 0:
I think I agree. Um, pretty much with with with Conan, um the you know, and And I think a lot of the rally we've seen in in these in the, you know, in the tech sector has been is more about the growth component, uh, than the quality for for those individual names. But I But I you know, I totally agree with with, you know, there is no,

Speaker 0:
you know, it's it's not as easy these days just to say Well, that sector is a quality sector. Um, you really need to do the work on the fundamentals of the of the actual balance sheet and the you know, the pricing power of of the of the organisation and and look across the sectors And

Speaker 0:
and that's why I That's why I said, you know, we are, you know, we're essentially looking to be neutral value and growth within our portfolios, but with an emphasis on quality. And and And what I meant by that was that the quality can come through both value and, you know, and growth stocks.

Speaker 0:
OK, so talking about companies that would never be called quality or energy shares. And so, Michael, how how do you think about energy shares currently in today's portfolios? Given the fact that we keep getting told there's no Capex, these companies are gonna make fantastic earnings. Their cash flow remains really good. And yet we've got an impending recession in the States. Talk to me about how you look at energy shares.

Speaker 0:
Yes. So, obviously, energy is not what you want to own into a recession because of how reactive the, uh, the energy price is going to be, uh, with with withdrawal of demand. I think what's been really interesting recently is watching oil hold on to its gains after the, um, surprise OPEC cut, which may or may not be, uh, real. And by that I mean, you know, we haven't actually seen a reduction in volume coming out of Saudi Arabia yet.

Speaker 0:
So, you know, I I think there is an intention. There's definitely an intention there. They want the price to remain in this barrier between, uh, easily. I don't know, 70 to $90 a barrel, which is what they see as sustainable. I think energy shares have.

Speaker 0:
They've come down a lot over the first quarter, and they've since then shot back up again. Uh, because of this huge impetus with the oil price. So we've in

Speaker 0:
in our fund, we have invested a bit with energy stocks because we think that we think the earnings will be pretty good. We think that the oil price has helped. And, you know, interestingly, you have seen a revival in cyclical assets over over the back end of March and into April. So I think Peter alluded to earlier equities are probably a bit too optimistic on, uh, on, uh, whether on a no recession outcome.

Speaker 0:
And I think we're trying to We're trying to take advantage of that pricing for maybe the next one month or two. But energy shares, we have them. Um, but they're not a long term view for this year. Yeah, so back to, uh, China. Conan and I want to just get back to this energy story. This is where my question is coming from. So again, we talk a lot about your US recession, but we're saying that there will be growth in China. I mean, a lot of people are talking about China economic growth, picking up this year.

Speaker 0:
How do you think about that when it comes to these very cyclical shares? They like So to To Michael's point, it's obvious. Don't buy energy. The recession's coming, but the other hand, it's. But wait a minute. China's really growing very fast. They need energy. Maybe that's good for energy shares.

Speaker 0:
How do you think about this when it comes to energy

Speaker 1:
companies?

Speaker 1:
Well, I was in I've been to Asia twice so far this year, and the amount of excitement there is there about the reopening of the Chinese economy after Covid, Of course, they kept their covid restrictions for a long time over after most of the rest of the world had already lifted theirs. The excitement over the reopening of the Chinese economy and the resumption of leisure spending by consumers in China on travel, on goods, on meeting friends and family.

Speaker 1:
Um, that is going to be huge this year for Asian economies, including China. Um, and clearly, as you say, that leads to a resumption of demand for energy, especially as people get on planes to fly around fly around the world. Um, I think that clearly is a tailwind for energy prices. I think it's something that has already been priced in to a degree.

