Matthew Bullock:

Hello and welcome to our Market GPS 2025 Investment Outlook. It’s fair to say that 2024 has been quite a fascinating year for markets, which have been positive on the whole, but it may not have felt like that throughout the course of the year. There have been plenty of challenges that we’ve had to address, and we’ll cover a lot of those today.

But looking to the year ahead, we continue to face a number of unknowns, such as unresolved wars in the Middle East and Europe, concerns around Chinese economic growth, and a familiar face re-entering the White House to much noise and uncertainty. So, today, we’re going to try to break down the year ahead and discuss three key areas, firstly, which areas of the market we believe will struggle and which ones will benefit, what are our investors looking for in 2025, and are there any longer-term themes to participate in?

So to help answer those questions and many, many more, I’m delighted to be joined today by three experts from across our investment teams, Kareena Moledina, Fixed Income Client Portfolio Manager Lead for EMEA, Richard Clode, Technology Equity Portfolio Manager, and last but not least, Luke Newman, Absolute Return Portfolio Manager. So, welcome, and looking forward to it.

So to start things off, Kareena, I’ll give you the easy one to begin with, which is, everything was starting to look quite predictable a few months ago. Inflation was normalising, interest rates were starting to be cut. But yet now, especially post the US elections, we’re talking about a possible return of inflation, with tax cuts, tariffs, restrictions on immigration, the list goes on. So can you try to help us make some sort of sense of all of that for economic growth and the path of interest rates for the year ahead? So as I said, an easy question to begin.

Kareena Moledina:

Right, very easy. I can just answer that quickly now. But there’s lots to say about that. 2024 has actually been a great year for fixed income and equities. It’s been a triumphant year. And actually, when we think about the global economic outlook, it’s looking pretty good in the sense that there’s little sign of recession, in the US, in Europe. But would we say confidently that we’re 100% out of the woods? I’m not sure.

And really, I think that’s because of the uncertainty that lies ahead next year. And a lot of that comes from Trump and the Trump administration and the power that the Republicans now have when it comes to rewriting policy decisions. And really, the Fed can say that’s not going to impact their path in terms of what happens in politics, but any policy decisions that are rewritten is going to have an impact on the economic outlook.

Tariffs is going to be a key issue in terms of whether… The impact of tariffs, like are those costs going to be passed on to the consumers, the impact on currency exchange movements. If we think about the tariffs that impact on China, the impacts on the rest of the world and Europe, we’re looking, and that could shave about 2% off growth for somewhere like China, 1% for the rest of the world.

If you’ve got trade restrictions, then with that economic growth, that’s going to impact your deficit. It’s going to produce high deficits. And then in immigration and what’s happening there, the impact that that’s going to have on jobs growth and substantially lowering that. So I’m getting a little bit negative here, you can see. But what that’s really telling us is that we could see global growth re-moderate in 2025.

Now, when we think about inflation specifically, the fact that central banks have said that we’re going to be cutting rates and they’ve started that path, that is their way of saying that inflation is under control. And that is going to be a key risk going forward, because these sort of pro-growth fiscal policies could essentially be inflationary in nature.

So when we look at the path of interest rates going forward, and we’re thinking about that, it’s quite different in the sense that I think that’s going to be something the Federal Reserve, for example, is going to be viewing on a monthly basis. They’ve said that. But we could be entering that higher-for-longer rates narrative coming forward.

Now, whether it’s actually rates increase versus just the little higher-for-longer narrative, and maybe a pause or modest reductions, I think we’re leaning more to that latter camp as opposed to the fact that we’re just going to have rates increase as a whole. But lots to navigate for investors in 2025. And I think thinking about having diversified portfolios and asset allocation and bottom-up security selection is really going to be key.

Bullock:

And yes, there’s a lot there. And I dare say when we get to the questions, there’s going to be a lot of questions for you, breaking that down a bit further. So if you’re listening and you’ve got questions, throw them wherever. Kareena’s ready for them.

But Luke, you were nodding quite a bit then. And this must be a bit of music to your ears as an absolute return manager, that in this uncertain period we’re going into, that must mean greater winners and losers to give you a happy hunting ground. So if we stick to the US to begin with, what does that all mean for you, and where do you see the opportunities, but equally the threats?

Luke Newman:

Yes, you’re absolutely right. I think it was one of the notable features of 2024, was just the return of more rational dispersion for equity investors. And we saw a lot of volatility, but it was understandable, and I think you could track it on valuation lines as well as news flow. And you’re right, the US election was no different. We’ve seen a big reaction to the re-election of President Trump. But actually, I think when you look at the major moves, domestic US catching a bid, particularly small cap, which obviously had been under a lot of pressure. Financials, again no real surprise.

