Speaker 0:
Hello and welcome to Asset T V's multi asset masterclass with me. Mark OK in association with a UK. Today we are looking at what the risks and opportunities are that face your clients in multi asset portfolios to discuss that I'm joined here live in the studio by Anthony McDonald, head of portfolio management, at a UK. We're also joined by Laura Cooper, senior investment strategist for ETF and Index Investments, Em

Speaker 0:
at BlackRock and by Alexander Petey. He's investment manager at a asset management. I mentioned This is a live show. So any questions, please do send them in. You can see how easy that is to do from the screen in front of you. Let's get things underway. An. I can start with you. Can you tell us a little bit about your role as head of portfolio management? And with within that what are some of those risks and rewards that you're seeing in markets and the economy right now?

Speaker 0:
Yes. Thanks. Mark.

Speaker 0:
Um, my team runs multi asset portfolios, So, um, we invest across the main asset classes. That's bonds, stocks, sometimes cash. Um and we put them together, um, in investment solutions that we think can deliver a good returns for long term investors, um, aligned to their risk level.

Speaker 0:
Um, and you mentioned that sort of bond stock and cash. Do do you have? There's been a certain amount of chat about putting alternatives into multi asset portfolios. Do you Do you do that? Or if you you get more of a I say purist approach mo mo mostly purist. Um

Speaker 0:
uh, we aim to deliver simple solutions that make make sense. Then we can do what we say on the tin, and we don't get too caught up in esoteric instruments that that that cause trouble down the line. And when you look at those bond and, uh, equity portfolios at the moment or those asset classes, what if I had to sort of really press you and say one risk on the horizon? One potential opportunity What? What? What would you what would you What Would you respond? Yeah, Well, the way we put it all together is,

Speaker 0:
um,

Speaker 0:
we are. We focus on valuation, and we think that, uh, markets absolutely deviate and can Deb a long way from the underlying long term value that cycles of greed and fear um, fear of missing out even sometimes, Um, and that we can We aim to identify those markets that look cheap compared to long term value and point towards them. Um, if I think about that value

Speaker 0:
starting point in the way we think about things, the interesting thing right now, uh is it looks to us that a lot of the more expensive markets are the ones that face some of the the bigger risks. And that's a really good starting point for asset allocation. It it really, uh we really feel it can drive good returns over longer term. And if I dive into detail of what I mean by that,

Speaker 0:
uh, within equities, if you look within it within different country stock markets, uh, the US market looks, um, expensive versus its own history. Um, other markets, like emerging markets to some degree, Japan look cheaper. But then, if I step back and think about some of our themes for the year, policy divergence is a big one.

Speaker 0:
Uh, the US, uh, and and And And Europe, as we know, have suffered the largest inflation problem, Uh, have really restrictive policy. We think about those high interest rates we know from central banks, and they should be an impediment for economies going forward. So while other parts of the world Japan, China, um, have easy

Speaker 0:
and in many cases loosening policy, uh, which should be a much more constructive backdrop for markets that are already to us look much cheaper. So that's a really interesting kind of combination of two things. Thank you. And Laura, Um, as a strategist at Black again, I just get your thoughts on what Anthony said. And also, what are some of the other things that you're thinking about and discussing with with

Speaker 1:
clients? Well, I, I think certainly the way that we're looking at these markets resonates with with, uh, with what Anthony just said in the sense of, Are we seeing inflation that's

Speaker 1:
going to be persistent and our markets under pricing that risk we think they are. Where are we? At the stage of the business cycle in the US and Europe? There's been these well telegraphed recessions that have really yet to come through, particularly in the US. So we're trying to gauge that, and then it's thinking about this broader macro backdrop. How does that feed into optimal asset allocations. So we did take some recent moves. You know, we still are quite cautious on developed market equities with some pockets of opportunity,

Speaker 1:
like Japan, as Anthony mentioned, and then in the fixed income space. You know, really, we've seen Bonds underperformed this year, but they're back from an income perspective. So we do like taking short duration exposures in fixed income.

