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00:00It does seem that the market is reading the ceasefire wrongly. It is not de-escalation.
00:06Yeah, I think the market has been a little bit complacent here. When you look at sort of the
00:10reaction to the ceasefire, yes, you know, the temperatures have cooled down a little bit.
00:15But I think the bigger implication is how do you think about energy prices and how do you think
00:19about the flow of energy from here on out? Because realistically, even if you started today
00:24and you started, you know, everything sort of magically restarted, you magically started seeing
00:29the flow of energy coming back through. It's a couple of months to work your way through just
00:34the logistics of getting all those freighters back through. I mean, you're still digesting a month ago
00:40the last freighters that would have left, you know, the Shred of Hormuz that would have been arriving
00:45in Europe into Asia and things along those lines. We're not even actually seeing the physical
00:49disruption from that yet. And then on top of that, you've had destruction and impairment of some of
00:55these assets within the Middle East as well. So you have Qatar, you know, what was hit in that major
01:01natural gas facility that could be up to a five year process to get that up and running back to
01:05full
01:06capacity. It's about Iraq, because they haven't been able to get a lot of their energy out. That's four
01:11million barrels a day. They've shut in about 70 percent of their production. And then even after the
01:17ceasefire was announced, you had drone strikes that hit the east west pipeline from Saudi Arabia, which is the
01:22main point that they were using to sort of get oil out, even after the sort of the street was
01:27hit.
01:28That pumping facility was slowed down. And then Fujara as well on the UAE, that facility was hit as
01:34well. So I think the market is taking this a little bit too lightly. I think of the grand scheme,
01:40you know, we had, you know, $60 oil before we went into this crisis that was pricing in a
01:44surplus of energy supply. What we can see now is that that surplus is gone. So at the very least,
01:50you're looking at a balanced market, probably closer to 80. And then each day that this ticks on, you're
01:55looking at energy prices going higher from here.
01:58It's not just mispricing in terms of the energy market is also elsewhere. If you take a look at the
02:05stock
02:05market right now, where are you seeing the biggest mispricings?
02:10Yeah, so there's a couple of different places, obviously within energy. You know, some of the stocks have been
02:15trading off a little bit recently on some of this hope that there's an off ramp here. We think a
02:21lot
02:21of the cyclical companies, even before you came into this, you know, Iran conflict, were priced to
02:26perfection. You know, people were assuming there was going to be some sort of economic reacceleration
02:31because of deregulation and things along those lines. And you had companies like Caterpillar,
02:35John Deere at 30 times earnings. You had GE at 45 times earnings. You had like a Goldman Sachs from
02:41a
02:41banking perspective at 2.6 times book value. A lot of the European banks were trading at one and a
02:47half to two times book. You were pricing perfection. You were assuming that the best case scenario was
02:52going to come through. And that may have been true before a lot of this happened, but the market
02:57wasn't ready for anything less than perfect. And that was the argument that we were making
03:02internally at GQG was not necessarily that we were expecting an armed conflict to flare up within the
03:07Middle East was that the market was just not pricing anything less than spectacular. And I think
03:12we're still trying to work our way through that now. And the market's kind of trying to play this
03:17V-shape, you know, Liberation Day rebound. And I think the physical implications are just a little
03:22bit more difficult to deal with than what the market is getting a credit for. What's also been
03:28interesting is earnings. We've seen very little earnings revisions to the negative. I'm just wondering
03:33whether we're in for a huge surprise when it comes to those revisions later on.
03:39Well, energy is one of the biggest, you know, fiscal inputs, you know, from a stimulus perspective,
03:45if you have cheap energy, which we have had for a number of years now. But it's also going to
03:50be a
03:51fairly large fiscal drag on the other side. You think about even by other products that are coming
03:56out of the Middle East. Think about helium. Helium is a major production component that goes into
04:02semi-conductors. And we're not seeing a whole lot of helium coming out through the straighter
04:05removes because that was a byproduct of what was being produced in Qatar. You think about energy
04:11inputs in some of these other countries as well. Natural gas is a very needed commodity for production
04:17within a lot of parts of Asia. You think of like Singapore, for example, 95% of Singapore's power
04:22production comes from natural gas and they don't have a whole lot of storage. Korea is somewhere in
04:27the neighborhood of, you know, a quarter of their natural or their energy production comes from
04:32there. You know, companies in countries like Thailand are like 40 to 50% Hong Kong as well.