Speaker 1:
Um, but I think with the energy price, with the oil price at the level it is, this is still consistent with very, very high levels of profitability. For most energy companies, um, in North America and in in Europe, um, it's true. People have have said it a lot, but it's no less true for that that there has been very limited capital expenditure

Speaker 1:
by oil and gas companies over the last decade. They've under invested. There's not been as much production coming online as as demand in the world has indicated. Um and therefore, energy prices, although they're not as extreme as they were a year ago, are still very high. And and most of the, um, companies that produce energy are very, very profitable today. Um, and I think you have to look at those enormous cash flows. In some cases, record, uh, cash flows for energy majors,

Speaker 1:
um, and and think that there is an investment? Um, there is an investment opportunity there. As long as the energy price stays at a level which is, um, in the ballpark of of where it is today. That said, you don't have to own oil and gas companies to profit from this trend. One of the sectors we're most excited about is renewable energy operators. So not the equipment manufacturers, necessarily, but the companies which own, UH, wind farms and solar farms, which are already in the ground and already operating

Speaker 1:
because these can also benefit from high energy prices with a bit more stability, because in many cases they lock in those energy prices for the energy they sell for 23, sometimes five years into the future.

Speaker 1:
And they have very low and predictable operating costs. Once a solar farm is in the ground, the operating costs to to run it every year are really quite modest and quite predictable. And in many cases the cash flows are inflation linked, uh, over the long term. So we think this is a really exciting way to profit from high energy prices for our clients while contributing to helping to make the electricity grid that little bit greener.

Speaker 1:
Um, and to do it in a way that has less volatility because there's a little bit less sensitivity to that very volatile oil price. There

Speaker 0:
OK, so renewables referred to sort of dirty energy. In a sense, Peter, I just gonna come back to you because you've made it quite clear you know, your neutral value versus growth.

Speaker 0:
But within, let's ask you a different question. Cyclicals versus defensive. You talk about quality is something you're looking at. How do you think about cyclicals versus defensives? Given the questions, I've just asked Conan and Michael in terms of what's going to drive these companies. Is it gonna be China? Is it gonna be the US? How are you thinking about this trade? So I think in the short, you know, in in the short term, I I know I mentioned that we saw China. We saw this sort of East West divide and we see you know, China as the

Speaker 0:
you know, A as as sort of the bright spot in in the macro in the macro environment. Um, but I don't think it's I don't think it's the great Saviour of the global economy. Um, and, you know, as as per my initial comments, you know, we do see, General, you know, we're heading towards recession generally in in the developed markets and and that will have knock on effects to, you know, to help to the growth opportunity in the emerging markets. But, you know, in China specifically,

Speaker 0:
you know, we do see, you know, the reopening from the covid restrictions, you know, being positive, there, being sort of trend level growth in china.

Speaker 0:
Um, but most of the impetus of that growth is coming. You know, as as Con Conan said from, uh, from consumption. Uh, and from services, not really from investment. So, you know, we don't see China, you know, driving the next sort of big commodity boom, uh, on the back of a massive investment drive. You know, if anything, China's probably got overcapacity in a lot of investment areas, like real estate and property. So

Speaker 0:
so that I mean, that's sort of where where we stand, Uh, on on that point. OK, let's go back to earnings.

Speaker 0:
Um, expecting the first quarter earnings to be pretty weak in the U SI. Think it's down six or 7% of the number. I saw, uh, maybe down the second quarter and then recovering. Um, if you guys are right and and recession is coming towards the tail end of 2023 towards 2024.

Speaker 0:
What does that mean? For your view on analysts earnings? I'm gonna start with you, Michael. Do you think the analysts are gonna get wrong or do you think it's sector specific? Maybe just give us some colour and what you're thinking about earnings generally so historically on analyst earnings, um, they don't They don't tend to be amazing predictors of what the final earnings outcome will be. You know, the the the the one I remember is that in, you know, 2000 and

Speaker 0:
2008, they still predicted a positive earnings square for the year, even though earnings tanked. And then they predicted a negative earning score for 2009. So look, it's very easy to to to dismiss an expectations. But perhaps what's more interesting is the trend. The trend is clearly lower. Um, although it's probably not as low as what we think of as a as a realistic number. I mean, it barely fell over last year,

Speaker 0:
and even though the numbers for 2023 are coming down, 24 is actually increasing, you know, showing you that the market is very much on board with this idea of a very mild recession, and then things will go back to normal in 2024. Um,

Speaker 0:
I think everything about this cycle since 2020 has shown us that things are not normal. So I could imagine that the 24 24 number is going to be too Optim too optimistic. So I'll take 23 24 together and say that they both need to come down. Um, and I don't think that bodes very well for taking a lot of risk.

