00:00So we've been flagging the need of diversifying away from the U.S. assets, diversifying, right?
00:07And given the scale of the U.S. assets, just small diversification means a lot for the prices of other asset classes.
00:15We started to see it in the fund flows, right?
00:18So the last few weeks, well, since the start of the year, we've finally started to see inflows into the European equities.
00:24And around 30 billion, right, just below 30 billion.
00:31So that's a lot for European equities.
00:33However, in the grand scale of things, given how much outflows we've seen beforehand and since the Ukrainian war has started,
00:41we've seen 16 percent of assets under management worth of outflows.
00:46So the latest inflows have offset only 10 percent of the previous outflows.
00:52So there's another 90 percent to go and the stock 600 is up 9 percent year to date.
00:57The S&P is essentially flat over that time frame.
01:00That story, that divergence then continues through the year.
01:02I think so.
01:03And it's not only the story of inflows into Europe that has been very under-owned.
01:07It's also the story of the U.S., which has been fully owned, especially for the international investors.
01:13So there are signs.
01:16And again, if it's going to happen, it's only starting because it's just made a small dent in the previous inflows.
01:24So international European investors diversifying back to home.
01:29What is the current tariff risk priced into European equities?
01:32So how about I put it through the earnings risk?
01:38Ten percent tariff risk was, in our view, was going to take away around three percentage points of EPS.
01:47We've been seeing huge downgrades, not only in Europe.
01:49These have been indiscriminate recessionary level of downgrades.
01:53So the direction of the analysis forecast, minus 60 percent a few weeks ago.
01:58That means for every 10 changes, you would have eight downgrades and two upgrades.
02:03Huge, huge amount of downgrades.
02:05That translated in Europe for growth expectations for EPS this year, from the start of the year,
02:11coming down from around 9 percent to 3 percent right now.
02:15So we've already shaved off 6 percent of that growth.
02:18Now, we have this model that tries to capture what kind of EPS outlook is pricing by the market.
02:24And it proves very helpful in times like this.
02:29So at the worst of the sell-off, it was telling us that European market pricing a flat EPS.
02:36Right now, it's pricing in around 4 percent EPS growth, which that's over the next 12 months, not for this year,
02:44which is still around two percentage points below the analysis.
02:47So the market, despite the rally, is still not as exuberant in terms of pricing in EPS growth.
02:54So I like to see buffer for some more downgrades to come through.
02:58When it comes to our targets, we still have around 5 percent upside by the end of the year.
03:03But we've been flagging that from these levels probably it's going to be a volatile rise.
03:07And what is happening in the bond market right now adds to these worries.
03:10So 5 percent, the volatility is there, the concern around the bond market.
03:14But there are some constructive kind of views in terms of how much is priced in on the tariff front for European equities with that focus on EPS.
03:21If they are at 10 percent, right?
03:23If they are at 20 percent, we are too high.
03:25Then we reassess.
03:26Before we let you go, you made some pretty bold calls on sectors the last time we spoke to you with that focus on autos and an overweight.
03:34Was it an overweight view on autos?
03:36Talk to us about how you've revised any of those calls.
03:38What sectors are standing out to you right now?
03:40Yes.
03:40So back four weeks ago, exactly when we've been seeing these recessionary level of earnings revisions, we've been flagging that historically that tends to be a contrarian by indicator, especially for beating up cyclicality.
03:53And at that point, we were in a balanced portfolio, a bit of cyclicality, a bit of defensiveness portfolio for uncertainty.
04:02What we've done is we have not moved fully into cyclicality, but we've dipped a toll into cyclicality.
04:09So I preferred growth cyclical, beating up cyclical continues to be tech and auto continues to be beating up value cyclical.
04:19Nonetheless, it's gone up 20 percent now, right?
04:22So you've got to imagine that from here we kind of need catalysts for that trade to keep on going.
04:29The signal is over the next 12 months.
04:31It worked very fast this time around, right?
04:34So let's see how that goes in the short term.
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