Speaker 0:
Thank you. And Alex, I introduced you at the start of the programme as investment manager, but your specific focus is on fixed income or bonds. So could you pick up perhaps on some of those points that that that laurel was was raising there? Absolutely. Um, I think Laura is exactly raised. Um, fixed income bonds have had poor

Speaker 0:
almost 18 months now, and they look, um, also to be finishing on a not this year. But we do think that fixed income is back. And for the first time in over 10 years, maybe 15 years. The bonds in general offer very good risk. Just a proposition relative to all other classes out there. Essentially, um, so we are quite positive on on the asset class in general,

Speaker 0:
but within that, it's very important where you take that exposure. Um, so we think being able to, um, dynamically move around the broader fixed income universe will be crucial to extracting those returns. Uh, in particular the income from the asset class, which is, um, what essentially it's meant to be doing. And that's how the asset class started to provide steady source of income.

Speaker 0:
And it hasn't been able to do so for the past over 15 years for various reasons mostly, uh, central bank repression. But now we're back, and we think we're in a really interesting time for bond investors. Uh, you're talking about the returns from bonds looking quite attractive, you know that it's producing an income. But is that in nominal terms or in real terms, because again, inflation's been quite high of late, and from saying it may stay a little bit higher than we we're all comfortable with for a bit longer than we want.

Speaker 0:
That's exactly right, and that goes back to the point. It's really important when you take your exposure, and if you look globally, you would see in certain markets. Inflation is already coming down, and it's, um, trending below the so called base rates based policy rates. Um, that government bond markets are all priced off. Essentially, you can get better, uh, returns real returns from bonds versus the, uh, realised and expected inflation,

Speaker 0:
One of those places in the US. Um, but if you look in other places such as Europe and the and the UK, this is still not the case. And we still expect inflation to be trending down in those areas as well. But it will take much more time until you're able to get positive real returns there. Um, so we think, um, exposure to the US in this point of time would give you that opportunity. In the

Speaker 0:
previous answers. You you had your your strategist hat on, but equally at BlackRock, obviously overseeing the ETF business and what's going on there. So what are some of those trends in fund flows that you're seeing at the moment? Do they do they reflect the thoughts of everyone on the panel? Or

Speaker 1:
I think there's a couple of interesting trends that have emerged when we look at ETF flows in particular, we use that as a gauge of sentiment, and and what's coming through is that fixed income investors. Investors

Speaker 1:
are using ETF S really as a tool to get liquidity in times of market stress. And this pronounced rates volatility that we have seen this year as well. Emerging market equities are actually on pace for a very strong year, we've seen August, for example, was the third highest inflow month ever for EM equity exposure. So that does suggest that there is some investor optimism around China because that's where the flows are coming

Speaker 1:
from. Those kind of a A led investors, and then we can look at the sector flow. So technology is on track for its fifth consecutive year of being really the dominant, uh, allocation that investors are taking sector exposures to, whereas some of the laggards, like energy, are still underperforming from a flow perspective. But that does open up quite an opportunity because we think they're under owned. There's a lot more scope for upside there,

Speaker 0:
thank you and Antony, when you're running multi asset portfolios, but there's two ways of asset allocating you. You've got to pull together one. There's the sort of strategic view, and then there's the tactical. So given all of these moving parts, we've been talking about? How do you work out? What's a tactical move as opposed as opposed to, you know, fundamentally tweaking a strategy.

