00:00Let's just say, firstly, an amazing first half of the year, and despite all of the tribulations of that period
00:08in relation to the war and the rise in oil prices,
00:12the reason I think equities have done so well is because earnings have been broadly very strong,
00:17and that's been true across all of the main regions through the last six months, in fact the last year.
00:24And I think what's really going to drive equities in the second half of the year, again, is fundamental earnings
00:29growth.
00:30And there are two, I think, drivers to this.
00:33One of them is that earnings are really a function of nominal GDP, real GDP plus inflation.
00:40That's what drives sales and revenues, and that still is reasonably healthy.
00:46And secondly, the massive increase we're seeing in capex around AI commercialization is not just driving parts of the ecosystem
00:58in technology,
00:59and particularly the chip and memory stocks, but also spilling out into stronger earnings growth and cash flows in many
01:09of the infrastructure companies that are helping to support that build out.
01:13So I think earnings are going to still be the driver in the second half.
01:18They're likely to be weaker but still pretty healthy, and I think equities will make reasonable gains and be relatively
01:24broad-based.
01:27How long does that effect of capital expenditure filtering through wider parts of the market last?
01:34I mean, is there a question that we're in the peak of this now and that perhaps the effect will
01:39peter out over time?
01:41Yeah, I mean, at some point, of course, there is going to be a slowdown in demand for compute.
01:48It can't be limitless.
01:50And there's also going to be an increasing focus on the cost and price that users or consumers of AI
01:57are willing to pay to achieve that technology uplift.
02:01But I think we're still some way away from that slowdown happening.
02:05It's also worth noting, Stephen, that it's not just the increase in capex around AI, which is important here,
02:12but that we're in the early stages of a multi-year increase in infrastructure and capex spending coming from other
02:21factors as well.
02:21Remember, governments around the world are borrowing more money, and some of this is being spent on upgrading infrastructure,
02:29making supply chains more resilient in a more uncertain world, improving and strengthening energy capacity and distribution,
02:39as well, of course, as upgrading defence spending.
02:42All of these things require huge amounts of capital spending.
02:46A lot of it is on physical assets.
02:49And therefore, for the first time in really a generation, there is an increase and probably quite a sustained increase
02:56in investment and capital spending happening across most of the major economies.
03:01And that's, you know, there'll be ups and downs, no doubt.
03:04But I think that's that's an important underlying theme.
03:06Another theme of the first half of the year, Peter, has been the influence of retail investors.
03:11Does that change how you put your outlooks together when you have to consider such erratic, volatile behaviour?
03:18Yeah. Well, firstly, the massive increase in retail investors hasn't been true everywhere.
03:25That's mainly been true in the US. It's been true in parts of Asia.
03:28And I think that does, you know, is a sense reflecting a vulnerability that people are perhaps getting too overexcited
03:35about narratives in relation to things like AI.
03:39And of course, we've seen, you know, in some places like the US, an increase in margin borrowing to access
03:46equities.
03:47And we've seen an increase in demand for, you know, leveraged ETFs, for example.
03:54Now, of course, retail investors have been consistently strongly buying equities, particularly in the US over the last two or
04:01three years.
04:01And they've done very well as a result of that.
04:03So they actually have been positioning in quite a healthy way.
04:10But overall, I would say private sector balance sheets, including household balance sheets, are relatively healthy.
04:18So and there have been lots of strong wealth gains, particularly in the US, on the back of the rise,
04:26as we've seen in the equity market over the last three and a half years.
04:29So it's something definitely to watch. And, you know, if that becomes more speculative, I think it leads to vulnerabilities
04:37in a correction.
04:39But I think the underlying trend is still positive.
04:42Well, you mentioned Asia. I think you're pointing to the COSPI.
04:44Do those gains that we've seen continue? Is it still a good time to get in on the COSPI before
04:50the second half of the year?
04:52Well, again, let's put it in context.
04:54In the first almost half of the year, that market was up almost 100 percent.
04:59Breathtaking, yeah.
05:00And it had been up, I think, nearly 80 percent last year.
05:04Extraordinary gains.
05:05It is worth emphasising, though, that that index is heavily dominated by two companies which make up 60 percent of
05:12the index.
05:13And they are in the chip and memory space, which is at the hard end of the benefits of this
05:20CapEx spending, because that's what is really supporting this exponential rise in demand for compute.
05:28Our colleagues who cover that market are looking at the index growing earnings this year by 320 percent.
05:36So it's quite an extraordinary growth rate.
05:39Having said that, of course, any time there's any sense that you get a slowdown in the end demand for
05:47memory or chips, you know, that is a very cyclical industry and there will be a pullback.
05:52So I think it's important to emphasise that the chip sector is a cyclical sector and at some point there'll
05:59be a slowdown in demand and prices will adjust.
06:05But overall, we wouldn't expect to see the same kind of gains in the second half as we saw in
06:10the first half.
06:10But we have a positive view on the broad market.
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