00:00Yijing Hong, president and chief executive officer of State Street Investment Management.
00:04Yijing, thank you so much for being with us. Always a pleasure to speak with you.
00:07One of the reasons why I love speaking with you is because you can take a look at the flows
00:10and just how much people are rearranging ahead of some of this data. And frankly,
00:15in the wake of the performance that we've already seen, I'm just wondering how much
00:18you're seeing people withdraw cash following the momentum unwind or frankly, taking cash
00:24that they had in money market funds and starting to deploy it in more significant ways.
00:27You know, what we've seen all year is that money is moving into money market funds. It hasn't
00:33really shifted, even though the market regime has changed. And I think in large part because
00:38expectations of yields remaining at more elevated levels than they've been is attractive and it's
00:44an opportunity to leverage it for opportunistic moves into the market. But it is becoming what
00:49we see as a durable asset class. So it's a durable asset class at a time where people are expecting
00:54the Fed to likely remain on hold or potentially raise rates at some point. I'm just wondering
00:59what it would take to unlock that $8 trillion in money market funds or wherever it is right now
01:05to go into the financing of the data center build out that we see every single day with Intel
01:10necessarily raising another $15 billion in equity as they were just announcing.
01:15Well, you know, what we've seen is that investors are really wanting to barbell their portfolio.
01:20So they're leaning into a lot of the AI story where the growth is in the market and second
01:25quarter earnings are a really good example of that. Same time, lots of money are flowing into
01:31the fixed income market. But we see asset classes like cash, gold, commodities, private markets as
01:39sort of like the anchor to a lot of portfolios. So I'm not sure we're necessarily going to see that
01:43much of a shift. Private markets is the anchor for individual like wealth portfolios or institutions
01:50or both. Has that sort of shifted since earlier this morning? Earlier this year, I meant.
01:56Mostly from an institutional standpoint. You know, we've focused a lot on private credit. We've
02:01continued to see institutions move in, in large part because private credit tends to have floating
02:06rate interest rates. So that's attractive in this environment. Where we've been focused as a firm is
02:13really on the investment grade sector, introducing modest exposures into three ETFs we launched with
02:19Apollo and introducing private equity, private credit and real estate into our target date fund
02:25series. Modest amounts, 10%, but it adds added diversification and an opportunity for individual
02:32investors to take the longest horizon investment that they have and benefit from the value creation
02:39we're seeing in the private markets. When you look at financial markets and this year along,
02:44do you think it would matter if the Fed raised interest rates? Would that change your allocation?
02:50Not significantly. We are overweight equities today. U.S. first primarily, emerging markets
02:58secondarily. And I think it's really on the back of tremendous corporate earning strength.
03:04We think that the economy is in pretty good shape, although from our perspective, we believe the Fed
03:11really should hold steady on rates. And that's what we're calling for, for the balance of this year.
03:15But to the extent the Fed does move, and it's already indicated it has a more inclination to move
03:21faster, but gradually. We think the economy is robust still, but at the same time, where our worries are on
03:29the
03:29labor market. And so that's why we view interest rates being steady as the better case.
03:34What are you so concerned about with the labor market? It's been kind of this no hire, no fire
03:39paralysis, really, for a while. Exactly. And, you know, I think with the Friday report, it showed the
03:46labor economy being a little bit weaker. It's not a really strong source of inflation. And it's really
03:52that inflation picture that guides us to say, this is not a time to be raising rates.
03:57You know, there's a big discussion right now in the Federal Reserve and frankly in markets about
04:01artificial intelligence and how inflationary it's going to be versus the productivity boom that a
04:06lot of people are talking about. We're seeing, for example, the idea that you are seeing growth
04:11continue to accelerate, even with some of the inflationary components tied to labor, for example,
04:16come in. What are you seeing at State Street in particular of how you're deploying some of the AI
04:21tools, the efficiency versus the cost? You know, I think it is still early days for a lot of
04:28companies. I mean, clearly every single company is investing heavily, as we are at State Street.
04:34Where we see tremendous opportunities is with, you know, very significant processes, data intensive,
04:41sometimes very manual efforts, enormous efficiency gains. But we also see revenue opportunities,
04:48too, as we think about streamlining our investment process post-trade, if you will. And then also
04:54customizing to clients, being able to provide what we do for very, very large institutions all the way
05:00through to individual investors. We've seen already the financial industry contract a little bit on
05:05a headcount front. I just wonder from your vantage point, how you think about the growth of State
05:10Street is it surpasses $6 trillion. And it's footprint, it's headcount footprint in response to the
05:17greater efficiency that you can do. Is it just grow the assets by keeping the footprint the same? Is it
05:22potentially shrinking the total size of the employee base versus the overall assets?
05:28You know, we see AI as just an enabler, enabling our people to be able to do more. And so
05:36we don't see this
05:37really as a headcount reduction play, but more so a benefit to being able to serve our clients even better
05:43on a global basis. When will you know that it's fully worked, all of your AI investments that
05:50you're putting into the firm? Do you see it now? Do you actually see employees being more productive
05:54on a day-to-day basis? We're gradually seeing it. But as I said, I think it is early days.
05:59Once we
05:59really see meaningful moves in terms of whether it's margin or revenue acceleration, I think that'll be
06:05the time. I expect that'll be maybe a year, two, three years out.
06:10Given that you don't see it as a headcount reduction within State Street, do you see that
06:14in the broader labor market as well for other firms? I think what's happening is that companies
06:19are slowing down their level of hiring as they are also undergoing this AI journey and determining
06:26ultimately what other headcount needs and where is that headcount going to be really focused.
06:32Has this summer been quiet for you? Summer has not been quiet. Is it normally quiet?
06:37I would say a couple years back it was quiet, but these last couple of years it's been nonstop.
06:43You know, the volatility of VIX has gone down, but are people feeling that way or are people
06:46very engaged and they feel like they're trading on a continual basis? I think people are incredibly
06:50engaged. I mean, these are the kinds of conversations we're having with clients every
06:54day. What do we think about the concentration of returns? How do you diversify portfolios?
06:59What is the worry that's coming behind what's happening today? How do you protect against it?
07:04Yeah, this seems like it has been a summer that has gone by very quickly on one hand,
07:09but on the other hand, I don't know. It seems like every single day is a different story.
07:13It is. You see, obviously, what's going on with the Middle East. You see this massive debate,
07:18a change of the guard at the Federal Reserve all happening at the same time this summer as we head
07:23into a really important election when it comes to the midterms.
07:26How would you characterize, Eijin, the overall temperament of investors right now? Are they
07:30optimistic? Are they bullish? Or are they more skittish of the potential risks coming into the
07:35second half? I would say on balance, more optimistic. Obviously, you know, the concerns
07:40about stretch valuations and the amount of financing that's happening on the debt side. But at the same
07:47time, you have to go look at fundamentals. And fundamentals are very, very strong. And so from that
07:52standpoint, I would say that the concern levels have actually lessened as we've moved in throughout this year.
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