00:00How are you thinking about the bond sell-off and what it tells us about vulnerability in
00:05terms of our exposure to stocks or indeed if equities is the place you want to be in
00:10an environment of high yields?
00:11Yeah, I mean, maybe let's start with a fixed income component of that.
00:13There's a few factors driving bond yields higher and I don't think any of them are sort
00:17of brand new.
00:17If anything, the data is just cementing what we already suspected, which is that growth
00:21is strong and obviously PMIs overnight are indicating that across services and manufacturing.
00:27When we think about the supply that's coming to market, we know across governments and
00:32also on the corporate side financing the AI trade, that's only going to rise higher.
00:37And then underlying that, you've obviously got inflation fears with oil price still above
00:41$100 and no obvious off-ramp when it comes to the near-term.
00:44So yields higher from here as a result of this factor?
00:47I think we could still, you know, actually last time I was on the show we were talking
00:50about 5 to 5.25 is what could be the near-term range and we're sort of starting to push
00:55into
00:56that.
00:56Now, does that mean we don't like fixed income?
00:58I think it means that you need to be more selective.
01:00I mean, there's a lot of that news in the price already, whilst obviously the range I just
01:05gave you implied we could go higher, but we still think that fixed income, locking in
01:09yields has a place in portfolios and obviously whilst we've got a positive outlook, there
01:13are still things that could go wrong, including some elements of the AI trade, including the
01:18labour market.
01:19So I think there's a degree of fixed income being a hedge, but our real conviction does lie
01:23with equities and the fact that equities will be the growth engine of the portfolio.
01:27I know you're dying to ask how much of this bond story will derail the equity story and
01:33to me that does come down to earnings.
01:35What it's doing to the risk premium around equities as well and how you're thinking about
01:38that?
01:39Absolutely.
01:39I mean, you've got now a 5% risk-free rate, arguably, which raises the visibility you need
01:44around returns across all the different asset classes.
01:48For equities, I don't think equities have been complacent to the rise in yields so far.
01:53We know that equities are very sensitive to the pace of change.
01:56We've seen the 10-year up, what, about 35, 40 basis points over the course of the month.
02:01That's not quite a two-standard deviation move that can really rile equities, but equities
02:05are obviously going to be aware and I would argue they've digested a good element of that
02:09already, trading on 19 times forward earnings versus 22 times at the start of the year.
02:14But it does place a higher burden on earnings going forward.
02:17We know expectations are already high. We think those expectations are going to be met and possibly
02:23raised when we look at 2027 because of the AI capex cycle, but also a broader capex super cycle
02:30that we've been calling it that does support a broadening earnings super cycle. But it is,
02:35you know, you do need to be focused on companies with pricing power,
02:37with visible earnings stream and watching those cash flows as well.
