00:00So just in the last few minutes or so, we kind of painted the picture of that biffication of these
00:04markets right on the one hand, really the revival of the memory chip trade that continues to drive markets like
00:11Korea, even Japan, where you are with semiconductor names being listed there, to new highs. On the other hand, the
00:18macro picture is is still holds the potential to be so dire.
00:25Yeah, that's right. And it's good to be with both of you. Thank you for having me. I'd like to
00:29point out, I think it's a very exciting time to be here in Tokyo. I've met with a number of
00:34clients and large asset allocators. And this question that you're asking me is the question that we've been dealing with
00:39and getting from clients really over the last couple of days.
00:42How can it possibly be that we have a war in Iran? We have fallout still continuing from AI winners
00:49and losers. We still have some questions around private credit. And yet markets continue to grind higher.
00:55And I would say there's really three reasons for this. And maybe I'd center them a bit from a U
00:59.S. perspective, but I would say they apply more globally as well.
01:02The first is that the economy in the U.S. continues to do quite well, right? We'll have 2 percent
01:07GDP growth this year. We have a Fed that's expected to cut two more times throughout the rest of the
01:13year.
01:13And so the economy is generally doing pretty well. The big driver, I would say, is the corporate sector and
01:20corporate earnings more generally.
01:21It's expected that we'll have 12 percent earnings growth this quarter, which will be the sixth consecutive quarter of double
01:29-digit earnings growth.
01:30That is real momentum in the corporate market. We also have record buybacks. We have 100 percent increase in M
01:36&A volume.
01:37There's a lot of momentum within the corporate sector. And so the obvious big risk is, does this ceasefire hold?
01:43Does the straight reopen within a couple of weeks?
01:46But if it does, which is what the market is pricing in, then I think you can see some calm
01:51be restored back to the markets, which I think is what we're seeing today.
01:55And to be fair, we talk about dislocation, but there are many elements of the AI story that very much
02:01rely on the availability and the well pricing of energy and commodities, right?
02:07You're in Tokyo. You're obviously in region. What opportunities specifically do you see when it comes to these markets that
02:13you're close to right now?
02:15Look, I think there's a lot of opportunity. Many, many clients are asking if there's actually been, you know, less
02:21of an acceleration within the AI tech trade over the last couple of months.
02:26And maybe this is an opportunity to reenter, right? If 40 percent of S&P earnings are coming from AI
02:32infrastructure investment more generally, there's more room to run here.
02:35So that's certainly one area where clients are focused. I would say that the broadening of equity markets more generally
02:43is another topic that's coming up in many of our conversations.
02:47And so talk about EM and is there more opportunity in both EM equity and EM debt.
02:53Talk about, you know, small cap in the U.S. more generally is another opportunity.
02:59And then I'd say that clients are also still focused on, you know, the actual reality of the situation where
03:04there does feel like there's more risk in the world.
03:05And so how do you protect the tails? How do you think about downside protection?
03:09How do you think about income? How do you think about, you know, pulling that all together in a way
03:13that builds a diversified portfolio?
03:15And so I think there's a lot of interesting topics and dynamics that clients are very focused on right now.
03:22Greg, would you include in that pile battery makers, alternative energy as well?
03:27Because if we take a look at this chart on the Bloomberg, I'll describe it for you.
03:30We've got Korean battery makers in particular performing extremely strongly.
03:35What's your outlook for this sector as the war drags on and consumers potentially down the track feel a bit
03:41bruised by their experience at the petrol pump?
03:44Look, I think there will be a lot of questions that come from the Strait of Hormuz being closed for,
03:50you know, whatever it is now, four to six weeks.
03:52Right. And so when you have that issue where you can still have energy markets be, you know, deeply affected
03:58by geopolitical risks,
04:00there's a lot of exploration into alternative energy sources, whether it's batteries like you're talking about here,
04:06whether there's other opportunities to think through, you know, how do you get petrofuels out of the region of the
04:12Middle East?
04:13I think that's another area that there's going to be continued discussion.
04:16But this this momentum towards alternative energy is has been in place before the war will continue to persist after.
04:23And in fact, I would say there's going to be significant acceleration as a result of it.
04:28So we do think there's momentum in the battery trade, as you just outlined as well.
04:33Now, also, the war in the Gulf does lead to questions about inflation.
04:38And I know you describe inflation pressures as temporary, but I'd offer the observation that temporary sits very close to
04:44transitory in the dictionary.
04:46What's your outlook for inflation going forward?
04:50Yeah, this is the big if question, right?
04:52So if if the strain reopens in the next couple of weeks, we'll continue to see higher oil throughout the
04:58rest of the year.
04:59We'll continue to see inflation pick up.
05:01But I do think that the market has the ability to look through that.
05:05Right. And so our estimate is that inflation does pick up throughout the rest of the year.
05:10Certainly headline core, maybe to a little bit as well.
05:14But we do think that this is, you know, something that the market has a strong ability to look through
05:19over time again, managing through these risks that we obviously have today.
05:25Nick at 225, you've brought some luck with you, Greg, to Tokyo, rising above 60,000, that level for the
05:32first time on record.
05:33So we continue to see really this level of exuberance.
05:38And even as I say that, I wanted to get your take as to whether it is exuberance, whether this
05:43AI and chip driven rally that we see in these markets, is it still cyclical?
05:48Is it still sort of being looked at and traded as a commodity that's tied to these sort of boom
05:53bust cycles?
05:54Or do you think it's kind of shifted into something more fundamental than that?
06:00Look, the AI theme and the investment around AI is a real trend, and there has real momentum behind it.
06:08So we do think that this persists.
06:11We don't think that it's exuberance at this point.
06:14There's a lot of investment that's being made around the entire ecosystem of AI, from the chips themselves to the
06:21power sources related to the data centers.
06:26There's just a whole host of areas that are affected by AI, and that will continue to persist.
06:32I think what remains to be seen is sort of how long that this plays out.
06:36But from our perspective, if you look at the amount of investment in AI, which if you just look at
06:41the hyperscalers themselves, they've estimated to be investing close to a trillion dollars into the infrastructure associated with AI over
06:50the coming years.
06:51That is a significant number that will have massive impacts across the world.
06:55And so that number will continue to flow through markets in a variety of different ways and will keep a
07:02lot of momentum there.
07:03So let's go ahead and see what happens here.
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