Speaker 0:
Yeah, well, our our our strategy is has been the same and will be the same since since since we launched our funds. Uh, you know, the response funds have been success successful following that strategy. Um, and that is very much based on that long term, uh, valuation analysis we do. But within that we are, um, very aware of and always analysing the kind of economic and market context within which assets are trading. Um, and that will help inform the the size of the positions that we

Speaker 0:
bonds are quite interesting in in all that context. Because, you know, we've heard from Laura. We've heard from Alex that that bonds are back, and if I put that into the bigger multi asset asset allocation context, Uh, one of the most interesting and important strategic takeaways for us, um is that

Speaker 0:
we think you can really rely on them again Now, uh, to perform that, uh, that that more kind of, uh, protective kind of risk off rolling portfolios. That ultra low yields was a challenge to that. Now. Yields are really pushed up very fast. Um, there's a lot of expectation for, uh, for ongoing tight policy

Speaker 0:
for central banks for the next year or two. AAA and any kind of downside risks to growth will will effectively come through, um, in in better bond performance. So we think they've really got a reasserted their their their traditional and really useful role in multi asset portfolios. And, you know, we we we bought them accordingly, as they've cheapened over the last, uh, few months.

Speaker 0:
Well, again, I, I suppose whenever we're we're sort of thinking about markets, we we sort of look to the to the recent past and say, you know, it's quite different, but II I to where we are, but I want to get a sort of sense of how we've got to where we are today. So perhaps put that in some of those broader context. Um,

Speaker 0:
So So, Laura, before we start to look ahead, have we got to where we are? What? What's So if if you take some of those sort of longer term strands

Speaker 1:
Well, I think you know what we're calling for Black rock is the end of the so called great moderation. So the past four decades of low inflation, low market volatility has now come to an end, and we are in this new macro regime that's going to be marked by elevated inflation. So this has consequences for asset allocation on a strategic basis, because when we used to look at our SA A on A on an annual basis, we're now looking at it on a more

Speaker 1:
kind of quarterly basis because we do think this return of volatility will open up opportunities that you can take on from a strategic approach. So that's the way we're kind of positioning. It's not kind of the good old days of the the past four decades, and really the key shock that led to that we think was the pandemic and the supply constraints that emerged on the back of that. Not just the supply chain constraints that we are seeing easing but really more pronounced structural

Speaker 1:
changes, particularly in the labour force. Like we've seen people exit the workforce, they've yet to return. We're likely thinking that that's going to continue to be this kind of structural impediment going forward that leans into this elevated inflation regime going forward. And when

Speaker 0:
you said you expect elevated inflation, could can you put a number on that? I mean, it's not It's not to hold you to it for eternity, but I mean, you talk about inflation at 3.5% 56 What?

Speaker 1:
Certainly not the 5 to 6% mark. That would be quite a a deviation from what we saw pre covid. But I think ultimately, when we think about this higher inflation regime, you know it's US inflation settling 2.53% over the medium term, which isn't a material kind of significant increase from that 2% target. But it does suggest that central banks were already seeing them pause, their tightening cycles well ahead of them getting back to target. So

Speaker 1:
is this tolerance for higher inflation. So we think that's going to be really the dominant trend, certainly over the next 12 to 18 months. And I think markets are kind of miscalculating the capacity for central banks to cut interest rates next year because we still will have elevated headline inflation and there is a risk that we could see an upswing in inflation, in certain pockets of of regions and not in Europe, but more in the in the US.

Speaker 0:
And it's just on that inflation point. How how effective is the transmission mechanism between hiking rates and it having an impact on the economy? Because if I look at say, I don't know

Speaker 0:
the US housing market, though, people take out fixed rate mortgages. So you know, if if I've taken out my mortgage and I can afford it in the States, in a sense, if rates go up or down, it probably doesn't make much difference to me as long as I can. I can pay it so you could argue that transmission mechanism isn't particularly effective. It's an excellent question. Um, and you'll bring a very good point. Uh, that transmission mechanism is different, um, in the different geographies, but we believe

Speaker 0:
term is working everywhere. Um, but you see examples already in the UK and in parts of Europe, where this is a very quick transmission mechanism, particularly and most evident in the housing market in the mortgage rates, which are mostly tied to a flexible interest rate environment, and that hits your spending power as a consumer immediately versus rightly pointed in the US. If your mortgage is fixed for 30 years, it doesn't really impact you that fast initially.

