00:00You came into the year pricing a sharp global growth acceleration.
00:04Investors had thought they had learned over the previous three years
00:06you can safely ignore all downside risks
00:08because if you're positioned for downside risk, you're just going to lose money.
00:12Risk premier still, both in equity and credit markets, are close to a 20-year low,
00:16and I think that's simply not appropriate.
00:18We're facing a whole barrage of risks, as you said.
00:20It's the Iran war.
00:21It's a very weak U.S. labor market,
00:23and there are a lot of pressures in the credit space as well,
00:26and I'm sure you will have covered it on your program.
00:28Risk premier at a 20-year low are not appropriate,
00:30given that kind of environment that you're in.
00:33Risk premier just coming up, they have to go up further.
00:36If they do, that means lower equities.
00:38It means defensive outperformance relative to cyclicals,
00:41and it means that some of the winners that were basically positioned
00:44and were prized for a very easy and benign macro environment,
00:48like banks, like miners, like semiconductors,
00:50they will come under more pressure.
00:52On the benchmark, and timings, of course, are crucial,
00:55and huge question marks in terms of timings around this conflict.
00:58Across the benchmark, what assumptions are you making
01:00about the further downside as these risks are priced in?
01:03Yeah.
01:04So I find the U.S. higher credit spread,
01:06ironically, as an equity analyst, extremely helpful
01:08because it's a very good all-in gauge of risk premier.
01:11It's currently at 300 basis points.
01:13I would say you need maybe another 100 to 150 basis points
01:16upside for risk premier to fully reflect
01:19the likely probability-weighted range of outcomes.
01:23And of course, they're quite wide,
01:24but there are meaningful downside risks.
01:25If you were to get 100 basis points,
01:28a move higher in risk premier,
01:29that's around 10% downside for equities,
01:31and it's around 10% pullback for cyclicals,
01:33for asset defenses.
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