00:00Clearly the AI story has been dominating the Asia trading session and it's easy to conclude therefore that Europe has
00:06been losing out.
00:07But actually this week, interesting that this week European stocks are in danger of making gains.
00:12They have over the past four days as a whole.
00:15Oil is actually weaker than where it was at a lower price than where it was at the start of
00:19the week and yields are lower.
00:21So even on the story that we're worrying about, there is perhaps signs of tentative progress or is that too
00:27much to hope for?
00:30So I think there's two things there.
00:31I think first of all, European stocks outperforming.
00:34That is the exception that proves the rule.
00:36I think you can go on assuming that European stocks will underperform for a long time to come.
00:42They have too few of the companies that the world wants and they lack too many of the resources that
00:48the world is currently limited in access to because of the Strait of Hermos.
00:52Separately about the point of you're absolutely right that markets are trading very optimistically around the strait.
00:58There is an assumption that there'll be some kind of fudged diplomatic resolution or close to it.
01:04I think there's a general assumption in the market that the U.S. has no appetite to re-escalate, but
01:09that there must be a solution because it would be disastrous if there isn't a solution.
01:13I'm slightly worried by that assumption.
01:15I maybe sympathize with the idea that it's probably the most likely outcome, but I feel like that probability is
01:22given like about 98% probability by the market when in reality the two other outcomes, either U.S. escalating
01:27or that we just don't get a resolution and the strait stays severely impaired for months to come, are sizable
01:35risks that are underappreciated by the market.
01:37And that is my worry going into the weekend.
01:40Oh, we're starting to see a few canaries, though.
01:43Indonesia raising rates by 50 basis points this week.
01:46The Philippines, according to Goldman Sachs, are likely to do an off-cycle hike.
01:49You've got what's going on in Turkey.
01:50You're starting to see some cracks beginning to form, Mark.
01:53Do I need to pay attention to them?
01:57So if the strait doesn't open soon, you're going to see some real EM crises this year.
02:03You know, we're already starting to see it in like Schlenk and Rupi, as you've mentioned.
02:07Philippines, Indonesia are large examples.
02:10India is a big country that might have some problems.
02:14Turkey, obviously, is a broken market, going to stay completely under pressure.
02:18So, yeah, look, if the strait doesn't open very soon, we've got some severe problems across many emerging markets.
02:25And so, like, it's a binary outcome.
02:27And the market's price is if it's going to be resolved.
02:29If it doesn't get resolved soon, yeah, you've got a completely different trading scenario in the second half of this
02:34year if this doesn't get resolved in the coming weeks.
02:37Do you expect some of the actions that we're seeing in emerging markets being repeated and copied here in Europe,
02:41here in the UK in the months ahead if this continues?
02:46Actually, one of the arguments I've talked to some emerging markets people specifically this week about that EM crises are
02:52underpriced.
02:53And the pushback was, isn't it being underpriced everywhere?
02:56The risks being underpriced everywhere, including developed markets.
02:59I would say that the difference is that emerging markets, even if they're not as vulnerable on a superficial basis,
03:04they suffer much more catastrophic outcomes because the capital gets withdrawn to developed markets.
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