00:00We have this Fed decision. I wonder if getting through that, being able to put that behind us,
00:04opens the door to look more closely once again at fundamentals and valuations to, I guess,
00:09relish the success of the earnings season past and look ahead to the next one.
00:13Absolutely. So the macro story has been unexpectedly resilient. And it's really nice
00:18how the earnings growth story has kind of broadened out across industries, across regions.
00:24And while the market has been so focused on the rising yields, I think it's more important to
00:28kind of concentrate on what is the reason the yields are going up? Are the reasons a good set
00:33of reasons or a bad set of reasons? I would say they're kind of mixed because you do have concerns
00:38on fiscal supply and extreme competition for capital. But on the other hand, there are many
00:44good reasons. The world is normalizing to a world where capital has a kind of correct price,
00:51more efficient allocation of capital, productivity, and obviously the AI-led boom. So it's real yields
00:58going up. So in this kind of an environment, I would say it's a resilient environment for earnings
01:03growth. The only thing we do need to be cognizant of is so much is rising. It's kind of riding
01:09on
01:10these earnings growth coming from the AI story that this story has to play itself out because
01:17it's really carrying the markets. Does the narrative continue? How do you look at what's
01:20happened over the course of the last week? I don't want to say that it's stalled out, but we were
01:24certainly throwing a curveball here when it comes to these hyperscalers getting together, talking
01:28about the potential risks here. How does that change the narrative as you see it evolving when
01:32it comes to the AI that, as you point out, is kind of buffeting so many stocks in the Xs?
01:36So I would like to point out one statistic that really points out the extent to which AI is
01:41carrying the markets. If you look at forward P's, because earnings growth expectations are so good,
01:47year-to-date forward P's have really derated. We started the year at something like the 95th
01:55percentile for the all-world. Today, it's just about 55th percentile. It means valuations look
02:00really good, but that's on a forward basis. If you look at trailing basis, we in FTSE Russell,
02:05we calculate the CAPE ratio with a more normalized seven-year in the U.S. CPI. If you see that
02:15ratio, then we are at dot-com levels. So looking back, normalized at dot-com levels, but forward
02:22ones at average levels, that tells you the extent to which this is shaping the equity markets. And I
02:29would want to point out that whatever is happening with the hyperscalers, their CAPEX, it's now strongly
02:35impacting the fixed income markets, investment grade very strongly. It used to be completely an equity
02:41story. Today, it's investment grade because if you see the amount of debt that they're issuing,
02:46they've gone negative free cash flow. Investment grade year-over-year issuance is up 27%. We are in a
02:55very unique world where IG issuance is much more than high-yield issuance at a much higher rate,
03:01and the hyperscalers make up a good 12% to 13% of it. They were barely 1.5%
03:06two years back. So this
03:08whole hyperscaler AI story, it's moved from being equity story to across asset classes,
03:15certainly deeply in the fixed income investment grade story. Andrani, I want to get into investor
03:18psychology here. You write that investors are becoming more discerning. What does that mean
03:23in real terms? How are investors behaving in the moment that we're in?
03:27So, you know, traditionally, we think of markets being either risk on or risk off. We are not.
03:31Markets are very discerning from two angles. One, you're seeing that it's not just what companies are
03:37reporting in terms of their revenue and earnings. But the free cash flow, you know, the quality of
03:44the earnings, the free cash flow, it's really impacting markets. So not everybody is constantly
03:48just going up immediately after an earnings announcement. And even if you see how people
03:52are putting their capital to work, last three months, six months, the world that we are in post
03:57the Middle East crisis, it's really a barbell story where money is flowing into U.S. and global
04:03equities, the growth equities, the tech and AI. But it's also flowing very strongly into investment
04:11grade short term to intermediate duration. This barbell story tells you that investors are
04:17very discerning. Yes, they want to ride the upside growth, but they're also cognizant of the risk and
04:23they want capital preservation and they want the liquidity. So this barbell capital story really tells
04:29you the mind of the investors as they are thinking. You talk about kind of post the start of this
04:33crisis. And it strikes me that so many people across Wall Street now have to pay so much more
04:37attention to the world of energy, the world of commodities. And I know that you've pointed out
04:41that distillates are really something that merit a lot of focus here. But when you look at the market
04:45broadly, what are the sectors you're most worried about as we see diesel prices continuing to creep
04:50higher as there's continuing to be this kind of worldwide concern about refining capacity?
04:54Yeah, it's very true. You know, we started pointing it out in our research reports quite early that
04:59it's not just about the energy prices. It's the crack spreads that we really need to be concerned
05:04about because the refining constraints. And that's why the extent to which gasoline and heating oil
05:10have gone up is much more than crude. And remember, we are entering the winter season. It's an El
05:15Nino year. There's lots of uncertainty. So how that's going to play out in the consumption world is
05:20obviously something to keep an eye out on. Having said that, it is also true that the U.S. economy
05:26has
05:27really changed over the years where, yes, it used to be a consumption-led economy. Today,
05:32the GDP growth comes much more from investment. So that is one change. And given the structure of
05:39the income and wealth, it's so much driven by the top 1%, 5% that stress in the middle of
05:47the country,
05:48stress in the 50th percentile, 60th percentile, tends to have a much weaker effect on the headline
05:54level that drives markets. So those are two important things to keep in mind.
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