Speaker 0:
So let's get back to the first quarter of this year, OK? Markets up quite strongly, earning earnings expectations all falling. And if Michael's right, they're still too optimistic.

Speaker 0:
Well, what's the market doing? I mean, why does it keep rising in the face of this obvious bad news?

Speaker 1:
Well, I think there's a couple of reasons behind that. Um, firstly, there's been, um, to a degree, an expansion of liquidity. Um, central bank quantitative tightening clearly slowed early this year. Um, as central banks provided more schemes to provide, uh, cash capital, uh, to financial sectors organisations that really needed it. So there's been more money sloshing around, some of which has found its way into equity markets.

Speaker 1:
Some of it is the long duration argument that we discussed a few minutes ago as long end government bond yields have come down. Uh, that makes companies, which are called long duration companies, uh, so companies whose earnings can be predicted a long way into the future that makes them look more more valuable. Uh, if you price them as a as a premium to government bonds. As government bonds become more valuable, so do those equities.

Speaker 1:
But I think what we've seen, especially in the US, has been an an enormous concentration of market returns. When we say equity markets have gone up, we're looking at the US. We're talking probably about an index of financial stocks, but actually only about 20 of those 500 have driven the vast majority of those returns. So when we say markets have gone up, really, what we're saying is 20 mostly very large technology companies

Speaker 1:
have gone up, and one of the reasons they went up is because those share prices suffered so much, Um, in 2022 in response to that, a lot of those companies decided to take a lot of costs out, and they shrank their workforces very, very significantly. They cut spending on new projects. They cut spending on research and and capital expenditure. And that means means their profitability, um, has rebounded quite strongly.

Speaker 1:
Um, and so that is driven to a large degree. The very strong share price returns One or two very, very large tech companies have almost doubled in share price terms over the last six months. Um so I think we have to be careful when we say markets have gone up or markets have gone down, especially this quarter, because the reality has been most of the US equity market has really stagnated.

Speaker 1:
But a very small number of companies have had exceptional returns which have driven those really quite attractive numbers we see at index level.

Speaker 0:
OK, Peter, So listening to con and we've had a very narrow, um, number of shares that have driven the stock market performance and to the point that's been very concentrated. Traditionally, that's not been a very bullish sign for markets and actually been more bearish. Do you think the last few months have been more of a bull Been a bear market rally or or, you know, do you think Do you think the lows are in?

Speaker 0:
Um, I I think I mean some What? Agreeing, um, with Michael and and and And the, You know,

Speaker 0:
the risk seems to be to the downside to to to to our our thinking, um, you know, earnings,

Speaker 0:
earnings expectations do seem optimistic. You know, the

Speaker 0:
leading economic indicators are not exactly accelerating, and costs are going up, so it it you know, it the risks definitely seem to to be to the downside. I I I mean, I think, um I gave a very, um, er explanation of, you know, of the recent rally. I think you know, the question I I have is is is really more sort of behavioural. And whether you know the market, I think is still believes that the Fed put is somehow there,

Speaker 0:
Um, you know, and with, you know, when the Fed stepped in, when s B B collapsed? I think people took that as a sign that the Fed will always have your back. Um, and I think it's gonna take quite a long time for the market to to to to unlearn that lesson. OK, it sounds like we're going into a different regime to me, you know, Interest rates higher for longer inflation sticking up for longer. But let's talk about the bond market. We spent a lot of time talking about equities. OK, so

Speaker 0:
given this picture, you're all painting. Let's start with you, Colin W What do you think of investment grade? High yield emerging market debt? Talk to me about your views on bond markets.