Speaker 0:
Um, but overall, uh, time comes when, um in particular corporate margins become to get squeezed because you have, um, higher spending, Uh, on one hand, on on wages and on the other, input costs are increasing. Then that leads gradually to more layoffs. And once you start losing your job, then you are forced to look at the housing market probably to offload your property. And then it starts to impact Uh, all those decisions, and that's the way it would work in in those

Speaker 0:
environment. So it's definitely a much slower process, we think, in the US, but it it's, uh, it's certainly it's not something that's, uh, it's they're immune to. And, um, early signs of the labour market starting to ease off from its tightness. You already see in the US. Um, we think that it's a matter of time that, uh, it will become more pronounced, especially if you keep holding policy rates as high as they are. And this is certainly what it seems like to be the intention of policy makers at the moment.

Speaker 0:
So from your perspective, it's more about the the the the authorities in Western nations maintaining in the real, maintaining the rate of rates rather than raising any further. It's it's if you think of it as a as a rate cycle as someone said it, it looks more like the top of Mount Fuji than the amount of Is that

Speaker 0:
that the argument? Uh, for me, that's that's exactly right. I think from here on, we are clearly in restrictive territories, in particularly in the US, uh, in terms of base rates. Um, so we know that the issue is that that transmission mechanism so it doesn't make sense to keep hiking rates even more. It's a question of how long it will take for this to trickle down. So from here on,

Speaker 0:
I believe the central bankers will be focused more on forward guidance and communicating that rates will stay here for much longer until they actually impact the economy rather than keep increasing the the base rates from here on. And so you want to come back and yeah, I was just going to pick up on that last point. Uh, you know whether or not,

Speaker 0:
um, central banks increase rates one more time. No more times from here. Uh, we all have to remember that on all measures that we look at, interest rates are almost certainly in the key markets in restrictive territory, acting to slow down economies. Um, and for as long as they stay here, they should be doing that. Now, the the case Alex made about, um, transmission mechanism and interest rate sensitivity is very important to the way we're thinking about our bond exposure.

Speaker 0:
Uh, we would agree that that the UK is a good example of a country that is likely to be more sensitive to higher interest rates quicker than a country such as the the US. Uh, what that means for us is when UK bond yields went above US bond yields. That's an opportunity for us to accentuate UK and our portfolio effectively, um, on our relative value measure, the UK bond yields started to look very cheap to us.

Speaker 0:
Uh, and we and we and we bought those UK bonds, and it's interesting because it gets to the idea of tipping points, which is, um, for a while, inflation was the main concern globally, and it remained for a bit longer the main concern in the UK. We know some of the data earlier this year, um, was slow to come down, and it looked like there might be a problem. But we really think we're at that tipping point now where inflation worries kind of give way to

Speaker 0:
growth worries and that once again, the UK will be at the forefront of of of that change. Thank you and Laura, just from what you were saying that this sort of period of the great moderation feels that it's coming to an end and for various there's, you know, there's a lot going on. But is it too early to get a sense of what the post great moderation landscape will look like? I mean, for example, if you've got lots of on shoring or friend sharing or whatever you call it happening

Speaker 0:
and for example, I don't know, you might argue a certain amount of manufacturing comes back to, say, the United States or Europe. On the back of that, how do you then think through what the implications are? Presumably, it would be stronger labour unions. Maybe there's a little bit more inflation build. I noticed President Biden, I think, was on on on the on the, uh on the picket line with some motor with the with striking motor workers not not long ago. What's what's making sort of sensible thoughts about how the world is going to play out? And what's the danger of being

Speaker 0:
so being a futurist? It's all interesting, but it's not very

Speaker 1:
useful. I mean, I guess the key point is to is to kind of appreciate that this is a higher inflation regime, so looking for those allocations that are going to benefit accordingly and as well looking for those sector allocations that we think will perform in an environment where we do still see recessions coming through in some developed market economies, notably in the UK. But the way we're looking at this is looking

Speaker 1:
those kind of allocations that are agnostic to the macro backdrop, and one of those is looking at so called mega forces. So whether that's ageing population, whether that's geopolitical fragmentation, the transition to net zero there are ways of playing these long term structural trends in portfolios that are really not necessarily related to what we're seeing in in the current macro backdrop. That's really the key change that we see from the the So-called. Great moderation.