And then in terms of where we’ve been active on the short side, those industry sectors’ companies that are likely to be in the crosshairs in terms of the federal savings that the new administration, including Elon Musk, are looking to target, to finance the tax cuts in particular, and the spending plans, they’re the areas that the market is more uncertain about.

I think the surprise for us was probably technology, where if we looked back, having read the manifestos, it was surprising in some ways to see technology performing as strong as it has done post-election. But I think it’s probably testament to the structural growth that we can see within that sector, the AI capability, the strong balance sheets.

For us, it went to plan since this election. The one area we had to take some evasive action was partly in those US small caps through Russell shorts, which have clearly been under pressure from these higher-for-longer rates, more consumer. And then we did have shorts within some of the regional banks in the US.

And I think when you look at that sector from European eyes, I think we’d have a lot of sympathy that the capital positions are quite light. And clearly, we’ve been on a journey in the UK and Europe over a long time to rebuild those balance sheets using retained earnings. I think it’s probably fair to expect that maybe there’s a shortcut that’s offered to that sector.

So that was one area that we had to move quite quickly to neutralise those short positions. But generally, we’ve seen, yes, a lot of volatility, but I think understandable volatility. And we’ll talk later, I’m sure, about Europe and the US. So big focus on the US, but actually still very easy to allocate long capital into Europe and the UK. And you can argue and debate on the domestic exposed names. But remember, there’s lots of internationally exposed, lots of US exposure within Europe as well. So we don’t have to myopically be focused on the US market.

Bullock:

Well, we definitely will talk about Europe versus US, because actually one of the questions that’s already come in asks that. But before we get to that, I’m going to go across to technology. You mentioned about technology. And Richard, I want to bring you in now, because technology portfolio managers are always just optimists, aren’t they? The future is always looking very bright. But is it fair to say that this year, the market got a little bit ahead of itself, in particular around AI?

Richard Clode:

I would argue not, and to Luke’s point, I just think a lot more rational moves. You’ve seen the best performing stock, the one that’s got a $3 trillion in market cap. That’s just been based off their significant profit growth, to the point of five times more earnings power than people thought two years ago. Because generally, when you get these new technology waves, you end up with bigger markets than you ever expected, and it’s a winner takes most.

So again, that’s the difference between, say, 2020 and today. The winner is generating a lot of profits and being rewarded for that, but the tenth-best player in AI training is not being benefited by the stock market. And that’s where I think, as bottom-up stock pickers, we can generate a lot more alpha, being able to delineate between the two.

I think there’s been more scrutiny on, as we step up that AI infrastructure spending, capital spending so much, companies need to be able to show some pathway to monetising that and seeing some return on that investment. And we’re seeing a lot more companies talk about that. There’s always a lead time and a lag between spending on the infrastructure and then being able to monetise that down the line. Some early positive milestones and use cases we’re seeing, but we need to see a lot more of that.

So obviously, through 25, we certainly want to see a lot more proliferation in terms of those use cases, the return on that spending. But I think ultimately, that will lead to more breadth in the opportunity set in AI. And I think that went a bit too broad early, and then we’ve narrowed back down again. And I think that will just naturally broaden out as this technology wave ripples across multiple sectors and into other areas.

Bullock:

Right, okay. So, Kareena, I want to come back to you. And unfortunately, I’ve got another quite easy question here. But with this uncertain picture for growth, if yields do remain higher for longer, what does that mean for where the natural rate ends up?

Moledina:

I think when you look at what the futures market is pricing in now, I just had a quick look coming in here, the natural rate at the end of 2025 is being priced in at a 4% for the UK, around 1.7% for Europe, and then about 3.7% for the US. And actually, for the US, that’s quite different to what we saw in September, where we were at the 2.9%-3%.

So there has been a decent move. And I think considering where the market is saying the neutral rate is, we feel it could end up around 3% to 3.5%. But we’re not convinced it’s going to be a smooth journey to that. We feel it’s going to be quite a bumpy ride. And really, a lot of that is given Trump 2.0 and the uncertainty that lies there.

But really for us, when we’re thinking about that from a fixed income context, we’re thinking about how you make sure that you’ve got risk hedges in place as well to position for that higher-for-longer narrative, really. So some things that we’ve been doing in portfolios is having duration, and also having exposure to floating-rate high quality assets in the securitised space as well at the short end of the curve. It’s another risk hedge that could play out for that higher-for-longer narrative.

Bullock:

So on that higher for longer, that equally affects then you, Luke, and you as well, Richard, but Luke, starting with you. So with that potential rates being higher, or at least not being cut as fast as anticipated, does that give you more opportunities to look forward? Does that actually make you a bit more cautious? How do you approach that for next year?