Speaker 1:
I think there's actually quite a big opportunity available in credit at the moment. Um, as we've discussed, equity markets have had a very strong rebound this year and have essentially shrugged off, uh, the chaos and stress we saw in the banking crisis a few weeks ago.

Speaker 1:
Credit markets haven't behaved in quite the same way, so credit widen. That means the yields available on on corporate bonds went up, uh, during the banking stress a few weeks ago,

Speaker 1:
but since then they've only retraced about half of those moves. In other words, credit is trading at much higher yields than it was um, a few months ago. Before that, banking stress Now, some of that might be for good reason, especially bonds in the financial sector, where we've had to reassess the risk of losing your money in some of those bonds.

Speaker 1:
But it is striking that while equities have essentially shrugged off those difficulties, credit markets have not. And I think that's an opportunity for multi asset investors to lock in really quite attractive yields on very high quality and and we think pretty safe bonds, um, and and to lock in that really good income for years and years to come. I think one particularly interesting part of credit markets is structured credit.

Speaker 1:
Um, so things like collateralized loan obligations Now these always make everyone a little bit nervous because they were notorious, um, in in the last financial crisis, sometimes for good reason. But a lot of them really, um, were very robust during that experience and came through well. There was some very, very high quality, Um

Speaker 1:
uh, paper in the, um, structure credit market, which is trading in dollars with yields of six or seven or 8%. Uh, with big big protections underneath them for, uh, for bondholders. Um, that's a lot higher than was the case a few years ago. Clearly rising rates in the US has helped with that. Um And so we think there are some good opportunities in some parts of the credit market, Uh, which are looking a lot more attractive now in terms of yields than they were only a few short months ago.

Speaker 0:
OK, so we've got higher yields and other bond markets. But, Michael, what do it real yields look like? How does that compare to where we've been? Historically, Uh, and the other question I've got for you is, if we are looking at the recession in the eye, do you want to be in credit at all?

Speaker 0:
So the first question real yields are, unsurprisingly, not very attractive because yields are high. Yes, but inflation is also high. And one of the areas where we do like is emerging market debt For that reason, because real yields in some of these countries are positive and and a lot stronger. So we like, uh, for example, we like Mexico. We like Brazil. Um, and we actually like South Africa. Um, so we we like those these three areas for that carry and, um,

Speaker 0:
high interest rate differentials, uh, compared to developed markets

Speaker 0:
and Also, the currency is a nice kicker. Um, you had a question on credit, so I have to admit, I I don't quite share Conan's positive view on credit just because I I I think my concern mainly stems from liquidity. I think if you are going to lock in these attractive yous, you better hold them through this year and next year because I think the last couple of years has taught us that credit can turn very nasty, um,

Speaker 0:
in sharp shell in sharp sell offs. So I think you need to have the determination to to see it for and for us. I think we're happier with a combination of equities and, uh, and Treasuries to to see us through. OK, so you mentioned much earlier thought that equity markets were not pricing in the bid, but you thought the bond market was pricing in things better. Maybe just give us some more colour as to what you mean by that and where you're finding opportunities in the bond space.

Speaker 0:
Yeah. So we so I mean, I think I I'm probably slightly closer to Michael's, uh, view than than than cons on credit. Um, I think we We are fairly cautious on on credit. Generally, right now, uh, I think that, you know, there will be opportunities, but I think maybe it's a little, uh, a little early given, Given that I think all the attention really is on.

Speaker 0:
Um, you know, is on the Fed right now. Um, and and how it responds, um, to slowing to slowing growth, Uh, and how and how far it's going to it's going to follow that. Follow that through. So, you know, and I And given where,

Speaker 0:
where you know where where our thinking is. Um, you know, we are more focused on on government bonds today. Um, as I said, um, a few minutes ago. You know, we up until recently, we've been slightly overweight. Duration, so we think, you know, we think the you know, the 10 year yield on the in the US is, you know, fairly, probably fairly priced right now. Um, and, you know, and and and we obviously only a few weeks ago it was at 3. 83 90. So,

Speaker 0:
um uh, I think maybe down towards 3. 20 it gets, um, you know, then then then we're probably not gonna be adding, adding, too much more more duration. But, um, but that's so that's sort of where, where, how we're positioning, uh, in in the bond part of our books. At the moment, Michael, you mentioned the emerging market bonds and you talked about the currency.

