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00:00Grace, the day you start the show with Bitcoin means that there's something going on that you're trying to figure out.
00:06Whether this is a new asset class or how do you look at crypto overall?
00:10Yes, so it's actually not an asset that we cover at present because of the extreme volatility,
00:14such as what we're talking about at the moment.
00:16But I just say that the pullback that we're seeing, I think, is indicative of people getting to the end of the year,
00:22assessing positions that broadly have done really well,
00:25and acknowledging that whilst we think there is a path to positive risk asset returns next year,
00:30there's also a lot of risks out there.
00:33And so there's some of those risks really coming in to affect risk sentiment across the board,
00:37and particularly assets that aren't connected to cash flows and therefore are more intangible to value.
00:43I know, Grace, you were one of the first ones to also come out with your 2026 outlook.
00:46So that's done, but it still feels like it's really AI and the Fed that's supporting these markets.
00:51Yes, I think so.
00:52I mean, look, what's most interesting to me when I look back for 2025 is how the composition of growth has changed.
00:59I mean, AI-driven CapEx has really been what's driven over a percent of U.S. GDP,
01:05which means it's overtaken the consumer in 2025 as a driver of growth.
01:09Even when we look at within the consumer, it's bifurcated.
01:12You've got high-end consumers driving a lot of the spending.
01:15And so that bifurcation, I think, is interesting as it pertains to the risks,
01:18because the first risk to me really over the next three months is that the economy is weaker than consensus expects.
01:26So particularly when you look at youth unemployment, there's a few red flags.
01:29And so that's one of the reasons that we think the Fed will cut in December and again in the first quarter.
01:34And that certainly is one reason to push back against a consensus view that growth is going to be strong and accelerating through the first half of the year.
01:42And the AI CapEx piece, I think, is obviously also a key risk.
01:47You know, we're not going to stop asking the question, are we in a bubble?
01:50We're not going to find out.
01:51I mean, our view is that the next few quarters, you're still seeing extremely resilient demand.
01:57Demand still outstrips supply.
01:59But the question really is not for the next couple of quarters.
02:01It's more to two to three years down the line.
02:04What does that look like?
02:05And so our answer to that is what the market's overlooking is who are the productivity beneficiaries, not just productivity, but also then revenue growth opportunities.
02:15And that manifests in higher corporate margins.
02:17And in what time frame?
02:19Exactly.
02:19Well, I actually think the corporate margin story could play out sooner rather than later.
02:24I think that you could see corporate margins continue to exceed company expectations, not just in the technology sector,
02:30but from a broader swathe of sectors who are benefiting from the spending, but also from revenue and productivity enhancements.
02:38So when we talk risks, there's downside, but also upside risks, I think, for next year.
02:41Grace, going back to the U.S. economy, I mean, you were talking about this like K-shaped recovery with the risks, especially to, you know, unemployment for youth.
02:49But actually, how bad could it be?
02:51Because it feels like the market has completely now put to one side all the issues of tariffs and trade and even inflation picking back up.
02:58Yes.
02:58Could that come at the forefront?
02:59Well, I would actually go back to the inflation argument, because I think right now, over the next three months, as I say, particularly in absence of data,
03:06the risk could be that the labour market is weaker than expected.
03:08Now, once we start to get into next year and, you know, a lot of the tax rebates come, the one big beautiful bill beneficiaries start to flow through
03:16and should sort of really affect all consumers, but particularly perhaps that lower end cohort,
03:21then what I think you could see is a re-acceleration of growth and, with that, a re-acceleration of inflation.
03:26So you could have cyclical drivers of inflation next year, as well as more structural ones around demographics and AI spending,
03:33which means that whilst we're talking about the Fed cutting now, by the time we get to the middle of next year,
03:39I think we need to be open to the idea of would the Fed need to raise rates through the end of 2026 or into 2027.
03:45So that's quite a complex picture to navigate.
03:49You mentioned our outlook. It's entitled Promise and Pressure.
03:52We do think the promise is going to win out.
03:54We think it'll be another good year for equities.
03:56But for many of these pressures, diversifiers, the alternative asset classes, gold, hedge funds, infrastructure,
04:02we think they're all really good components to add to the portfolio.
04:05Grace, what do you do with the UK?
04:06So we had a big market event last week with the budget, and it seems, I mean, there were 80 measures.
04:12A lot of the market, you know, certain pockets of the market are still trying to figure out exactly what it means for them.
04:17Yes. I mean, the UK is often an overlooked market, and I think there are pockets of value.
04:21The budget was better than feared for many.
04:23You know, many of our clients are invested in UK gilts to, you know, sort of step out of cash and secure shorter-dated income.
04:31But I think within the UK stock market as well, the banks, the mining complex, I think, is interesting because I think the capital ratios are strong.
04:39The dividend return component, again, is very interesting to clients seeking income.