Newman:

Yes. So there, I think it’s a really interesting question for us, because certainly there’s some areas of caution when we think about real-world effects. And I’ll come to that in just a second. But I think the bigger opportunity for us is one of this market regime that we’re in. This is the best opportunity we’ve seen for active equity stock pickers. And again, by extension, because we have a stock-specific short book within the Absolute Return strategies, we’ve got a bountiful opportunity ahead of us because of this rationality.

And part of it’s technical, because the discount rate is no longer zero or near zero. So we can appraise future cash flows in a different way. We’ve got less correlation in market. Not every growth asset is correlating with US Treasuries. So it’s much more stock-specific fundamentals mattering a lot more. And I think that’s been proven out over the last couple of years. And you can see it coming through in some of the strategies in terms of the ability to get back to the pre-QE levels of return.

But on the real-world element, I think there’s positives and negatives. I think on the negative side, clearly financing cost is higher. And we’re seeing corporates who haven’t addressed their balance sheet, haven’t addressed their borrowing, have large future borrowing requirements. And clearly, that will be reflected typically negatively within their valuations, either through potential for equity raise or simply through their own income statement, through higher interest rate costs.

But I think the real-world element on the long side is interesting as well. What we’ve seen is the strongest companies adapting, a bit like we’ve had to, to a higher hurdle rate. And you’ve seen greater clarity given around growth strategies, for companies deploying capital into an acquisition or a project, having to explain more around why profit and cash flow growth will exceed that hurdle going forward.

So I think there’s positives and negatives there. And that’s not a cop out. It’s really back to what normal used to be, that yes, money has a cost, and that’s likely to remain for the foreseeable future. Market regimes don’t change every couple of years. I think this is where we are for the medium term. I think when we look at the policy implications, as Kareena was saying, in the US, in the UK, and let’s see what happens in Europe, and some important days ahead for France and Germany in particular, but it wouldn’t surprise me if the consequences lead to stickier inflation than maybe the more dovish estimates were over the last couple of years.

Bullock:

So you said about how you’re seeing more opportunities now than, quote, ever before. Is that so?

Newman:

For ten years.

Bullock:

So we don’t all have that longevity in our careers. But if we, yes, look at that then, are you seeing equal opportunities on the long and the short side, or is it more skewed towards one versus the other?

Newman:

It’s interesting, and I always tend to trust our own net exposure, longs minus shorts, as our view on this. And what I would say, over the last 12 months, our net exposure was still net long, so more long exposure than the shorts, but it has been drifting down. So I think that’s telling you two things. One, where we’ve had long ideas that have worked well for the strategies, we’re finding it easier to take some profits there. But it is, at the margin, getting easier to bring new names in on the short side of the strategies.

Bullock:

Got it. Okay. Richard, I’ll bring you in now on the technology side of things. So if we look at the broad opportunity in technology, and sticking with that higher for longer on the interest rate side of things, and if we remove the big household names, so Apple, Nvidia, Microsoft, Broadcom, those sort of names, if we strip all those away, is impact of higher rates, or at least a slower pace of rate cuts, going to impact the sector great, in particular in that small cap space?

Clode:

You can probably sense from my reaction, I just don’t care about interest rates. I frankly don’t care.

Bullock:

Explain.

Clode:

I’ll explain. By that, I mean, look, I would worry if interest rates were going to go to 7%, 8%, 10%. I’m going to worry if interest rates go to zero. If they’re higher for longer, if they’re 3% to 5%, to Luke’s point, and I don’t quite have as much grey hair as Luke because I do technology, but we’ve been doing this for 20 years-plus. We remember when rates were 3% to 5% in 2005, 2006, 2007, in the late 90s, and you can make great money, and you had to be a stock picker.

And I just hear a lot of excuses from equity managers in particular that, oh, the Fed needs to cut faster or my small caps aren’t going to work, or this region is not going to work, or this sector is not going to work, and oh, the MAG7. But it’s all excuses. And actually, if you actually analyse it, it’s all completely wrong, and it’s just not true. At the end of the day, you’ve got to be able to pick a good company versus a bad company. That might be a mega cap, that might be a small cap. There are plenty of good small caps out there.

So our best performing stock year to date is NVIDIA, yes. Our second best performing, third best performing, fourth best performing are small and mid-caps, one of those in the US, two of them are in India. There are great opportunities out there. Anyone who’s telling you that they need the Fed to do something for one of their stocks to work probably isn’t a good stock picker.

Bullock:

Okay, great. Anything else to add on that? No? I think that’s perfectly clear. So I’m now going to open this question out to the group and see who wants to nibble at it first. But how critical will geopolitics be to the direction of the markets next year? And I’m going to keep staring until somebody answers that.

Newman:

Okay. Well, yes, clearly we’ve got those known unknowns again. We can see the broad areas. And even over the course of this week, some worrying, surprising news coming out of Asia. So yes, we’ll need to stay flexible, liquid, alert. But I think what we like to do, and this is a lot of work that ultimately doesn’t come to fruition, but actually we like to create blueprints of how we would react to the portfolio level in the event of certain news.