Speaker 0:
And from what I'm reading out there at the moment, people have become very negative about the dollar, and it's a lot to do with China's, not China. So the US reserve role in the world in the currency markets.

Speaker 0:
What's your take on what's happening right now? So as you mentioned Joanne, I think the Twitter discussions on the demise of the dollar it's vastly overblown. So I think what we're seeing here this is, in our minds, a temporary period of dollar weakness. We have this rare point at that bottom of the dollar smile framework, where,

Speaker 0:
um, US growth is clearly on the downturn, but we don't really see any effects versus the rest of the world. So that's why I think E. M. FX has done so well. That's why even, um, even the great British pound has come very far from where we were 3 to 6 months ago. So a lot of currencies are doing very well against the dollar at the moment, but that doesn't discount its valuable use as a hedge. Um,

Speaker 0:
you know, there was a moment in March during the S V B crisis where the dollar actually shot up. Um, it shows you how people think of the dollar. Ultimately, when everything goes wrong, people still reach for dollars. They reach for bonds. And I, I think in in our minds, dollar remains a useful hedge going forward. As, um, the saying is that

Speaker 0:
when the US catches the the US sneezes, the rest of the world catches a cold. So we think that that's the same dynamic that's going to play out. So do dollars are not dead. Dollars are not dead. OK, Peter, Um, do you? Uh, sure. Yeah. No, I I mean, I, um I mean, when So when we published our, um, sort of long term capital market expectations at the at the end of last year,

Speaker 0:
you know, one of the clearest messages was, you know, over the next 7 to 10 years, you know, we expect to see a fairly significant depreciation of of the dollar,

Speaker 0:
so I think long term. We We do see that. And you know, there are many reasons for that to overvalue the size of the Fed's balance sheet. Um, General de dollarization globally. Um, you know all these long term trends, but, um

Speaker 0:
uh, but to Michael's point, you know, shorter term, you know, the the dollar Smile as you know, as it's called. You know, we see that in a risk off environment, the dollar tends to outperform. Um, so it it is a quite a useful hedge within within a portfolio. Um, so short term we see, we see maybe the dollar,

Speaker 0:
um, weakness is maybe slightly overdone. Uh, right now and and you might benefit from having some dollar exposure in the, you know, in the near term. But long term, we definitely, uh, would subscribe to that. That that depreciation of the dollar. OK, Colin, we're talking about the dollar, but we're not saying against what? So is it weaning against emerging markets? Is it weaking against the euro? I mean, is it? You know, when you talk about the dollar's movement lower,

Speaker 0:
who are the winners?

Speaker 1:
I think that's a really interesting question. 10 years ago, when we talked about the dollar, we were probably mostly talking about it versus euros. Um, and today clearly there's a basket of currencies that are considered significant comparators not just the euros, but also Chinese renminbi and probably also Bitcoin and gold as well. All of those are things against which you have to compare the dollar,

Speaker 1:
and at any one point it's probably going to be weakening against some of those and strengthening against others. I think the point that Peter made just now about the dollar, traditionally being a safe haven in times of stress is really important when you see recession, when you see financial stress, when you see companies coming under strain and hedge funds delivering, you tend to see AAA rush for dollars where people try to get into the safest, most liquid asset.

