'Get Started' in Alternatives: JPM's David Kelly

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00:00So, David, I'll start with you. Economic nationalism. Is that just another way to describe de-lobalization?

00:07No, it's really about tariffs and immigration. So what we're seeing is a trade war.

00:14Obviously, we're sort of at the forefront of the trade war, but we are seeing these trade barriers go up.

00:20And to the extent the U.S. pushes up trade barriers, other countries will follow suit to some extent.

00:24And then also around the Western world, not just in the United States, but also in Europe,

00:28there's this pushback in immigration. And so it's like, we want to keep the goods out.

00:32We want to keep more immigrants out. And those are kind of headwinds for the global economy.

00:39There are offsets, which we'll get to. But those are kind of headwinds because they tend to push up

00:43inflationary pressures and slow down economic growth. And so really, it's trying to think about

00:48the other things that are going to allow us to move forward, given those headwinds.

00:51Well, Stephen, I'm going to steal Romaine's question because it's a good one.

00:54And how do you invest around that? Because if you take the example of the equity market

00:58being sort of jostled back and forth by these trade headlines, it just seems to inevitably go higher.

01:05Yeah, I think one of the things that we're trying to acknowledge, we need to realize in this report

01:08is that there's perhaps never been a bigger gap between the stock market and the economy.

01:12You know, there's a huge divergence. And what we're seeing in the stock market is that,

01:17you know, this shift to a more tech-heavy focus, the shift to companies that have

01:21asset-light balance sheets that have more sustainable margins and less economic cyclicality

01:26allows you to gain greater confidence in the ability to generate earnings growth.

01:31That's what's pushing markets higher, despite the fact that the pace of growth may be slowing.

01:35Are you getting a good read, though, on the markets if you are seeing that disconnect?

01:39Because we would always rely on the macro data to kind of divine where the stock market is going

01:43and maybe vice versa as well. But I'm curious, with that gulf, does it change what you have to look at

01:48to try to figure out where things are going? I think what it means is that you're going to see

01:52more divergence within markets. And parts of the market, like small-cap, more consumer-oriented

01:57parts of the market, are going to have that cyclicality, more of that economic exposure.

02:02But the technology sector seems to be diverging more so from the economy. Now, that's more of a U.S. phenomenon.

02:09Globally, there's still an element of economic cyclicality in places like Europe, which is actually a good thing

02:15because you've actually upgraded our growth expectations for Europe.

02:19One thing, though, I am curious about, and David, this gets maybe to the idea of your immigration point,

02:23is this idea of sort of economic mobility. So with this sort of nationalism, we've seen it here in

02:29the U.S., obviously, shutting out immigrants, including high-skilled immigrants. You've seen other

02:33countries do it as well. And even on the tech front, we go back over the last few decades and you think

02:37about the sharing of ideas across borders. Is that lost or is that just going to morph into something

02:43different? I think it's partially lost. I mean, the United States has regrown because, you know,

02:48it's basically, you know, send me your tired, your hungry, also send me your skilled, send me your

02:53goods, send me your ideas, send your... We've been sort of, send it all here. That's kind of been our

02:57attitude for two centuries. And now it's more like, you know, please keep it away. And that's not great.

03:02But there is also a counter-reaction because, you know, the economy responds to that. So we will see

03:07a certain amount of development of our own industries. And all around the world,

03:11you know, they are adapting to a world in which maybe the U.S. isn't going to be

03:15the only place for tech going forward. So it does, as Stephen was saying, it opens up opportunities.

03:20We're looking at places like Europe and emerging markets or somewhere where, you know, people are

03:24very under-invested right now in the U.S. and where U.S. investors are. And that's something to look at.

03:30I do want to talk a little bit more directly about artificial intelligence because it's hard to talk

03:34about the coming decade without speaking explicitly about AI. You write that when it comes to the AI boom,

03:40it's going to be, of course, a factor there. But we're at a critical juncture. And I would love

03:46to articulate what that juncture is because that could mean different things to different people.

03:50Well, yes, because we've seen so much enthusiasm. And it reminds me a little bit, of course,

03:54it reminds everybody a little bit of the late 1990s where we had the initial Internet boom. And it was

03:58real. You know, there's no doubt that the Internet changed the world. But you still have to be careful

04:03around markets because we had a huge sell-off in technology stocks. And we had a small recession in the

04:09early 2000s. So we're worried that, you know, obviously we could get out above our skis in certain

04:15tech companies. I think you've got to be very careful which tech winners you're looking at. But also, you know,

04:20this is long-term investing. And so we're thinking over the next 5, 10, 15 years, you're going to see AI more

04:25and more integrated. That is going to push our productivity growth. And we know that productivity gains

04:30tend to head towards companies. I mean, U.S. companies are very good at realizing profits from this.

04:35And this is really part of the sort of tortoise and hare we've got here. We've got a tortoise of an

04:39economy. We've got a hare of a market. And one of the reasons is that hare will gobble up the

04:45productivity improvements in the form of profits. So, Stephen, are you seeing that already, at least

04:48with the publicly traded companies? Is there a sort of evaluation that you can sort of put on that

04:53based on the potential for productivity improvements? Yes. I think one of the things that we need to

04:57acknowledge is that, you know, markets, particularly in the U.S., are expensive. And in fact,

05:01we forecast over the next 10 to 15 years, something like a 20 to 25 percent decline in multiples. We still

05:07think that U.S. equities can generate close to 7 percent a year, which would mean doubling your money over

05:12that time period. Yeah. But I think what's important to recognize is that multiples, while they may come

05:17down, we don't think they come down to the long-term levels. The composition of the market today is better

05:21supported, stronger secular growth. And like we've been talking about, those margins are structurally higher

05:28and AI is only going to support that. I want to switch gears a little bit and talk about public

05:33versus privates, because in the alternative section of your report, you write that when it comes to

05:37private equity, the return assumption for private equity is about 10.2 percent right now. And you

05:43compare that to public equities, and it's pretty much on par. And we know that the last couple of years,

05:49interest in private markets has absolutely exploded. But when you compare the returns for public and

05:55private, and they're just about the same, I mean, does that favor one over the other?

06:00We don't think it favors one over the other. We think it favors a complement of both. I think one

06:05of the important dynamics to acknowledge is the fact that capital markets have evolved and companies

06:10have the ability to stay private much longer. That means the pond from which private equity investors

06:14are fishing has gotten bigger and potentially higher quality. The comparison that we like to make is to

06:20look at private equity relative to public small cap companies, because traditionally when you were looking

06:25for those next big growth companies, the next winners, you would look to small cap. Our small

06:29cap expectations have actually been moderating relative to both large cap companies and private

06:34equity, because those companies are not going public in as small cap companies. So we're having

06:40more strategic conversations with clients who traditionally would have allocated to public

06:44markets to find those next big winners in places like AI to get exposure through private markets.

06:49One of our big themes here is that people, even if you've done, particularly if you've done no

06:54alternatives, get started, because bonds alone is not enough to diversify a portfolio. And we think

07:01that, you know, if you're new to the alternative space, maybe having 10 percent of a portfolio in

07:05alternatives may make sense. And if you're more sophisticated or more, you've done it for a while,

07:11maybe 30 percent in alternatives could make sense. What we find is it can add to returns, but also lower the

07:16volatility of portfolios and particularly when public markets have done so well, adding things like

07:20private equity, but also things like infrastructure, transportation, real estate to a portfolio just

07:25helps give it some balance at a time when, when frankly, markets aren't very balanced.

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