04:38So these are material things that you have to deal with. And if you're not getting this energy flow and
04:42it's going to be materially impaired, that's going to raise the costs for everything. And you're going
04:47to start seeing some slowdowns happening on the back end. So I think this is something that the
04:51markets are going to have to continue to contend with and eventually have to price in and earnings
04:55will have to come down. Right. So, Brian, how do you position, I mean, how do you position to
05:01capitalize on the opportunities when they come? So there's a couple of different things that you
05:05can think about. Number one, what we thought was interesting, even sort of observationally last
05:10year coming into this year is boring was on a discount. And so things that were perceived as a
05:17little bit slower growing, a little bit sleepier, more boring, things like utilities, things like
05:23staples, things like, you know, large pharma companies. If you think about the European context
05:28or utilities, power utilities, you know, developed, you know, regulated utilities tend to grow a little
05:34bit slower, but you're still getting caught six to 8% EPS growth. In some cases, a little bit even
05:38faster than that. You get a couple hundred basis points with dividend yields. You're not paying an
05:42egregious multiple. Those things now become more in focus because they should hold up substantially
05:47better during these types of environments. I think energy is another one. People are very quick to sort
05:53of call like, okay, well, energy had a little bit of a movement on a year-to-day basis. So
05:58therefore,
05:59we want to sell into any sort of strength. Again, as I mentioned before, the situation that we see in
06:04the straight-over moves, you've taken out that surplus. So now your baseline of where the bottom of that
06:09energy pricing is going to come through, even if this thing ends tomorrow, is probably closer to $80
06:15a barrel. And if ExxonMobil can make, you know, on an average energy price through 2030, the end of
06:21the decade, if they can make double-digit EPS on an average energy price of $60 a barrel, what can
06:27they do when energy is sitting closer to $80, let alone at $95 or $100 where we're sitting right now?
06:32So I think those are some areas that become extremely interesting, especially at these level
06:37of free cash flow yields and the dividends that you're getting off of these businesses coming through.
06:41They might be the only areas that actually work well if you get into a true energy
06:44shock type of scenario.
06:47So, Brian, when all these risks are being priced in properly, what kind of correction might we see,
06:53for example, in the S&P?
06:55Yeah, so the S&P is still baking in. Actually, some folks, if you can increase some of their
07:00estimates from an S&P 500 standpoint, I think you can see some fairly material downside from an S&P
07:06estimate standpoint. And although multiples have come in a little bit, largely driven by some of that
07:11tech rotation that you saw to some of those quote-unquote halo assets, those hard asset,
07:17low obsolescence risk is kind of the phrase that folks have coined. I think that you still see some
07:24downside pressure from an earnings perspective. The additional thing that I think people maybe
07:28aren't necessarily connecting the dots on is if you think about where does a lot of the funding from
07:34the technology side actually come from? So if you're concerned about an AI bubble at all, where does a lot
07:38of
07:39that funding come from? A lot of it is Middle Eastern investors. And if you've seen that that
07:43has tightened up and those investors haven't necessarily opened up to putting more money
07:48into private equity, private capital, or investing in data centers or investing in AI, and that's where
07:53a lot of those deep-pocketed sort of flows were going to, that could create a problem even on the
07:58U.S. technology side of things. And what's interesting there is we've already heard and seen
08:02some cases where folks have enacted force majeure and they've actually pulled their investment funds
08:08back in these types of scenarios. So could we actually see a slowdown in that capital cycle
08:14accelerate what might be the bubble burst on the AI side of things? We haven't even mentioned the fact
08:19that energy is actually driving interest rates and inflation higher. That is the very first thing
08:24that kills an economic cycle or a tech cycle as well. When you already have some questions about how much
08:31AI capex spending is actually going to yield from a return standpoint. So again, those are some of
08:36the things that we're concerned about. And I think the market has just been extremely complacent about
08:41pricing some of these risks in.
08:43So you're essentially saying that this Iran war could lead to the AI bubble bursting, but
08:49how might that play out? I mean, some companies are less exposed to that than others. Would it be,
08:56you know, the big players versus the smaller ones like the ones we're seeing in Asia?
09:03So a couple of things we've already heard is some of the smaller semiconductor manufacturers have,
09:08you know, seen some delays or been communicating some delays. So you're shifting around some supply
09:12there. But also if you're getting a delay and sort of when that capex is actually being distributed
09:19against, you know, from a capex perspective, from a hyperscaler perspective, does that slow down when
09:25that comes through? Again, that higher cost of capital, you have to start assessing, okay, well,
09:30if I have a higher borrowing cost and a lot of these hyperscalers are pushing more into using debt
09:36financing to fund a lot of their capex demands going forward, that makes it even more untenable for
09:41them to go down that process. Do investors start penalizing them? And then on the other side of
09:46things, if you look at, you know, some of these other areas that have been a little bit, I guess,
09:50beaten up and a little bit overlooked, like, you know, regulated utilities, like these consumer
09:56staples names, they may end up being a lot less bad than sort of the slowdown that you may get
10:01in a
10:02capex cycle from an AI perspective. Let's not forget that we really haven't even monetized AI in a really
10:08big way yet. You're only talking about 10, 20, 30 billion dollars of revenue against a trillion dollars
10:15almost in spending on a capex that's been, you know, sort of promised here or even sunk into the
10:20ground. Do you agree, Brian, that the likes of Microsoft, Alphabet, Amazon are more exposed when
10:27it comes to, you know, the shifting financial landscape versus the likes of your open AI, Anthropic?