So I’m going to give you one example. What we’ve seen, and it may be wishful thinking to some extent, but if we see some sort of resolution, ceasefire, de-escalation in Ukraine, for instance, I think that for… And we’ve talked about US equities. For European equities, that could get very interesting very quickly on a number of counts.

And we’ll have to see. There’s been some shift, it looks like, in the domestic support for hostilities. And again, it’s always difficult to get clarity on these numbers. But let’s say there was some sort of neutral conclusion that we saw there, what we would be looking at, and are looking at, is the impact on energy prices. So could that start to open up gas imports back into Europe, maybe in a convoluted way, via Azerbaijan, but could that happen again?

But if you look at some of the areas of the equity market that have been under the most pressure, some of those German, European industrial cyclicals with a high energy requirement, that can get very interesting very quickly from a cost perspective. There’s a rebuild element.

And one sector that’s been very strong would be the aggregates and materials sector, cements, which have been on their own journey, coming in from the cold in an ESG lens, working hard and proving their worth. But really at the heart of this infrastructure rebuild we’ve seen across the US, but across parts of Europe as well, that’s the sector and industry that I think would be very much in demand in that environment. And valuations are not aggressive.

And then finally, and probably the most difficult, are those businesses that didn’t see their Russian or Ukrainian interests under pressure from various stakeholders, including shareholders a few years ago. What state are those assets in? Can they be switched back on? Can they start repatriating profitability back to the parents again? But that just gives you a sense of the sort of areas we’re looking at, for an event that we don’t know if it will happen or not, but we’d rather be prepared so we can move quickly.

Moledina:

I think it’s really hard to price geopolitical risk in terms of from a trade perspective and actually, the investment horizon, what would that look like? You’re going to see spreads widen, but that could be something that just happens over a view days, it could be something more longer term. It’s quite opaque to be able to assess something like that.

And I think, without sounding like a broken record in terms of what you’ve both been saying, it really goes back to that fundamental bottom-up positioning in your portfolio. From our perspective, that is risk management 101 for these sorts of scenarios, and making sure that you’ve got exposure to names that you feel comfortable holding and weathering potential storms ahead, also looking at the impact from a sector perspective, and what sectors are going to be impacted as a result of some of what’s going on in the different regions, etc., and what does that mean for your portfolio.

And it goes back to what I was saying about the risk hedges that you have in place. Have you got a portfolio that’s set up to navigate different environments? That’s what we think about when we’re looking at our multi-sector credit portfolios, dynamically allocating and, well, having the ability to dynamically allocate seamlessly across different sectors, but also focussing on having this high conviction, bottom-up approach.

Bullock:

And so, Luke, you mentioned about Ukraine, but the other one people are talking about is trade wars and potential trade wars next year with Trump coming into the White House. Again, it’s an unknown, well, known unknown. But how are you approaching that in portfolios right now? How are you thinking about that? Are you doing anything?

Clode:

I’d say it’s the latest chapter of many structural trends that are leading to a more de-globalised regional supply chain world. We already had… Post-demographics in China and an ageing workforce and a shrinking workforce and wages going up there, you had zero COVID and the concentration risk. You’ve got geopolitics now. You’ve got tariffs. All of that just means that you’re going to have to regionalise. A Tesla being sold to someone in China is going to be made in China. The same in the EU, the same in the US.

And we’ve already, at least from the tech side, seen that happen in the internet sector. We’ve seen that happen in smartphones. We’ve seen that happen in EVs. This isn’t really anything particularly new. There’ll be some added nuance and some tweets, I’m sure, for sure, about that. But we’ve already seen restrictions on EV tools from ASML into China or Nvidia chips into China.

So at least from our side, I’d say tech is probably one of the least impacted by that, and there are going to be some new things to worry about in a lot of other sectors. But I think in tech, at least we’ve got some of the board brushes already in place.

Newman:

I feel a lot’s moved on as well. Again, this was one of the two areas we were working on pre this election. One was the federal spending threat/opportunity for the US, and the other was the tariff. We had the spreadsheet from 2016. So actually, a lot of our work we did last time around in terms of which of the companies, who’s got the sourcing exposure, who’s got the reciprocal demand exposure.

And as we work through that spreadsheet, it’s amazing how much has changed. Where you’ve got industries and companies that were single sourced from China, let’s say, actually now they’re dual source, or they’ve got protections in place. Or, I think the market’s muscle memory is, actually, a lot of the areas that we worried about, because they were deemed to be volume dependent, maybe were a lot more insulated in reality.

