00:00It's another uncertainty. We already had a degree of uncertainty building in around AI. Maybe we'll
00:06talk a little bit more about that. But I think that clearly anything that changes the sort of
00:11inflation growth mix or the risk around that is going to have an impact, particularly so
00:16given that equities are relatively expensive. And that's been true in the US for a long time.
00:22But the rotation diversification trade we've been talking about over the last year,
00:27with other markets outperforming, has basically left them all quite expensive. And I would also
00:33say, bear in mind, in all equity markets in the last six months, you've seen a big upgrade to
00:38cyclical performance, reflecting a lot of confidence in growth. So anything at the margin that dampens
00:44that leaves them vulnerable, I think, to a correction, but not more than that. Nothing, I think, systemic.
00:50So give me a sense, first of all, of how long oil prices have to stay elevated for it to
00:56have an
00:57impact on how, I guess, CapEx for a lot of chief executives, but also prices and margins.
01:03Yeah, well, I think there's obviously two things here. There's how much oil prices go up and for
01:09how long they go up. So our assessment is that given the changes we've seen so far in aggregate
01:16globally, the effects on inflation are relatively modest, something like 0.2 on inflation globally,
01:24a little bit more in some other places, and very modest global impact on growth around 0.1,
01:30a bit more than that, 0.2 in Europe. But if we start to get them going to $100 or
01:36more,
01:36and they're prolonged, then you start to get into global inflation going up maybe 0.7,
01:42and a contraction in global growth by about 0.4, and any combination there between. So clearly,
01:49this is an anxiety not only about how long the conflict goes on, but what kind of effect it's
01:56going to have on the mix between growth and inflation. And we should also say that there's
02:00another channel, the whole sentiment channel. Financial conditions have been tightening globally
02:06about 0.3 since this conflict started. And that's another route to which it can affect confidence and
02:14equity valuations, at least in the nearer term. We were talking about the closure of the Strait
02:18of Hormuz. I mean, it's not closed, but actually there's no traffic almost at the moment. It's
02:22almost ground to a halt. Does that impact, I mean, does that play on inflation expectations
02:26or on shipping costs more directly? Well, both of those, I think. Again, the issue really is 20%
02:34of world supplies are going through that channel. It's obviously very, very significant. But there's
02:39a lot of uncertainty about how long that disruption will go on for. And that knocks on through to
02:46higher shipping costs, of course, and the routes that need to be diverted in order to get goods and
02:53services around the world. And that can take longer to do as well.
02:57And I guess there's still the uncertainty of trade and tariffs, because we don't know if,
03:02you know, some of the tariffs that were paid, you can claim it back, whether now there's 15%.
03:06I imagine you executives are also distracted with what's going on too politically to really
03:10look into that as much as maybe they should. I think that's all right. And, you know,
03:15the least, the last thing that investors like to see is uncertainty. And this is coming on top of a
03:22period where you've seen very, very strong rises in risk assets. So the valuation is part of that
03:29equation. But I do think it's important to also say, and we've written a note this week about
03:34correction risks, we do see further downside. But I don't think this is likely to morph into
03:40something more prolonged or deep or a bear market. And I think partly that is because
03:45the underlying growth cycle is pretty robust globally. You've got a lot of
03:49policy support coming through. Secondly, earnings, actually, at least up until this point,
03:55have been quite strong. And rather unusually, actually, earnings revisions globally so far
04:01this year have been going up. That's typically not the case. But thirdly, and very importantly,
04:06I think private sector balance sheets around the world are healthy. Households,
04:11corporates in aggregate, and banks, of course. And that, I think, again, softens some of the
04:15worst second-round effects that a shock like this might generate.
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