00:00Can I just get your reaction to what we have seen. I mean what a morning with crude jumping to
00:05$119 a barrel with the front end of the gilts curve
00:08jumping up like 35 basis points. The BOE and the ECB pulling up interest rates globally after a Fed decision
00:15yesterday. No moves but everyone feels maybe a
00:19little bit hawkish. How do you see it. Yeah I think that's absolutely right. No doubt that the language that
00:25central banks have been
00:28pursuing particularly across Europe has been hawkish. And as you said in your report Europe is more exposed in many
00:35ways to the risks of
00:36spiking energy costs be it oil or gas. And of course European growth is starting from a weaker base. So
00:46that inflation growth mix
00:48deterioration that the markets increasingly worried about is having a bigger negative effect on the markets here. Bearing in mind
00:56though that
00:56European equities have had a very strong run up actually outperforming the U.S. through the course of last year
01:03and through the
01:03first couple of months of this year before the war started. So I think context is also important here.
01:08It certainly is. But I just do wonder Peter if it does make sense that you're seeing very limited declines
01:15in the U.S. given the rate
01:17volatility. Yes it's not as much as Europe. Yes the U.S. is more energy independent than both Europe and
01:24Asia. But does it
01:25make sense. Is that enough to protect the U.S. equity market from significant downside if this conflict continues on.
01:33Well you know we put a note out a couple of weeks ago saying that we thought that equities were
01:38at risk of a correction not a bear market.
01:42And that would still be our view. And so far the reaction in equities and indeed as you say in
01:48credit markets has been relatively muted
01:50and particularly so in the U.S. Look I think there's good reasons for that. The U.S. economy is
01:55robust and was so going into
01:57this crisis. Of course the dollar has gone up having been weakening through the course of the last year or
02:04so.
02:05And many of the biggest companies in the U.S. have very strong balance sheets and are less exposed to
02:11the negative effects of
02:12rising oil prices. So underlying earnings are pretty healthy there. But we shouldn't also dismiss the fact that the U
02:20.S.
02:20equity market like most equity markets is trading at valuations well above long term averages. Equity risk premium are low.
02:27And as bond yields go up that puts further downward pressure on equity markets. And also we came into this
02:34year in the U.S.
02:36markets and in other equity markets with cyclicals performing very strongly really reflecting quite a lot of confidence in growth.
02:43And anything at the margin that weakens that outlook I think does leave equities vulnerable in the short run. But
02:50longer term we think
02:52that the cycle remains intact. Private sector balance sheets are healthy and underlying profits are in a pretty good place.
02:59Peter what do you make of U.S. stocks versus rest of world. I mean I guess I've often made
03:06a
03:06big deal of the fact that European and Asian indexes other regional indexes really outperformed the U.S.
03:12last year. But of course they'd underperformed the U.S. for so long. How does the setup look to you
03:18right now especially
03:18given the energy independence problem that you know Europe and Asia have.
03:25Yes. Well our view over the last year or so has been that equities would start to broaden out geographically
03:33with other markets performing as well or better than the U.S.
03:38and across sectors with non-tech sectors also performing well and value also picking up relative to growth.
03:47And that really has been the setup over the last year.
03:51And part of that also reflected very significant valuation gaps between the U.S.
03:57which was much more expensive than other markets for much of the last decade or so.
04:04But I think in the current context of this shock because underlying economic growth is stronger in the U.S.
04:11and because the mix of earnings is slightly less sensitive to the impacts of rising energy prices
04:17and the dollar is the reserve currency and is rising.
04:20I think it's understandable that the U.S. equity market is behaving in a relatively defensive way.
04:26If this conflict is relatively short-lived and we go back to the previous underlying secular trends
04:34I think you will see many of the non-U.S. equity markets bounce quite strongly.
04:39And one of the other reasons for that is the big ramp up in CapEx spending from the tech majors
04:45is spilling out into big demand for infrastructure plays and companies that are helping to build the data centers
04:55the energy capacity that these technology companies need for their long-term growth.
05:01And a lot of that is also found in markets outside of the U.S.
05:04And I think that will probably reassert itself as a trend.
05:08Just on the spending, Peter, we were speaking with Joanne Feeney in the last hour
05:12basically making the case as frequently is, as a case as frequently made that companies hate uncertainty
05:19and this just adds to it.
05:20So you get a pullback in spending plans.
05:22I wonder if you see the same thing and if that is the case, what type of companies would pull
05:27back?
05:27Should we worry, for example, about hyperscalers not spending as much and supporting this American economy
05:32or is it more cyclical consumer type companies?