Speaker 1:
And we don't think the dollar is giving up that role in the global economy any time soon. So for the last, um, 5, 10 years, it has been a very, very strong, uh, risk off source of a safe haven assets in portfolios and and we think that role is is quite likely to continue,

Speaker 1:
um, coming back to what we said about interest rates a few a few minutes ago. If interest rates in the US do do remain high as we expect them to, that is definitely going to be a supportive factor for the dollar. Um, and it's one of the very few hedges at the moment that pays you to own it. Um, most hedges in a portfolio you have to pay to get that hedge. Um, and yet the dollar is something that pays you, um, in some cases, nearly 5%

Speaker 1:
uh, to owners in your portfolios. And I can think of a lot worse hedges, uh, than ones that pay you those kinds of very attractive yields, or even more if you're willing to take a little bit of of term premium and credit risk along with that.

Speaker 1:
So I think you don't need necessarily to predict the direction of the dollars. I think it has a useful role to play in your portfolio. It can be a useful hedge against times of financial stress, and it can be a source of carry and return at the same time, and it can be a source of really significant liquidity as well. And for those reasons, regardless of whether it goes up or down by a couple of points in in the short term, I think it has a really important role to play in multi asset portfolios.

Speaker 0:
OK, so long term trends, weaker dollar, But the demise of the dollar might be exaggerated. As we sit here today, the one asset class that's getting a lot of noise is gold. Uh, so, Michael, when when I used to interview fund managers, I'd say, Well, are you buying gold? It looks like Look at you as if you've lost your mind. But, you know, as we sit here over $2000 the gold price Is it now an alternative currency? Should we be looking at it?

Speaker 0:
Um,

Speaker 0:
so on the alternative currency, um, moniker. I think it's very interesting you said that because gold and Bitcoin have actually, you know, they they have shown some relationship in the last couple of months. I thought what was most interesting is over March. Actually, um, you actually saw decoupling where gold did quite well, and Bitcoin sort of had a had a bit of a moment where it dropped off, and I think to me that tells you everything about what people actually consider to be

Speaker 0:
the anti Fiat. Um, alternative. You know, gold gold over Bitcoin for me. So on on gold itself as an investment, I think

Speaker 0:
I I think in an area of high rates you might think it doesn't make a lot of sense because you're not actually earning any income from from owning gold. Um,

Speaker 0:
I don't I don't disagree with that. But it does seem it does seem to have done a lot better than its relationship with real yields would suggest. It's, uh, been incredibly resilient. I think some people put that down to central bank demand. I think there's certainly, uh, there's actually benefits to owning that in your portfolio. You know, alongside this bigger theme of, uh, de dollarization as you, as you mentioned earlier, Peter,

Speaker 0:
um, you know, we we we have reports of Bank of China, apparently are buying gold on on the on the sly. Um, I think a lot of central banks are looking at that currency rather than storing US dollars, Um, or alongside the US dollars in the long term. So gold definitely has proven its worth to me. Um beyond beyond what? What?

Speaker 0:
What we've seen in the recent past. Yes, it is. It does look very expensive at $2000. Um, but if you adjust it by inflation, it's still nowhere near the all time high levels. So it plays a place in the portfolio, and yeah, we we like it. We have some. And we also own our own gold miners, which you can see as a higher data to play. But also, those guys also throw off some fairly attractive, uh, dividend yields.

Speaker 0:
OK, Peter, is gold something you're holding in your portfolios?

Speaker 0:
Uh, so we hold it in in some of our portfolios, not we Where where we are mandated, uh, we we we will hold gold. Um, and we like it as a as a diver, fire and and And I I mean, I would agree with with what Michael said. I mean it. It's performance in the, you know, recent months has been, um, you know, been very gratifying and maybe slightly surprising given, given what's happened to real rates. But

Speaker 0:
but going forward, given that you would expect there to be an inverse relationship with with real rates, um, and real rates presume, You know, hopefully round about peaking. Um, you, you know, you would expect gold to put to be quite a good hedge within a portfolio. Combine that with a you know, with a depreciating dollar over the long run, that should also be positive for gold.