So actually, it’s the other area that I think has been a surprise. Yes, it’s been noisy on the subject of tariffs, but we’ve seen definitely a more muted initial response than we did in 2016. And obviously, we’ll have to monitor that going forward.

Bullock:

So we’re getting close to the Q&A section. So just firstly, as a quick reminder, if you do have a question, feel free to pop it in the box and send it across. We’re getting plenty of questions through. So please add to those, and we’ll get to those very shortly. But before we do go to the questions, I am going to do what we did last time and I think we’ll do forevermore, which is to ask you to make a prediction of the year ahead. So we don’t want anyone sitting on the fence. So there’s no, on one hand this, on the other hand that. We want a few predictions. So what’s the one opportunity and the one threat that you’re looking out for in the new year? Who wants to go first?

Moledina:

I can go.

Bullock:

You can go first.

Moledina:

I’m obviously going to talk about fixed income, because that is the opportunity. And really, I think if you look at… A lot of clients that I’ve been speaking to, that had been in cash, are seeing that as you’ve got the rate cycle starting to take place, and history tells you that we are looking at 12-month returns post a rate-cutting cycle beginning, that you’re going to see fixed income outperform, and across fixed income sectors.

So for us, it’s really the yield. And that’s the opportunity, the yield that you’re getting in the fixed income market. Carry is king, as they say. But it is about how you build that yield. Because you don’t have to go into distressed debt and CCC-rated debt to get an attractive yield. You can get areas that we’ve been looking at, AAA CLOs. To actually get the yield in investment grade corporate assets that you’re getting on AAA CLOs, you have to go down to the BBB segment.

Agency mortgage-backed securities are looking attractive. They’re providing yield that you would get from CCC-rated debt back in the day. So we feel like that yield can really provide, I guess, a buffer to the volatility that you see, and potential impact on performance going forward. So that’s the opportunity.

And in terms of the threat, it’s inflation for us, really. And I’m talking about true inflation. Everything that’s happening, it’s essentially like inflation’s in the rearview mirror, it’s over. And if we truly see inflation pick up, not just bouts of sticky inflation, then that’s going to be something tricky for central banks to have to navigate.

Bullock:

Got it. Okay.

Clode:

The opportunity is the longevity of the opportunity in tech. We’re 17 years after the launch of the iPhone, and we’re still talking about the same stocks that ended up dominating the internet era. And we’re two years after the launch of ChatGPT and the Hopper chip coming out of NVIDIA. In 2035 investment outlook, I’ll still unfortunately be banging on about AI.

The risk to that is not going to be linear. A bit like in 2000, the expectations when you had a Nokia feature phone and dial-up broadband were not going to be able to realise the true potential of that technology, and it needed an iPhone to unlock that, I think that the technology is a lot further ahead in AI to be able to do that, and the valuations are nowhere near where they were in 2000. But it’s not going to be linear. And even this year, in a great tech year, we’ve had two significant drawdowns, in April and also in the summer. So the longevity of that opportunity, but staying and keeping that time in the market rather than trying to time the market, is crucial when it comes to tech investing.

Bullock:

Got it.

Newman:

I think it’s a two-pronged opportunity, and one, I’d hope for our investor base, reacquainting, rebuilding liquid alternative absolute return investment. And then I think the last two years have shown the value of strategies like ours within portfolios again. And again, we’ve been achieving at least two times the level of sovereign yield through that period with real consistency on a month-by-month basis. So that is an opportunity is the pitch.

And again, linking maybe then to Richard, actually one opportunity more immediately to us within the strategies is on our short book, and it’s the second-order impacts of AI. And actually, when I look at sectors like US food, consumer goods, some of the quick service restaurant groups, they’ve been in our crosshairs, because those are the businesses that we think are actually over-earned, overpriced through much of the last few years, through lockdowns and then through that inflationary spike that followed.

But those are the names, when we start to see those early stages, those early impacts on those businesses, similar to the obesity and the GLP-1 drugs, what changes in consumer habits are we seeing coming through, those are the areas that we’re seeing opportunities on the short book.

In terms of threats, I’d be very surprised next year if there wasn’t a US bond market wobble or panic. And we’ve alluded to some of it already. And we’ve got an expert here today. But when we look at the commitments in the US for tax cuts and spending, a lot of those are rolled across, and yet the funding of them is incremental.

And I think we, obviously sat here in London, have got very good experience of when the market starts to worry about deficits. Is there some early disappointment in terms of the success of addressing that federal spend, and could that cause a situation where we start to see a disorderly move wider in yields, and could that lead to the dollar under pressure and US markets under pressure? I wouldn’t say it’s the core scenario, but as a live threat that we are actively worrying about, that’s very much front and centre for us.