Speaker 0:
Alex, just pick up on the demographics point. How does that affect your thinking about bond markets?

Speaker 0:
Oh, we're in the camp that longer term, the this inflationary forces persist in global economies, and we completely agree. In the next 12 to 18 months, we will see higher inflation regime mostly supply side shocks be from energy prices or from readjustments of the global supply chains. But for us, um, demographics and the and the

Speaker 0:
advancement of technology longer term or more powerful factor so past the next 12, 18 months, we believe that this inflation will research itself. So from that point of view, we think technological advancement is is already here, and it's already replacing the need for that labour. And probably covid was the situation that, um, was fast forwarded the technological advancement that we

Speaker 0:
we at that point to see the next 10 years to one or one year to 12 to 18 months. So we have already seen a lot of that, um, automation coming online, so we we don't need as many workers as we used to. Um, so we think that's a powerful argument. Uh, that supports, um, the this inflationary process in the demographics. Thank you. And Alex talking about covid there. I think I I it it is very relevant. And now we're a couple of years away now, extraordinarily. But, um, it's

Speaker 0:
easy to underestimate the impact of what happened during covid. In terms of the the policy support and how long it takes for the data economic data to be unscrambled from, that is we We really are looking at data that's still very effective. And what affected from what happened in 2020 2020 into 21 and then a good example of that is all the, um you know, uh, fiscal stimulus. You know, money given by governments into effectively people's bank accounts to to help the economy. Um

Speaker 0:
uh, weather the period, Um and you know, a lot of that stayed as money in bank accounts for quite some time. You know, we the economists, talk about excess savings, and then the U has has really been gradually spent by all evidence over the last 12 to 18 months, and that has helped uh, parts of the US economy withstand what might otherwise have been a normal sequence of events. Um, following higher interest rates. You know, as time goes on, uh, it feels to us that that that time is

Speaker 0:
is a risk, really? Partly because, um, the higher interest rates should always be expected to, um, affect interest, uh, economies with a lag. And partly because some of the, um, exceptional factors that that hark back to covid are starting to work their way out of the system. Um, and to kind of reduce the kind of resilient element that we that that we've seen so far. And so what's interesting to us this year if we hark back to our starting point of our valuations, is that equities are a good example. Then the markets that have progressively become a bit more expensively valued.

Speaker 0:
Um, and we think one reason for that is the economic resilience we've seen when actually we think as time goes on, that's creating risks rather than reducing risks. So could you talk a bit more? Because I think you you the multi asset portfolios you you're running you. I think you've had them about

Speaker 0:
three years, haven't you? So So you you've been running during this sort of inflexion period we've been talking about. So as you look back on it, what What did you get, right? What? What did you get wrong? What is a sort of sense of sense of that? Excellent question. Uh, and you know when when we launched them? Uh,

Speaker 0:
yeah, uh, we We have had three years of kind of multi decade, um, events, right from a recovery from pandemic, um, three UK prime ministers in a very short period of time. 40 year highs in inflation. You know, they they've really been, uh, been been been hit hit with a range of, uh, unusual factors. Um, and what we've done is we we we've proven that,

Speaker 0:
you know, our our process can be resilient, uh, entering uh, 2021 into 2022 with with that cautious view on on bonds just based on the the expense of valuations. On the one hand, and what we saw is underappreciated risks of the surge in inflation, on the other hand, uh, and has held them in good stead. Um, over that period. And now, as we look forward, we think that's changing. Um, as I said, we think that bonds