Speaker 0:
Yeah. So, talking about an asset class that hasn't had a lot of good press lately Property, um, commercial property market in the states looks a bit scary to me. Um, within your your global multi asset managers and my question more is Are you overweight or underweight property? So, Colin, are you What? What is your views on property at the moment in your portfolios?

Speaker 1:
I think property is really interesting because you can look at it in two ways. So if you look at direct property funds, so unlisted funds which own the assets directly

Speaker 1:
some of them say the value of their portfolio is down five or 10% over the last year, year and a half. Some of them say it's actually up.

Speaker 1:
But if you look at the listed vehicles which own properties so real estate investment trusts, most of their share prices have fallen 30 40 sometimes 50%. Um, over the last three years. So the equity market is telling you something very different about the valuation of property compared to what property funds themselves are saying. And only one of those is is going to be right.

Speaker 1:
Um, we think that some of those listed property securities uh, look very cheap. Um, there is still demand for some very high quality parts of the property market. Uh, very high quality, very energy efficient offices in particular are in a lot of demand from occupiers and seeing, in some cases, record rents some parts of the logistics market, uh, some very well located warehouses. There was a record letting deal, uh, very near here for some logistics assets only a few days ago,

Speaker 1:
um, and also, um, residential property, particularly in the southern United States, where there's a a little bit of an internal migration south there. Um, co states like Florida cities like Miami have seen really, really significant property booms. Um, so there are definitely some bright spots in the property market.

Speaker 1:
Um, but I think you do have to be aware of what those listed securities are telling you and what they're saying is that some of the valuations out there for direct property funds maybe haven't adjusted quite enough yet.

Speaker 0:
So, Michael, do you hold any direct property, direct property funds or yours all listed? And what's your view?

Speaker 0:
Yeah, So I I think I think Conan is absolutely right. So we we are underway to real estate as a sector in general, um, but that that didn't start this year. It's been a long running theme just because, um,

Speaker 0:
just because we we think that's not it, it's good.

Speaker 0:
It's sensitive to interest rates. And that's as Colin said, it's definitely been hurt by rising rates and, um, the fall in house prices and property prices in general. Um,

Speaker 0:
I think what Con Conan raised this really great point, which is, You know, you can definitely find attractive valuations in publicly listed real estate, but that it is a bit murky about what is the actual mark to market value on the private side. So you know whether there are any knock on implications from that we we we don't know.

Speaker 0:
Um, we we don't know how how many people are holding onto that area, you know, I think just yesterday, Blackstone said that they had, uh, raised $30 billion for another property fund. I mean, it's not the news I would have expected, but it's just showing you that somewhere out there there is still demand for property, and maybe that will help cushion.

Speaker 0:
Um, that will help cushion the the slowdown in, in in property markets. We're seeing, uh, in in the US and in Europe and UK et cetera, So we don't own any. But again, I don't You know, we we're not expecting 2008 for sure.

Speaker 0:
OK, moving away from property, Peter, My questions to views on private equity

Speaker 0:
Um, you know, that's a market that's had enormous amount of inflows, great alternative assets, fantastic returns. But as we said today, with interest rates sort of 4 to 5% on cash, um, what do you think it means for private equity markets that are essentially unlisted investments? So

Speaker 0:
Well, I think I mean, I think there's a similar. There's a similar answer, uh, to the real estate question, um is part of the answer, because I think a lot of private assets generally have not seen a valuation correction in the way that public, you know, listed listed listed assets have. So, um, so private equity, I think is still yet to maybe have that, you know, have that correction,

Speaker 0:
Uh, in terms of of existing existing investments, I think from a, you know, from an investment perspective and a portfolio of construction. You know, so much of the, uh, you know of the investable world has become private over the last, you know, over the last couple of decades that that it's it's not a market you can afford to avoid if you're trying to get a diversified, um, exposure to to to a global investment. So

Speaker 0:
I think private equity is definitely something you want to look at having in your portfolio. I think right now you need to be very careful about valuations and maybe maybe be a bit cautious and take your time to invest

Speaker 0:
on. Would you have a similar view? Do you think one needs to be cautious around private equity?