Bullock:

So we’re at the end of the questions, so we’ll go now to the Q&A. And as a last chance, if you do have any questions, do feel free to send them through. So we do have quite a number of different questions. So some are more specific, and some are to the broader group. So we’ll start off with Kareena. One of the questions that’s come up is, do we have a view, or does your team have a view, on Italian government bonds?

Moledina:

We don’t specifically trade the Italian government bonds in our portfolio. But overall, in terms of the views on fixed income government bonds as a whole, we’re quite positive. It’s duration in the portfolio which we talked about as beneficial going into the environment where rates are being cut. But that’s not something specifically that we’re trading.

Bullock:

And just sticking with you for the moment, because when you’ve talked about yields, one of the things that we did see over the last, well, several years now has been people putting a lot of money, investors putting a lot of money into cash…

Moledina:

Yes.

Bullock:

As a safe haven, and sticking there or staying in cash. What do you think about that, looking at the year ahead, about those investors? Is it right to stay in cash, or are there better options out there?

Moledina:

We used to have this slide in our decks that used to say, you can date cash, but don’t marry it. And I think that’s what we’ve been thinking, in the sense that it has proved beneficial for clients up until this point. But if you were to plot the returns, post rate hikes, you would see that cash underperforms, and I’ve looked at it versus the fixed income sector, that cash underperforms fixed income sectors. So we feel like with yields where they are now across fixed income asset classes, it’s truly an attractive opportunity for people to move, well, out of cash into fixed income.

Bullock:

Okay. So Luke, this is probably one more for you, although anyone can feel free to answer it. So it’s about the US, the US market, and talking about whether the US is a crowded trade. Because everyone’s talking about the exceptionalism in the US. Everyone’s piling money into the US. But does that mean that the opportunities are no longer there? Are the valuations too stretched? Or are you still seeing value there?

Newman:

Yes, we’re still. I think because it’s such a stock-specific market, we are genuinely seeing opportunities for the long and the short book in all regions. And I think it feels like certain market developments won’t go away. So obviously, we can see these higher passive flows, we can see the use of baskets thematically in sectors. They’re here to stay. It’s just that the correlation within them is a lot less tight. And it’s back to the things we’re talking about in terms of this return to a more rational environment.

So we’re reintroducing a lot of the work and screening tools that we used to use when rates were at this level. And you could do something very simple, a very simple cross-asset analysis, looking at equity free cash flow against the yield to maturity on a corporate bond for the same entity, so multi-asset 101. But it gives you some really interesting insights that are much more effective when it comes to deploying capital now. And generally, and this is a generalisation, US equity is looking obviously still a lot more highly valued than European equivalents in many cases.

I think one of the joys of the last two years for us, and we think it will continue, is the ability to start pair trading some of these opportunities again. So similar businesses, one listed in Europe, one in the US, that may compete and be the number one or two globally, rather than a 30% differential in valuation, actually, we’ve seen those parities, where they’re justified, re-establish again.

So these are great for us, because we can isolate a lot of other factors, other risks, and it’s just that alpha opportunity. And in a nutshell, that’s where our excitement is, those alpha opportunities over and above an index return, which is not what we’re looking to deliver. But the opportunity for alpha generation, again, is incredibly high.

Bullock:

On that pair trade side of things, this is not a pair trade, but you touched earlier on about US versus Europe.

Yes.

And that’s one of the questions that’s come through, which is, US or Europe? And where do you begin?

Newman:

It depends. We’re slightly net short US now, surprisingly, probably after these moves, and we’re net long in Europe. Now, that’s fluid and flexible, but that gives you a sense of where we are today.

Clode:

A few things to maybe add on the tech sector. One is, it’s exactly the opposite way around on the tech sector. Because there’s so few tech companies in Europe, or in Latin America, or anything you’d actually want to invest in Asia, there’s a huge scarcity premium put on all of them. And everyone herds into an ASML or whatever it is, and you end up at a significant valuation premium to the names in the US, just because there’s more of them. So actually, counterintuitively, in the tech sector, you often find actually the cheaper company is in the US versus Europe.

And then actually, I was looking at a slide the other day. It was almost like a paintball [gun] chart, in the last 50 years, companies created from scratch in terms of market cap. And the US was like this, just splattered gun everywhere as if some crazy three-year-old had gone loose with a paintball gun. And Europe, they literally looked like a couple of people had put a biro in there. That’s the difference in terms of innovation. And again, when we think about AI and we start seeing what’s out there, it seems like the movie is going to repeat itself in terms of the creation of new businesses in a new technology wave as well.

Bullock:

So actually, just to stay on the tech side, because we talked about crowd trades in the US, one of the questions that’s come through is saying, we get the idea about the long-term trajectory of technology, and AI in particular, but isn’t everybody talking about that? Is that a crowded trade, or is there still plenty of value opportunities out there?