Speaker 0:
can reassert their their long term role, uh, with much higher probability in portfolios. And so what you get from us is kind of, uh, long term views, but gradual evolution as market backdrops and valuations change. Thank you, Laura. You men. I think you mentioned recession. The dreaded R word first on the panel. So I want to come to you on that, Um, when is recession finally going to arrive? Because a lot of people have been predicting it for

Speaker 0:
at least 18

Speaker 1:
months. Well, I think it's exactly what Anthony stated around the consumer savings in the US. That's really why the US economy is less rate sensitive than it has been in the past. But now that those cushions of support have essentially been depleted, we are going to see those lagged effects of tighter monetary policy feed in. And so even if we don't see an outright US recession next year,

Speaker 1:
we do think we're going to be in a period of stagnation. So inflation is still high, but really just this lacklustre growth. Whereas if we look, for example, to Europe or the UK. The Europe is already probably in a recession, or at least by the end of this year it will be looking at some of those leading economic activity gauges. And so the ECB is clearly put policy in a very

Speaker 1:
stance. We're starting to see that feed through into credit tightening that is having a material impact. So we think that really sets up for this regional divergence in the growth story. But what

Speaker 0:
if you, I mean, you've mentioned sort of the opportunities and and the different set of monetary policies when you go to a place like Asia? But on the other hand, we're hearing quite a lot that, you know there might be problems with the Chinese economic growth model.

Speaker 0:
Um, how do how do you broadly fact factor that in? Because there's there's a danger that the US could be coming off the boil at about the same time the world's second largest economy comes off the boil.

Speaker 1:
So we do take a cautious stance towards China because of the the growth backdrop does look more challenged than our earlier expectations. But in terms of portfolio allocation, yes, we have a neutral stance on emerging markets. But it's really about being selective and granular in those exposures because there are pockets in emerging markets where they do think offer quite attractive

Speaker 1:
opportunities. So India, for example, because of domestic demand, demographic tailwinds. We think that's really going to be an area that's going to see some upside in terms of equities. And then as well we think of Latin. So you mentioned earlier this restoring this rewiring of supply chains. We think Mexico, Brazil, those are going to be key beneficiaries. And yes, those

Speaker 1:
markets have become more expensive. But we did see a bit of a pullback over the summer. We still think there's attractive opportunities. Entry points there because of the just the broader dynamics are supportive for those countries.

Speaker 0:
Thank you. And Alex, can I get your thoughts on that around from the bond perspective particularly? I know one of the portfolio you you helped run is the Strategic Bond Fund. So again, where where? How are you allocating that at the moment?

Speaker 0:
Sure, there's some very good segue starting from the, um, recession and the inverted youth curve. If you look at it as a one indicator of that, we we believe it has a very good predictive power over the long term in particular, the longer the youth curve stays inverted and there's a very simple reason behind that. Uh,

Speaker 0:
it has a real impact on the economy because bank lending works by banks borrowing cheaply and being able to lend more expensively in if the curve is, um, um up or sloping when When it's inverted for extended period of time, banks have less incentive to lend to the economy, which in turn over time will show lead to recession.

Speaker 0:
So in terms of fixed income allocation, that leads us to really like government bonds in general. Um, but we're cautious where to take exposure or, um, uh, where to allocate the money. So in particular, we like the front end of the government bond curves. Um, the reason is, um, first, we again think that we're not far from rolling recessions in the developed markets. Um, but second, we think if inflation persists here, uh, which, um, we agree is likely to be the case in the next 12 to 18 months.

