00:00So we just set you up there by saying that we're effectively at the target in a moderately, how would you describe it, moderately easy tariff scenario?
00:10Yes.
00:11And, yeah, so what's the...
00:13Well, the blue sky scenario we have is 940 MSIAC, which is about up 7% from here.
00:19And that really comes down to four reasons.
00:24One, even more moderation in tariffs than we have today.
00:27Secondly, policy response outside the US.
00:34All central banks outside the US, apart from Brazil and Japan, are cutting rates.
00:40And we're getting a significant fiscal response both in China and in Europe, hence our Chinese GDP forecast today is the same as April 1st.
00:51Thirdly, the well-behaved nature of US wage growth.
00:56That, we think, will allow the Fed to cut in September and follow that up by three further cuts.
01:03Now, if the Fed cut four times this year and other central banks apart from Japan and Brazil are cutting rates, then the market will look for any V in earnings.
01:15Also, the well-behaved nature of wage growth helps protect profit margins in the US.
01:20And, finally, I do think there can be some exceptionalism in the PE due to Gen AI.
01:28So, really, the blue sky scenario is more moderation in tariffs, policy easing both fiscal and monetary outside the US, well-behaved wage growth, allowing the Fed to cut more than the market expects by year-end, as well as helping protect margins.
01:45And some exceptionalism in P due to Gen AI.
01:50A lot of boxes to tick there, to your point.
01:53You're focused on Europe now and China.
01:55Tell us why those two are your goal cases.
01:57So, first of those boxes, three of those things are going to happen anyway.
02:02The debate is, how moderate do tariffs become?
02:06And the debate there is whether the art of the deal is to say tariffs are ideological to have bargaining power.
02:15Okay.
02:16But when you look at it logically, you should end up with more moderate tariffs, to put it bluntly.
02:21Yeah, than the current level.
02:22And the scenario on the Fed, since you talked about that then, you say four Fed cuts.
02:26What gets us there, I guess, is the question.
02:28Well, the House view from Jonathan is they cut in September, which is more or less in line with the market.
02:34Obviously, they need to make sure that the rise in consumer expectations of inflation don't become embedded.
02:42In my opinion, the fact that wage growth is so well behaved, the voluntary job quits ratio,
02:48one of the best-need indicators of wages, according to Yellen and Bernanke, is consistent with 3% wage growth.
02:55And the market expectations of inflation are very well behaved as well,
03:02allows the Fed then to look through a spike in inflation and react to slower growth.
03:08UBS have GDP in the U.S. slowing up from 2% year-on-year at the moment to 0.9% year-on-year, year-end.
03:16So they react to that slower growth effectively. It's a soft landing.
03:20You mentioned the bull case for Europe. How do we express that? That's one of your overweights.
03:27Yeah, I mean, first of all, why? And also, you know, how to invest in it. I mean, put it very bluntly,
03:35next year we think growth will be on a part with the U.S. That only happens 9% of the time.
03:40And when it happens, Europe is 10% more highly rated than it is today against the U.S.
03:48Secondly, when you look at all valuation measures, it looks abnormally cheap.
03:56The one we particularly like to look at is dividend yield plus buyback.
04:00That used to be well below the U.S. It's now 1.5% above the U.S.
04:04And thirdly, the positioning is still abnormally cautious. Indeed, on the U.S. crowding data,
04:10it's the least crowded market. Well, of course, the U.S. is the most.
04:14How do we express it? Because we are also bullish of the euro, we're buying domestic Europe.
04:21We like, on the defensive side, the telecoms. But on the cyclical side,
04:29we have been overweight European banks for two and a half years.
04:34And we like European retailing and the budget airlines.
04:40We particularly like sectors which cost in dollars, which benefit from a stronger euro.
04:46And the case on China? The why is there? The why is there?
04:49The case on China is very simple. I think it really comes down to four things.
04:53One, the dividend yield is on a par with the high yield. And when you look historically or in China,
05:03that's almost always a buy signal. Secondly, you have had a sharp improvement in earnings momentum
05:12in China relative to global markets in spite of pretty weak nominal GDP growth of 4.5%.
05:19So earnings are decoupling from the macro cycle. Thirdly, we think there's a good case for excess liquidity.
05:27TSF, total social funding, is growing at 8.7%. That's nearly double nominal GDP.
05:34When you get excess liquidity, it doesn't go overseas because of capital controls.
05:39It's probably not going to go into housing given the state of the housing market. It goes into financial assets.
05:44And finally, look at positioning. I mean, it's worth considering that the MSCI weighting in China is below that of Apple.
05:53And the actual weighting we think in China is 1 20th of the US and 1 3rd of Apple.
06:02That's crazy. Well, when I started, Japan was 43% of the world, MSCI world. Now, look, it's barely five.
06:14Yeah. So sometimes common sense pays. And you go back to the early 1990s, the second largest bank in Thailand was bigger than JP Morgan.
06:25So sometimes, you know, a bit of a common sense smell test. I also think when you look at China, you know, tech, according to the Australian Strategic Policy Institute, leads in about 70% of the fields it's in.
06:37We've got lots of anecdotes, of course. It's abnormally cheap.
06:42Earnings momentum is good. And you've had a reassessment of, quote, unquote, two unshakable principles, i.e., you know, should we say less problematic corporate governance.
06:54It takes us now into the what do we do with the US? What is the appropriate weighting? Where do we land in that sort of scenario?
07:02And, you know, offline, we talked about how you guys are index weight. There's a chance that the US market's underweight.
07:09You know, the underlying question is what is the what should be the index weight of the United States?
07:15Yeah, I mean, you know, if you look at MSC Acqueworld, it's about 63%. The US is 27% of global GDP. It's 16% of global trade.
07:26You know, you know, looking at it very simply, particularly given the previous discussion, it does seem structurally emerging markets are underrepresented on any method of people, GDP, innovation relative to the US.
07:41I think we'd look at that, you know, logically. And, you know, while I admit with benchmark, I see more risk of underperformance than outperformance.
07:53And the concern I have is that normally the US outperforms when global growth slows because it's got the lowest operational leverage amongst other things,
08:04or when the dollar weakens because 28% of earnings come from outside the US.
08:08The problem is this time, the slowdown in global growth is led by the US, and the Fed are more reactive initially.
08:15And normally as global growth slows, bond yields fall and growth stocks being long duration outperform.
08:22That's not happening this time. Falling bond yields see growth stocks underperform.
08:27And as for the dollar, yes, a weaker dollar a priori is helpful. But this time around, the dollar weakness is a part of a sell-off of US assets.
08:39So that relationship is working less well. And when you look at the US, what do you have?
08:44You still have an exceptionally high valuation. The sector-adjusted P is 30% above its post-2010 norm.
08:51You have an exceptionally bad fiscal position. You have an exceptionally bad net foreign debt, which is nearly 90% of GDP.
09:00It was single digit 25 years ago. And buybacks, which used to be the lifeblood of the US, as a proportion of market cap are now on a par with Europe and Japan and below the UK.
09:13They used to be much higher. So a lot of those drivers which were there are relatively not there.
09:19It was very low.
09:20Only $1.4000 more.
09:21Why?
09:22I said no doubt $5.4000.
09:31No doubt he could make it better.
09:34However thatganza then $6000 is up an Cathedral to be hard.
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