Clode:

We still think there are a lot of opportunities. We had a top ten position in AI semis yesterday. It was up 23%. And again, that’s just because, finally, they actually designed the Amazon Trainium chip, which is seeing a lot of demand, and they’ve just done the deal with Anthropic. Anthropic’s going to be training their next large language model on AWS’s internal chips. But they don’t actually make the chips themselves. They actually get this company to do it. So we still think there is a lot of opportunity. You’ve just got to understand where this technology is going, and these key inflections, and who’s actually going to benefit from it.

So I think as a tech specialist, not just being as an active manager we’re very happy, but as a tech specialist, everyone understood the internet, everyone knew who the FAANG was. Now, with AI, they need us again, and they need to understand where this technology is going to go, and who’s going to benefit from it. And there isn’t the crowding, because unless you’re doing this 24-seven, it’s very hard to be able to appreciate where such a dynamic and innovative technology as this is going to go.

Bullock:

So I’ve got a couple here now for you, Kareena. So I’ll start with the more specific ones. So European corporate bond yields, well, will they be driven more by the next ECB rate cuts or by credit spread widening?

Moledina:

I think the focus is really on spreads and how that’s going to pan out. And actually, if you think about euro corporate bonds, if you look at the spread picture, it’s not that attractive, is the reality. But the yield picture’s attractive for what you’re getting for a high-quality asset. And actually, it’s not just about the valuations. You have to look at things such as fundamentals. And actually, the fundamentals are pretty strong when you look at corporates. So they seem to be in a pretty good place.

And then the other side is the technicals. If you think about the supply and demand technicals, net issuance is expected to be a bit less than it was this year. So that’s a positive technical for the market. So in terms of yields, and what’s going to affect yields, it would be things like spread moves. It can be things like rates. And so it’s a mix of both.

But you can’t think about valuations without thinking about technicals and fundamentals. So there’s lots of components that will go into the performance. But for someone who’s happy to… If you’re happy to think about the yield pickup, then it’s an attractive area to be in. But if you’re looking for attractive yields and attractive spreads, then you might want to venture at some investment grade exposure into areas such as securitise and diversify there.

Bullock:

And the second question that’s come through, and this can apply to many different central banks, but what is the risk that you see, and anybody can answer this as well, the risk of policy error?

Moledina:

Quite big. Well, I think they protect themselves by saying that we’re going to look at what’s happening on a month-by-month basis. Sometimes, when you hear about the decisions that are being considered, and you see all sorts of press articles in Bloomberg, and people talking about the next rate cut, it seems quite tactical in nature.

So overall, there’s a lot to navigate for central banks going forward. We’ve talked about that a lot today in terms of the environment, inflation rates, the economy. We’ve talked about all the obstacles that are generally facing the global economy. And then that’s part and policy of what central banks have to think about. It’s inflation, it’s the economy, it’s things like unemployment. And we know today, from our conversation today, that there’s so many risks that affect all of those three areas.

And that’s essentially their role, is to manage that. So I feel like it’s generally quite high, but they will have to be quite clear with their narrative. Even, we talked about the terminal rate and where we’re going to end up. And we’re hoping to have some sort of rhetoric on that in the December meeting from the Fed in about two weeks. So I think they just need to be quite clear with the direction they’re moving, what data they’re looking at going forward. But it’s definitely a high risk, I would say.

Bullock:

Yes, please.

Newman:

I was going to say, now, obviously, it’s increasingly politicised as well. And it literally makes the whole… It makes the whole… Introduces even more jeopardy onto that as well.

Bullock:

Yes, rich pickings for you then.

Newman:

Indeed.

Clode:

But ultimately, again, what’s the answer? All the central banks, government, we’ve run out of money. The demographics are awful. We’re going to end up with one dependent for every worker in Japan, two workers for every dependent in every developed market. How on earth are you going to solve for this? Central banks can’t solve for this. No government seems willing or able to actually solve for this. And so the answer, I would argue, is going to be much more likely to come from the tech sector, because, god, we need a productivity boom. If we don’t have a productivity boom, we’re going to be in a lot of trouble in the next ten or 20 years if this ageing process continues.

Bullock:

So we’ve got time for one more question. And we’ve got a number of different listeners who are from the UK, we’re based here in the UK, but we haven’t really talked about the UK. Are there opportunities in the UK on the equity and the fixed income front?

Newman:

We think so, yes. And again, I didn’t major on it, because I remember being sat in this chair a year ago and that was my top opportunity. And it’s coming through, I think, on an absolute basis. But also, I think clearly on a relative, within Europe, there’s plenty that could be better, but there’s a degree of stability and predictability in the UK. So I think that’s interesting.

But I think the real vindication is look what financial buyers and trade buyers are doing. There’s barely a day that goes by in the UK equity market we’re not getting an inbound either corporate takeover approach or a public to private approach. So that’s real money with a real view over the long term, taking advantage of these valuations, which have moved to some degree.

