00:00Were you surprised by the outcome in terms of this naval blockade and how are you managing
00:06portfolios and trading around the risks at the moment? Morning, Heidi. Good to be here.
00:12Broadly, the starting point is as real money managers, we're not complacent. We're looking
00:17through the conflict. We're looking at scenarios. Obviously, there's going to be an economic impact
00:21globally and regionally and cross sectors and asset classes. So we're not complacent,
00:26just looking through the scenarios. So that's the justification. But with regard to the ceasefire,
00:33not ceasefire, now we're going to have the, obviously, the straight, the blockade with the
00:38US Navy, whatever it may be. These are just negotiating tactics, not being flippant with
00:43the comment. There's going to be many more twists and turns going forward. If people are looking for
00:51some transparency here, it's going to be very difficult to get a good look through. But price
00:55volatility will continue with pockets and will unwind. And then the volume impact, the shock
01:01to the underlying economies from, obviously, gas and energy and fertiliser, whatever it may be,
01:06that's yet to occur across global economies and different regions. So we've got the price shock.
01:11We're going to have the volume shock, as they say. It's going to impact broader economies.
01:15The starting point before the conflict, though, this is a key. Economic conditions were reasonable
01:20and accelerating in parts of the world going into the conflict. Earnings momentum and developed
01:24economies, particularly the US, are quite resilient. They're discounted. They remain discounted
01:28for the foreseeable future as we sit back. But at the moment, when it comes to listening
01:33to what Iran's got to say and the negotiations, you don't want to try and dismiss it, but you've
01:39got to look through it at the other end. And what's going to be at the other end? A different
01:42setup and a very large-scale infrastructure capex program over the next decade to deal with
01:48these sort of issues. We heard, of course, from Kristalina Georgieva saying that even if the
01:53ceasefire holds, there would be a period of time of adjustment for inflation pressures, right?
02:00You mentioned looking at the kind of real growth scenarios there. At what point do you start to be
02:04a little bit more concerned from that end, particularly the asymmetry of the situation that affects
02:10Asia-Pacific more than other economies? Yeah, spot on. So, first and foremost, we are concerned
02:18and obviously the scenarios and probability of recession, obviously, before the conflict
02:23announced is higher. But we think you can manage through that. And there's going to be more supply
02:28shocks and bottlenecks coming through as obviously the different spectrum of energy, LNG, oil,
02:35fertiliser, the whole supply chain. And it's going to be impacting some emerging economies
02:40and economic activity in North and Southeast Asia, in parts of Latin America as well. It's a global
02:48footprint. Europe's obviously going to be paying a higher price. But taking a step back, there'll be
02:51a drag on global growth. The US probably more resilient than most other developed economies.
02:57There'll be a higher inflation footprint to deal with going forward. Just as the four-quarter
03:02tariffs of last year are coming out of the system, we're going to be putting in these higher
03:10energy products right across the board. So, you've got to deal with that going forward.
03:14Inflation expectations is the key. We don't know where that would land at the moment.
03:17But just think of a high discount rate, higher inflation than policymakers would prefer to deal
03:23with as we navigate for the course of this year with many more frequent pockets of volatility.
03:28But the underlying earnings will come through and there will be a recovery at the end of this
03:33conflict whenever that is. But at the moment, these headlines are not going to be quite,
03:37they're not useful for investors.
03:41On the higher inflationary outlook, are you expecting more pressure for bond markets?
03:46We are seeing yields now surging the 10-year JGB at a 1997 high. Is this going to be meaningfully
03:54structural or is this just a knee-jerk reaction?
04:01The degree of the rise is knee-jerk. But at the same time, there's a structural higher nominal bond
04:08yield in the DM markets. And JGBs have got this other complication of this higher JGB yields across
04:15the curve at these multi-decade highs. We're going to be attracting capital back, which is going to be
04:18a slow destabilisation across bond markets globally, in addition to the current knee-jerk and
04:24obviously the structural. So there's three components to the JGBs. But higher nominal bond yields,
04:31steep, the steepness will remain. It could be a flattening because of the sell-off in that two,
04:35three year as rate rises are expected. High swap curves, the whole point, good for financial earnings,
04:41good volatility as well, picking up. But the thing again, high discount rates, no matter what part of
04:47the curve you want to refinance and swap out, higher cash rate discount rates to deal with,
04:52higher inflation, PPI, early signs, impact margins. Margins were healthy before the conflict.
04:59There's still a lot to give back. So it is not ideal. But at the same time, this is not
05:04a sell the
05:05risk off short at the moment. It's just sit back and see how you go through across the asset classes.
05:11Everything's obviously looking for the correlations, but it bumps ahead. But real money investors are
05:17looking through the conflict at the other end, given the situation where we know GDP will be
05:23revised lower in the second half of the year. George, when it comes to energy assets, resources,
05:29no matter how you cut it, is it structurally higher from here on out? Because we are refocusing
05:36on geopolitical risks. But at the same time, of course, we do have the enduring AI demand that
05:42we continue to see. Yeah, spot on. There's not a duality there. We believe it's a correlation there
05:49very quickly. So real money managers, overweight to energy assets early last year. We had to wait a
05:54long time to get that payback. It's a structural overweight to energy, resources, metals, and the AI
06:01has got more input, more productivity gains to deliver, and those multiples are lower.
06:05But here's the key going forward, is that there will be more M&A activity. So something like,
06:11as an example, Adnock gas, Adnock oil, Santos Australia didn't go ahead. They tried many different
06:18scenarios. That would be the perfect play of the Northern Hemisphere, Southern Hemisphere alignment,
06:23given the high capital, you know, AA plus for Adnock, triple B minus for Santos. That's a good case in
06:29point that you can cut and paste that scenario everywhere in the world. Expect much more M&A
06:34activity being strategic, and much more like SLB, Wally Parsons, a lot of CapEx coming into in the
06:41short term. But that's a structural play over the next decade or so. So it's more M&A, and the
06:47AI
06:47will be impacted as well, be contributing, obviously, into the energy sector, the energy services sector,
06:55right across the board. But most importantly, the productivity gains of the US, it looks quite
06:59resilient, will still come through up to 15% to 20% of the EPS of the S&P 500.
07:05We still
07:06believe it's coming through from productivity gains of the AI. They'll just be discounted
07:10multiples with that compression for the foreseeable future. And this is a key week for financials
07:16in the US reporting season, but very difficult because they can't give too much guidance
07:20given what's going on globally.
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