What's Next After 'Remarkable' Market Bounce?

Bloomberg

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00:00It has been a remarkable mathematical bounce off of the lows. We're about 25% off the lows

00:06on a closing basis, almost 30% off the intraday lows in the S&P 500 in the US. So optimism has

00:13quickly come surging back in. But at the end of the day, we do have an expectation and a degree

00:20of optimism that the ultimate landing zone for tariffs is at a reasonable, palatable enough

00:25place that global trade and global economies and therefore markets can continue to make

00:30their way through this turbulent start to 2025.

00:34Europe has also seen a huge benefit. I mean, the whole of the coverage really for the first

00:39six months of the year that we're doing in the last couple of days has been about the strength

00:42of the euro and the strength of European stocks. Again, for the second half of the year, is

00:47that something that persists in your mind?

00:49It's a bit of a heartwarming coming home story, so to speak, which has good, valid reasons

00:55behind it in our belief. You've got the German infrastructure package, a greater degree of

01:00optimism about what security-oriented spending can do to contribute to the flywheel of economic

01:06growth, a greater willingness to invest here in the region, and a reconsideration of how

01:11long the US dollar and how concentrated in US assets a lot of global investors want to

01:17be. It doesn't necessarily mean that global investors need to flee the US or anything like

01:22that. But if a lot of market participants decide that they might want to invest a bit more

01:27internationally once again, then Europe stands to benefit from that flow of funds.

01:31Is this what this is about? It's about a balancing rather than a full retreat from the US?

01:35I like the way you put that. I would agree. I think you're right. A balancing, a little bit

01:40of a rebalancing as opposed to a drastic shift from one particular geography to another. And that's

01:46probably sensible because the reality is the US has done so well from an economic growth,

01:51labor productivity, market performance standpoint, really for about a decade and a half since the

01:57GFC, the global financial crisis. Therefore, US overweights have gradually built up in a lot of

02:03portfolios. So if there's a bit of a revisiting to being more globally oriented, then again, that

02:09rebalancing alone could help benefit this region and other attractive international markets in our

02:16viewpoint, which include India and Japan. Should investors be more concerned about the US's twin

02:23deficits about the Trump tax and spending bill that is going through the House and may well get

02:29passed in lightning speed, perhaps by July 4th, you know, budgets in the US notoriously difficult to

02:39get passed into legislation. And this is trillions of dollars worth.

02:44It is most expectations calling for an increase of the totality of US long term debt over the course

02:51of a number of years by in the range of $3 trillion off of an already incredibly high base, though it

02:58might be a little bit of back and forth between the Senate and the House in the coming days. But

03:02whatever final form the bill might take where it does look like there is a good amount of momentum

03:07to getting something done rather soon. It's an upside boost to some of those debt stories and

03:15those debt numbers. One might think that that would cause a degree of consternation in the bond market

03:19and bond yields to be drifting higher. But that is not, in fact, what we've been seeing.

03:25It was mentioned earlier where the US 10 year yield is. It's at reasonable levels. We were closer to 4.6

03:31amidst all of the tariff uncertainty a short while ago. And it seems as though what the market will bear

03:38is proving to be OK. So what I mean by that is the reality is the bid to cover ratio on US

03:44treasury auctions remains OK and therefore yields also remain OK.

03:49Yeah, all the concern about the bond vigilante seems to have been put back in the box, at least

03:54for now. We thought in yesterday's session, we saw a bit of a rotation out of some of the big tech

03:59names, at least out of the Nasdaq 100, seemingly into Russell 2000 small caps. Some are reading into

04:05that that that was a sign of investors positioning around the fiscal stimulus that could come through

04:10domestically as a result of this tax and spend bill. Is that likely to be a sustained theme?

04:16Do small caps get a lift in this environment? Have they been overlooked?

04:18Could be to a degree. We still see greater earnings growth potential in tech driven by the incredible

04:25increase of the rate of adoption of AI and the very cyclically sensitive and cyclically boosted

04:32financial sector, particularly when the cycle is doing well. There's also quite a lot of talk about

04:38a bit of a lightning of some of the regulatory requirements upon the big banks in the US, which

04:44have proven to be quite stable and secure and therefore regulators and the Fed seem to be

04:50saying, you know what, maybe we can lighten some of the reins on these institutions because they're

04:55navigating their way OK. And that would also result in a greater amount of liquidity being released

05:00into the system. It could help further M&A, IPO, greater deal activity, money in motion and so forth.

05:07I hear a lot about diversified portfolios. What does a diversified portfolio mean to you now?

05:14I suppose part of the way I would describe it is that it means not being overly concentrated in

05:19any one particular thing, any one particular geography and expanding beyond the realms of

05:25the traditional just so-called 60-40 portfolio. So to us, the idea of a diversified portfolio means

05:32being globally oriented and also having a healthy dose of alternatives into the portfolio if an investor

05:39can bear the liquidity profile of that. We think that the hedge fund space is very attractive,

05:44its ability to go long and short, be nimble, play some of these relative value and macro stories.

05:50We've got FX volatility that's come surging back. Interest rates are on the move. There's a lot of

05:56things that suggest that the hedge fund space can capitalize on some of these movements. And then

06:02other longer term oriented alternative strategies such as private infrastructure we think can provide

06:07good ballast to the so-called traditional 60-40.

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