Speaker 1:
I think you always need to be cautious about long term unlisted investments. One of the additional features of risk for private equity is leverage. So most private equity buyouts involve significant use of debt, Um, generally multiples of of the company's underlying earnings potential. And a lot of that debt is floating rate. Um, in other words, the interest rates on the loans used to make the buyouts go up as central banks put up interest rates, they're not fixed rate.

Speaker 1:
And so that means that the cost of that debt for many of these private equity backed companies has risen very, very significantly over the last few years. And if you were five times levered at your old earnings level, um, and and paying out, um, 20 or 30% of of your cash flow in in debt repayments, you may find that your debt repayments are significantly higher now, which, of course, leaves much less cash flow for equity holders.

Speaker 1:
So I think there are significant strains in some parts of the private equity industry. And you've seen that in news reports over the last few days about investment banks, uh, being stuck with loans for private equity buyouts that they've really struggled to offload, and when they have sold them, they've been a big double digit discounts to the face value of of that debt. And if the face value of the debt is is discounted like that, you can be pretty sure that the equity is going to be, uh, is going to be looking pretty stressed as well.

Speaker 1:
That said, private equity is a part of the market in a style of investing. This is very, very dependent on investment skill. Um, and if you have high quality management teams, uh, sometimes they can pull off of pretty miraculous results

Speaker 1:
in the face of difficult markets. I still remember some of the deals in 2007, which everyone said in 2008, 2009 were were worthless. And actually, the management teams managed to pull off really good returns out of those just over a slightly longer period than than expected. Um, so I think private equity is one area where the quality of your management team is exceptionally important.

Speaker 1:
Um, and if you have the right management team in place and conservative capital structures, I think there's still plenty of opportunity to generate strong returns there. But be very wary of leverage. Be very wary of excessive floating rate debt, Um, especially in sectors where where costs within the business are going up as well. And I'm sure we will see some increased stresses in that part of the market. Um, becoming more public over over the months to come. It is

Speaker 0:
interesting to me because so many people come to South Africa telling us to buy

Speaker 0:
of equity. And yet I think there's enormous amount of risk in that sector. Still, OK, took we kind of like three minutes left. Guys, um, I could talk to you all day. You really are. I love hearing you guys talk, so we're gonna quickly summarise and start with you. Michael, Just give me your sort of

Speaker 0:
most preferred asset class and your least preferred asset class. It should be pretty obvious from today what those are. But I just want to summarise up the people listening to us today. So your favourite asset class your least. And where are you most overweight. Most underweight. You know what I mean? Sure. So, uh, gonna go out there and say gold is our most favourite asset class? Uh, least favourite is credit.

Speaker 0:
And in between, you know, we we are fairly we are fairly defensive. So in equities, we own a mixture of quality and growth in fixed income. We own a mixture. We We are slightly overweight fixed income, uh, particularly on on Treasuries and and sorry and in Europe as well.

Speaker 0:
Um, in FX space, we are underweight the dollar because to take advantage of some juicy, um, e m FX opportunities. So it's not It's not a totally risk off portfolio, but I'd say we are halfway there.

Speaker 0:
Ok, Fantastic.

Speaker 1:
I think our most favourite sector is renewable energy infrastructure at the moment, great cash flow yields still growing with inflation and with with high power prices,

Speaker 1:
um, our least favoured sector would be highly levered businesses which are going to suffer as those high interest rates persist. OK?

Speaker 0:
And Peter, you get to have the last word. Uh, so So we are, um so we are underweight risk assets. So we're underweight equities, and we are funding that essentially out of a mixture of fixed income and cash, Uh, and within fixed income, we have a preference for, um, you know, government and high and and very high quality credit. Gentlemen,

Speaker 0:
I wish I was in the studio with you today. It would have been a lot more fun for me. But I've loved hearing your views and and thank you very, very much for your time today. Thank you. Thank you. Thank you.