10:34So I would argue that there is exposure on both sides, because if you think about some of those
10:39frontier model companies like the Anthropics, the open AIs, a lot, again, those funding rounds that
10:43they're getting from, they're going to Middle Eastern sovereigns and things like that to source
10:47some of that cash flow. And there's a lot of capex intensity there. But even if you mention,
10:52you know, an alphabet or like a meta, what are the basis of their revenues? It's actually
10:57advertising. And people forget that advertising is actually a very cyclical business. So if you're
11:03going into maybe a little bit of a downturn or a slowdown, one of the areas that companies,
11:07consumer products, companies, things like that will cut down in terms of their budget is going to be on
11:11the advertising side of things. So we actually, and you saw a little bit of this towards the end of
11:152021, now that these advertising business models have matured, you saw a little bit of a slowdown
11:21in advertising actually having a pretty material impact on their earnings. And again, this is against
11:26a situation where they're already spending well beyond their free cash flow. The free cash flow is
11:30essentially gone and they're raising debt on the other side of this. So I think this could have a
11:35material impact to the downside. So could we, might we see cracks in the financial system on the back
11:41of that, given the fact that we're seeing this massive capex and the market's been absorbing all
11:48this money? So from a financial system standpoint, again, we were a little bit more nervous just on
11:56the fact that people had priced in an optimal scenario. As I mentioned earlier, like a Goldman Sachs
12:01was sitting there at two and a half times book value, sort of structural highs. You have to think
12:07if some of these things, these capital cycles start to flow down, M&A activity has to slow down,
12:12investment banking activity maybe starts to slow down a little bit. Maybe the IPO process starts to
12:17slow down. It does. I'm not saying that this necessarily has to happen now, but this feels very
12:22late in the cycle. And then you have sort of this shock that is sitting on the other side of
12:27things
12:27that potentially slows things down a little bit further. Again, our argument isn't necessarily
12:32that we think all of this necessarily happens tomorrow. Our argument is that the market is
12:36already priced in that we move on beyond this and you're not getting paid for that. You're not
12:40getting paid for that. So what you are getting, you know, potentially paid for is anything less than
12:45the optimal scenario. The market's not ready for that. And we like our positioning in that type of
12:50scenario. We've been talking about exposure to the Iran war in one country, one market,
12:55hugely exposed is, in fact, India, but you're still bullish. Why is that?
13:01So what's interesting about India, I mentioned, you know, some of the power exposures and sort of the,
13:06you know, the energy exposures of some of the other countries where they're getting their
13:10natural gas from and how much of that is used. What is super interesting about India is a couple of
13:15things. Number one, their power production, 70% of their utility power production, their electricity
13:20generation, it actually comes from coal. And India has a lot of coal and they have the ability to
13:26continue to sort of process and get more of that. So from an actual utility and electricity generation
13:31standpoint, if, you know, 70%, almost three quarters of that power production is coming from coal,
13:36it's not as big of a deal for them to sort of absorb that. A lot of the rest of
13:40it, by the way,
13:41comes from green energy, things like wind power and solar. So very minimal, you're talking like
13:45three ish percent comes from actual natural gas. Now they are a net importer of energy,
13:50so they do take in crude oil and they do use that for petrol and diesel and things along those
13:56lines.
13:56And that will be a bit of a drag for them. The one thing I would say about that, though,
14:01is India has some of the most complex and advanced refineries in the entire world,
14:05and they're able to take crude flow from a variety of different sources. That's not true
14:09of everywhere in terms of the refining capacity, in terms of the mismatch that is out in some of
14:14other locations. But India could take Russian crude, which has now been freed up, at least the
14:19stuff on the water has been freed up from sanctions, some of the Iranian stuff that has been freed up,
14:24Venezuelan heavy sour crude has been freed up. So you're seeing that India has options in terms
14:29of these other things. And then the names that we own are much more on the infrastructure and utility
14:33side of things, which are the types of names that you would rather earn on during some of these
14:37periods of volatility anyway.
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