00:00At the start of this year, we identified three defining forces, which were global fragmentation,
00:05artificial intelligence, and also inflation. And not only do we think that they've proven prescient,
00:10but also that recent events, as you highlight, really have just added urgency to that call,
00:14whether it be events in the Middle East, where even if we do go down this path of a resolution,
00:19I think oil prices are going to remain with that risk premium over the next 12 months. But we also
00:24have artificial intelligence, new model releases so far this year, I think, have really evolved
00:29the bear case there as well. And inflation, where I think we're going to see some meaningfully
00:33higher points in the months to come. So all of those themes, I think, really defining.
00:38And at the same time, you've got equity markets really close to all-time highs. But I would say
00:44that to us, that does make sense. Because when you think about the underlying driver,
00:49not so much the emotional reaction to seeing some pretty scary headlines, but the underlying driver
00:55is more CapEx being spent. And obviously, that's not just associated with the AI build-out. But if
01:00you look at governments directing capital, companies also following suit, the most recent earnings
01:06that we saw, the past earnings season, saw a 12% increase in capital expenditure beyond AI CapEx.
01:14And I do think that economic value is going to flow to owners of risk. So that's why I think
01:18markets are at the highs.
01:19Grace, is there a danger that actually the CapEx, again, is going to be inflationary? And if interest
01:24rates have to go higher, we're hearing central banks like they're just really worried of making
01:28the wrong call. So if inflation is significantly higher, there's some kind of policy mistake.
01:33I mean, does CapEx automatically go up because of this? Or is there a concern that chief executives
01:39just spend less?
01:40Yeah, I think CapEx is rising because the underlying nature of national security has changed. And this
01:45is one of the structural changes that I think whilst investors shouldn't overreact to short-term
01:49headlines, they shouldn't underreact to these critical changes taking place beneath the surface
01:54of the market that's necessitating CapEx into issues of security, which is not just physical
01:59security, it's energy security, it's supply chain security. So that's why CapEx is rising across the
02:05board and in a global way. Now, as you say, Francine, it does mean that inflation is a risk. And
02:09one of the
02:10things we highlight in the outlook is the feeling that whilst we are equity bulls, we feel that
02:15portfolios aren't prepared for the full range of outcomes. And so we want income with inflation
02:21protection, so infrastructure, which still feels under-owned by the market. We think there's going
02:26to be volatility. So hedge funds, we think, are a really great asset to add gold as well. And yet,
02:32when we look at our own client portfolios, around 20% is still in cash or in short-dated securities
02:38maturing in less than 12 months. And so that's why we think actually, look, we want to be
02:42in there for the equity bull market that we still see ahead. But we do think that there's
02:47still portfolio resilience that needed to be added to capitalise on some of these trends.
Comments