Speaker 0:
We are unlikely to see materially more interest rate hikes which are more impactful from the front end of the curve, but instead those will be met with forward guidance. And it would lead to steepening of, um of government bond curves from very inverted levels right now. So we we like to take a very large exposure to government bonds, but mostly in the 3 to 5 to 7 year part of the curve, but and also underweighting the 30 year part of the curve. OK, and what about if you from developed markets? If you're looking out into emerging markets? What what are some of the

Speaker 0:
opportunities? Emerging markets have had a very good year year to date that we have started the year with very healthy allocation there. In in the past couple of weeks, we have pared down some of that exposure, just reflecting for the strong run and second, the increasing,

Speaker 0:
um, global economic risks that we see on the horizon. Uh, so we do think there will be a very interesting opportunities, uh, emerging, uh, in in that part of the world. But we are in line with about neutral now, in terms of allocation There. Thank you, Anthony.

Speaker 0:
Yeah, I just wanted to to talk a bit more about the the idea we've heard from Lauren Alex, about kind of inflation persisting over over over the next 12 to 18 months. Uh,

Speaker 0:
and clearly, if we think about some of those drivers that we've heard like, uh, supply chain rewiring there, there are good reasons to think it could. But we often think about things in terms of kind of the different kind of paths that that we might go down and the probabilities around it. And it does feel to us as though we're starting to get a bit of a consensus around the idea that inflation will get stuck above target. Uh, and there's a good probability it will. But we would point to the fact that actually there's a probably a better now than appreciated chance that that it doesn't either, and that that this inflation process,

Speaker 0:
uh, can continue if we think about the drive. There are lots of things that may have driven the inflation surge that we saw, uh, 2021 into 2022. But but a lot of the things that come directly to mind include the the sudden and kind of combined impact of, uh, of government spending at the same time as rock bottom interest rates at the same time, and in big size and a lot of economies, one and often both of those two drivers

Speaker 0:
have now reversed. Um, there was the the big supply chain snar up as countries open reopened from covid at different times and pent up demand kind of came through again. All measures of supply chain indices and that's coming through in inflation. The goods sector suggest that things have gone the other way now and that that that there's been AAA real healing. So if we look at a lot of the original likely drivers of that inflation research, uh, we think they're working the other way now and

Speaker 0:
and II I I'm absolutely open to the view that that that these things can come embedded in the system. But at current levels of interest rates, we do think there's an underappreciated risk that that inflation actually just keeps coming down for a bit longer. And when we think about what that means for, um, asset markets, we think we think we think that kind of higher inflation for longer is increasingly being more reflected in in the government bond markets, and that, again is a reason why uh, we're starting to add a bit of government bonds into our portfolios as a kind of partly protective strategy.

Speaker 0:
Well, thank you. Well, we talked quite a lot about sort of the long term economic themes and some of what's going on short term. But I, I wanted to. Now you've all sort of hinted at pockets of value and overvaluations to avoid. So in our final third of the show, I'd like to to really push you on what Some of those some of those are. Let's get some granularity around it. So, um,

Speaker 0:
Laura, can I come to you on that first stress? This is not investment tipping, but just in terms of over and under evaluations. Um, there's a lot going on on the surface of of indices and markets. But what are some of the things that are particularly interesting you

Speaker 1:
at the moment? So I guess there's different ways of looking at this. So one. The question that we've been getting from clients quite frequently is around the tech leadership in the US. The concentration of the rally year to date

Speaker 1:
that persist, and we do think that yes, valuations are looking frothy in the tech sector, but there is still kind of fundamental supports behind that. So we do still think that tech leadership can extend. But what we're positioning is more around S and P 500 equal weight. So you still get that tech tech exposure. But you also get some of that small cap exposure. If we do see some of those cyclical upturns come through in the US economy,

Speaker 1:
other areas of of opportunity are certainly in kind of energy. As I mentioned before, E valuations are depressed. It's under owned. But yet we think it's going to be a key beneficiary of this long term transition to net zero. And that's really underappreciated. When we look at earnings estimates right now and then it's looking for pockets of opportunity. For example, Japanese

Speaker 1:
equities. We think there's inflationary tail winds are going to persist for some time. That's given Japanese corporate some pricing power and then overlay that with the Tokyo Stock Exchange revamp revamped governance rules earlier this year, that is really enhanced shareholder friendly corporate behaviour. So we do think there's some tailwinds there. Even if monetary policy