04:43So common overlooked.
04:45I wouldn't say it's our favorite market, but I think that there are opportunities there.
04:48What happens in Europe?
04:49Actually, there was the first – I had a couple of analysts yesterday saying that, again, the market is underestimating the fact that maybe the ECB doesn't move for quite some time,
04:59but then the next move up, end of next year, could be also interest rate hike.
05:03It could.
05:04I mean, we're on – we're expecting the ECB to be on hold.
05:07But, again, it depends on this profile of growth.
05:09And I think the consensus is that, particularly driven by the German fiscal spending, that growth in Europe starts to pick up in 2027.
05:16But actually, the European consumer is not in a bad place.
05:19Actually, the accumulated wealth there actually is arguably more in Europe than in the U.S. at the moment.
05:24And so if we see European growth come through a little bit stronger, more in 2026 rather than back-ended in 2027,
05:31I think that would be a positive catalyst for the European domestic economy.
05:35And it was interesting.
05:36I was in Asia last week seeing clients.
05:39And there's a real sense that actually some of the retailing in Asia is starting to pick up as well,
05:45which would be positive for European luxury, which is a sector that we recently upgraded,
05:49given that we do think whilst there's structural issues undoubtedly in China, you know, some of the luxury names are bumping along the bottom.
05:56Yeah.
05:56And that's like quite a stark reversal from a couple of months ago.
05:59I don't know whether it's pricing or is it just a China pickup?
06:02I think it's a bit of both.
06:03But China is a huge part of the sentiment and obviously the growth driver as well when it comes to European luxury.
06:10So the notion that actually, you know, Hong Kong retail sales could be improving, that people on the ground are starting to say,
06:17look, it's not so much that there's a V-shaped recovery coming out of the economy,
06:22but, you know, people have got quite used to where they are and they know it's not going to be resolved any time soon.
06:28But just a mild improvement from what's been a tough couple of years could be positive for sentiment.
06:33And again, in a sector that's pretty unloved at the moment.
06:35Grace, we've certainly seen some bumps along the road for global bonds.
06:40And yesterday we had a bit of a wobble because of what we heard from the Bank of Japan.
06:43Today there was an auction.
06:44Last month of the year it was fine.
06:46How do you look at Japan?
06:47Yeah.
06:48So Japan was sort of neutral rated from an equity position and similarly for the fixed income component as well.
06:54I think for the story in Japan on the equity side to do better, you need to continue to see the shareholder returns.
06:59But that's also a story in Europe, which is why we have a preference given the growth conversation that we had.
07:04And look, I still think for that scenario where growth surprises to the downside, fixed income is still going to provide support.
07:12So adding to government bonds, in our mind, our duration across the book is around 6.5 years, which is longer than some of the clients that we see,
07:22because we do want that inflation protection, the downside growth protection, but you still need the inflation side too, which is in the old space.
07:30There's so much political instability in geopolitics, which we cover on the show every day, but it doesn't quite translate into the markets,
07:37maybe at the margins into a little bit of oil.
07:40No, so it's interesting because actually when you look back over the last few decades,
07:45obviously geopolitics commands the larger share of airtime, but actually has never really had a lasting influence.
07:53I wouldn't say never has rarely had a lasting influence on financial markets and risk assets.
07:58And the exception is really when it hits the oil price.
08:01And so really that's the transmission mechanism.
08:04But our view is that oil is, you know, range bound to drifting lower because we still see a lot of supply coming.
08:10But that would obviously be one of the warning factors and not just for the impact overall on bond yields,
08:16on sentiment, but obviously on the inflation picture as well would be a concern.
08:21So gold is our main commodity that we're constructing.
08:24Grace, does that feel strange?
08:26I mean, when geopolitics, because we did go into the year saying, look, a lot will change.
08:30Trade is going to be really upended.
08:32Watch out for tariffs.
08:33And now, you know, are we in the clear or could it come back with force?
08:38I think we sort of think we are moving through the worst of the trade issues, you know, in the clear,
08:44if, you know, to categorize it more broadly.
08:48Obviously, on a sector by sector, there could be small nuances.
08:51But I think that the market sort of got over the trade issues quite quickly.
08:54The corporates, whilst we're still seeing some follow-through, some feed-through next year,
08:58the corporates have dealt with it admirably.
09:00And again, I have to think that that's also linked to some of the AI productivity benefits that are coming through.
09:05And so I think for the most part, trade should be behind us.
09:10And for it to cause real concern, you'd have to see something quite major that caused, you know,
09:15real issues in the system, more akin to what we had in the COVID pandemic,
09:18where you had proper supply disruption rather than just the fear of a couple more percent on the effective tariff rate.
09:25Grace, thank you so much for joining us.
09:26Grace Peters, our co-head of Global Investment Strategy at J.P. Morgan Private Bank.
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