And we talked about the pair trading. Some of these enormous discounts have closed. But in many cases, you can acquire these listed companies with their own net cash on their balance sheet. This is an odd situation. So yes, it doesn’t get a lot of attention, but it’s working incredibly effectively at the moment. So yes, we’re absolutely remaining long UK.

And I should say, yes, we’re based here in London, we’ve not always been apologists for the UK market or for the UK economy, and there were long periods where we were net short over the last 15-20 years in the UK. Absolutely not the case today. Still looks like a standout opportunity.

Moledina:

I would say we’re positive about the UK. But when I think about something like the UK corporate bond market, it’s quite concentrated in certain sectors. So we’ve actually seen a trend with clients moving from UK-based to more global corporate bond type portfolios. So there are value in areas, but in times like this where you want to navigate an uncertain backdrop, you want to have that diversification across the market and not be as concentrated in certain sectors. But definitely in the corporates and securitised space, there’s opportunity.

Clode:

The problem with the UK is that… We’ve got one of the leading lights in AI. The problem is it’s listed in the US, and it’s owned by the Japanese. And the other one was bought by Google. So there’s phenomenal AI development and companies, but none of them were actually able to invest in the UK. And unfortunately, that’s not going to change, because the IPO market is broken in the UK, in terms of the tech sector, at least, and UK AIM is structurally broken as well. So unfortunately, I just don’t think that’s going to change, and every self-respecting UK tech company goes to list somewhere else, which is a very sad state of affairs, but unfortunately the reality.

Bullock:

Well, I think that’s where we’ve run out of time, but maybe that’s something we can pick up again next year. We’ll leave it on that positive note there. But yes, we’ll wrap up there. And firstly, I want to thank Kareena, Richard, Luke for joining the webcast. And then finally, I want to thank all of you for joining as well. And I wish you all very much a pleasant rest of the day.

Alpha is the difference between a portfolio’s return and its benchmark index, after adjusting for the level of risk taken. The measure is used to help determine whether an actively managed portfolio has added value relative to a benchmark index, taking into account the risk taken. A positive alpha indicates that a manager has added value.

Balance sheet: A financial statement that summarises a company’s assets, liabilities and shareholders’ equity at a particular point in time. Each segment gives investors an idea as to what the company owns and owes, as well as the amount invested by shareholders. It is called a balance sheet because of the accounting equation: assets = liabilities + shareholders’ equity.

Bond: A debt security issued by a company or a government, used as a way of raising money. The investor buying the bond is effectively lending money to the issuer of the bond. Bonds offer a return to investors in the form of fixed periodic payments (a ‘coupon’), and the eventual return at maturity of the original amount invested – the par value. Because of their fixed periodic interest payments, they are also often called fixed income instruments.

Discount rate: The process of determining the present value of future earnings, which allows an investor to have a better idea of the value of a business today.

Economic cycle: The fluctuation of the economy between expansion (growth) and contraction (recession), commonly measured in terms of gross domestic product (GDP). It is influenced by many factors, including household, government and business spending, trade, technology and central bank policy. The economic cycle consists of four recognised stages. ‘Early cycle’ is when the economy transitions from recession to recovery; ‘mid-cycle’ is the subsequent period of positive (but more moderate) growth. In the ‘late cycle’, growth slows as the economy reaches its full potential, wages start to rise and inflation begins to pick up, leading to lower demand, falling corporate earnings and eventually the fourth stage – recession.

Equity: A security representing ownership, typically listed on a stock exchange. ‘Equities’ as an asset class means investments in shares, as opposed to, for instance, bonds. To have ‘equity’ in a company means to hold shares in that company and therefore have part ownership.

Exposure: The amount an investor stands to lose should an investment fail. It is another way of describing financial risk.

Fundamental analysis: The analysis of information that contributes to the valuation of a security, such as a company’s earnings or the evaluation of its management team, as well as wider economic factors. This contrasts with technical analysis, which is centred on idiosyncrasies within financial markets, such as detecting seasonal patterns.

Inflation: The rate at which the prices of goods and services are rising in an economy. The Consumer Price Index (CPI) and Retail Price Index (RPI) are two common measures. The opposite of deflation.

Long/short: A portfolio that can invest in both long and short positions. The intention is to profit from combining long positions in assets in the expectation that they will rise in value, with short positions in assets expected to fall in value. This type of investment strategy has the potential to generate returns regardless of moves in the wider market, although returns are not guaranteed.

Small caps: Companies with a valuation (market capitalisation) within a certain scale, eg. $300 million to $2 billion in the US, although these measures are generally an estimate. Small cap stocks tend to offer the potential for faster growth than their larger peers, but with greater volatility.