05:37Well, I think you said it. Investors and companies don't like uncertainty and anything that raises the degree of uncertainty
05:48in an economic sense is going to slow, if not derail, plans, whether it be for M&A and corporate
05:56activity
05:56or indeed for CapEx and investment spending.
05:59Look, I think the underlying pattern of CapEx spending, particularly amongst the dominant hyperscalers, is likely to continue
06:07because end demand remains extremely robust.
06:10I think that will remain the case.
06:13But of course, they do have the flexibility of moderating some of these plans.
06:18And if that happens, it will have a knock-on effect on all of the supply infrastructure,
06:26which was very much the beneficiaries of that CapEx spending.
06:29So, you know, I think we may see some stalling of pre-existing plans,
06:35but I don't think that this is really going to derail what is likely to be a cyclist trend,
06:41I think, of increased CapEx spending,
06:43because the world really has underinvested in infrastructure for a very long period of time.
06:50And as governments are increasing defense spending
06:54and the technology innovation boom is requiring more energy,
07:01I think you're going to see quite a long period of increased capital spending
07:05and focus on infrastructure.
07:07And that should be true in the U.S. and in other markets as well.
07:10Peter, is there a point at which oil stays too high for too long for you?
07:15And what is the duration that should start to worry us for, you know, $100 Brent?
07:22Yeah, look, absolutely.
07:24I think the issue, yeah, of course, the longer this goes on,
07:27the more risk that oil prices rise and spike more aggressively.
07:32And these relationships are not linear.
07:35So, you know, you can look at the sensitivities of a $10 rise in oil
07:40over a short period of time,
07:42and the overall impact of that is relatively modest on inflation,
07:46certainly core inflation or growth.
07:48But as you start to get the next $10 or the next $10 beyond that,
07:53it becomes successively more impactful.
07:55So I think we're very much at the point now of significant uncertainty
07:59because the length of time that oil prices have been rising
08:04and the volatility that you spoke of earlier
08:07is really raising anxieties about the longer-term effects
08:12that this may have on inflation and inflation expectations
08:15and therefore policy rates and growth.
08:18And that's what's really, I think, starting to feed into
08:22the near-term pricing of risk assets and particularly equities,
08:25which we're seeing, you know, weakening a little bit more now
08:29than we've been seeing in the last couple of weeks.
08:32So I think there is more risk on the downside in the short run.
08:35But again, I would emphasize that we don't think this is really going
08:39to derail the global growth story.
08:42And because private sector balance sheets are actually quite healthy
08:46and corporate balance sheets also,
08:49we think that this will be, you know,
08:53a temporary pullback in risk assets
08:55rather than something that's deeper and more prolonged.
08:58Peter, another way that had been described to me
09:01as to why we're not seeing a deeper pullback specifically in the U.S.
09:05is just that everybody is very well hedged.
09:07You haven't had retail throw in the towel yet.
09:10What are you looking at in terms of positioning,
09:13the sort of more technical factors that might be helping to put a floor
09:16under the losses of equities?
09:18I think you raise a very good point.
09:20I think that the institutions in aggregate have been well hedged
09:25and that's given some degree of stability and robustness to equity markets.
09:33A lot of what you've seen really is rotation within markets
09:37rather than an aggregate pullback.
09:39And some of this does reflect, I think,
09:41movements within portfolios to short cover positions
09:46where investors have been taking a negative view,
09:49but also broad hedging, which has been very significant.
09:52I think that, you know,
09:55one other very important thing to be watching here
09:57is the labor market
09:58because we were seeing some weakness in the labor market
10:01coming through in the U.S. before the war.
10:04And if that were to continue
10:06and that has an effect on consumer confidence
10:09alongside rising oil prices,
10:12that may have a little bit more of a dampening effect
10:14on retail consumers' willingness to, you know,
10:18continue to buy equities in the short run.
10:22But again, I think, you know,
10:24there are strong positive tailwinds here.
10:28The wealth effect has been strong.
10:30Financial conditions, particularly in the U.S.,
10:32have been very loose for a long time.
10:34Sure, they've risen sharply,
10:35but from a very, very accommodated level.
10:38So I think that at the moment,
10:41the behavior of the markets
10:43reflecting a good deal of hedging,
10:45I think, again, suggests that overall,
10:50you know, people are relatively well positioned
10:53for a short period of volatility,
10:56such as we're seeing at the moment.
10:57So I think that we're seeing at the moment.
10:57happening, but it feels like I also am multif merge
10:57And so I'm sure the answer that will be
10:57Do it with comfort?
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