00:00We're running out of superlatives here when it comes to the 30-year yield.
00:03You've said before that a lot of the bad news is already priced into bonds.
00:08Is there more pain to come?
00:10I think there could be, Lizzie, because when we think about the various factors driving the curve,
00:17some of them are good.
00:18You know, the recent growth numbers we've got, I think, are encouraging on both the services and the manufacturing side.
00:25And I do think the notion that we're in a higher nominal growth world is one of the factors driving
00:30the curve throughout inflation concerns and issuance.
00:34And we know issuance is not going away as we look to next year, not just government issuance,
00:38but also corporate bond issuance to fund the AI build out is potentially going to show quite a sizable increase.
00:46So I don't think these factors are going away.
00:48So we've obviously moved pretty far quite quickly over the last month.
00:53But I still think that you could see some upward bias to yields.
00:56And, you know, the two reasons why that wouldn't play out, I guess, firstly,
00:59would be if you did see some material weakening in the labour market or that you saw some unwind in
01:06the AI fundamentals.
01:07And when we look across all the data points, we don't see either of those two things playing out in
01:13the near term,
01:13which is why I think the bias has to be that you could continue to see some upward momentum.
01:19Is 6% the new 5% for 10-year yields?
01:23I think 6% feels a little bit of a stretch.
01:27We've spoken about 5 to 5.25 is the range that we think that you could settle in.
01:31That's for the 10-year part of the curve.
01:34So I think 6% would be a bit of a stretch.
01:36And obviously, when you then start to think about, OK, you're rebasing the risk-free rate,
01:41what does that mean for all the other asset classes?
01:43Is the pace of change is what's going to prove really important.
01:46So we're seeing, you know, overnight some indigestion in the equity space.
01:50I do think equities will continue to climb.
01:53I think they're going to overcome this, you know, rates wall of worry.
01:57But it does come down to earning stability.
01:59So I think, look, 5, 5.25, even up to 5.5, depending, again, about the different inputs,
02:04can be digested by the equity market.
02:07And obviously, it does create some opportunities for new fixed income money as well.
02:12And to what extent is that the case as well here in Europe?
02:14Because it hasn't been immune to the bond sell-off.
02:17No, indeed.
02:18And I think when we think about the opportunity set for Europe,
02:22actually, I'd argue that there's more opportunities coming in European fixed income
02:26because of the move high in rates versus European equities,
02:29where growth is still, you know, resilient, better than expected.
02:33Earnings are still good, but it falls significantly short of where the U.S. is.
02:37So I think, you know, stronger dollar due to the U.S. growth and rate backdrop.
02:42But in Europe, you know, a rising tide lifts all boats, as they say.
02:46But Europe would be our least preferred region on the equity side,
02:49but more opportunities in the fixed income side.
02:52Yeah, I wonder how much sort of collateral damage there is to those governments
02:57that are planning their budgets in Europe at the moment
02:59and looking at their debt interest costs rising day by day, it appears at this point.
03:04Is that going to exacerbate that fiscal squeeze that some of the countries
03:08like the U.K. and France are looking at?
03:11Yes, I mean, this is obviously one of the type groups that governments need to walk
03:15because there is genuine need for capital.
03:17When we think about capital, the capital super cycle, the CapEx super cycle, as we call it,
03:22it's very easy to think that that's just AI and therefore less relevant to Europe.
03:27But the other big part of it is issues of national security, and this is hugely relevant to Europe
03:32when we think about defence spending, you know, energy security, supply chain security.
03:37So there are genuine needs for, you know, sort of this CapEx expenditure to very much stay here in Europe.
03:45But it obviously does create upward pressure on the long end of the curve.
03:50And also, you know, as we go into a year where there's somewhat of an election calendar,
03:56you know, sort of some political issues as well.
03:58When we talk about cyber security, I couldn't not ask you.
04:01Bloomberg are reporting this morning about how Morgan Stanley have accidentally leaked their deal list
04:06in an email to clients.
04:07And, of course, we're all obsessed with AI and every cyber security story is a worry.
04:14How do you think about the risks on the horizon when it comes to artificial intelligence?
04:18We've heard some serious doom and gloom in recent weeks.
04:21Yes, no, for sure.
04:23I mean, to be clear, we are bullish AI in our own business as well as, you know,
04:27across the impacts across public and private markets.
04:30But you're absolutely right, Lizzie, there are risks and they come in waves, don't they?
04:34The market a few weeks ago worried about, you know, sort of the need to slow down the pace of
04:39the AI build out
04:40for many of the reasons that you reference.
04:42When it comes to the investment perspective, it's impacting us in a few ways.
04:46So, firstly, cyber security, you know, keeping house and home safe, I think, is a key risk and an investable
04:52theme.
04:53It also is changing a little bit how we think about infrastructure because infrastructure has been a key call of
04:58ours.
04:58We think infrastructure does well in a higher inflation environment and obviously is feeding into this CapEx supercycle I've referenced.
05:05But with the growing importance of strategic assets, often comes, you know, some vulnerabilities as well.
05:11So, it's very much impacting how we're thinking, where policy interplays with the CapEx build out and the kind of
05:17assets that you choose.
05:19So, the risks are definitely there.
05:21But we think from a portfolio perspective, equities provide the growth.
05:25Fixed income provides some defensive ballast, but alternatives, hedge funds for those uncorrelated assets, infrastructure I've mentioned,
05:32and gold because of the deficit fear is still really important to think about from a strategic asset allocation perspective.
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