Speaker 1:
is maybe not of a key support for for that much longer. So there are pockets of opportunity on a sector basis and on a regional basis, looking at the equity

Speaker 0:
space, thank you and pick up pick up on that, particularly on Japan, because I think you you mentioned I did absolutely. Um, and Japanese equities is an area that we we're very positive on,

Speaker 0:
uh, looking forward. It's it's it's been a AAA an overweight position in our portfolios. Um, for for a bit of time now, uh, on the basis that, um, it really does look quite attractively valued, especially when we consider other parts of the world that don't look so so well valued to us as our own history.

Speaker 0:
Uh, but then, if we drill down into into it in more detail, um, one of the questions we always ask ourselves is, uh, yes, that market may look cheap or expensive versus history, but is there a structural change that justifies that for us in Japan? It's the other way around. Uh, it looks cheap. And we mentioned Laura mentioned the Tokyo Stock Exchange changes, so, you know, they're They're the latest in a series of measures designed explicitly, uh, to improve corporate governance and share

Speaker 0:
holder returns in Japan. And if you look at the the the kind of medium term, uh, company return return equity profitability, it's working. Um, it it should be a real tail into a rep price of Japanese equities. And I think that we may be starting to see the triggers that drive that. So we're very positive on Japanese equities at these valuations, a sceptic might say, Any time in the last 30 years, someone's promised that the Japanese were

Speaker 0:
I completely it was gonna be different this time. Completely agree with you and that. And that was why, 10 years ago, when these measures started going, that was the response. Uh, you know, long term reform is difficult, and it won't happen. But actually, if we just have to look at the series of measures that have happened and the impact that they've had on corporate profitability, a return on equity to see it has been working, it just hasn't been recognised yet. And that for us, is a really powerful combination. This was one of the Japanese equity markets over the years, has been

Speaker 0:
on the back of what happened in the eighties, a lot of Japanese Corporates essentially had to be their own bank. They had to build up a cash pile and sit on it. And then, quite rightly, when the people came from overseas and said, Oh, you should give us some. We bought a share. You should give us that cash. They very politely said, Well, you weren't here during the tough times. And thanks for coming in and giving us a view. We should just hand over cash. But, uh, we're not gonna do it

Speaker 0:
is is that changing? That's absolutely changing. And why? Uh, well, the why is because the leadership in Japan wanted it to change, Wanted to attract in foreign capital. Um, and so what you've seen over ever since the last Shinzo Abe's anos and this third area of structural change is progressive and continuing increase in cash return to shareholders dividends and buybacks. Uh, that that that that links into the point that the change has happened continues to happen,

Speaker 0:
Um, and should be a real tailwind for for Japanese equity investors. Well, we talk about Japan as a source of of equity investments, but Alice What's your take on it? As a bond market

Speaker 0:
as the bond market is, um is still one of the few places that doesn't offer that attractive returns to us. Um, so we, um, are actually short the Japanese government bond markets. Um, we can, um, come up with, uh, 10 different ideas to be along any most developed market government bond markets and to pair that with a short in Japan. And that's, uh, again

Speaker 0:
on one hand, a rising from the, um, still coming up inflation that that you see in Japan is not appreciated, uh, in, um, in their government bond curve, but also by the reforms that the new Japanese, uh, central bankers are slowly pushing through the system

Speaker 0:
and you have seen in the past, Uh, nearly 12 months now, the yield on the 10 year, uh, JG BS have increased slowly but steadily. Um, we think it's still way too low. Uh, we think, um, in the next 12 months, this the the band in which, uh, the government bond, uh, market can operate will be adjusted even higher. And this is our biggest short conviction in the market right now.

Speaker 0:
Given the the demographics in Japan are ones that other parts of the world are beginning to to, um, say suffer from, um, do you think the Japanese bond market and what's going on there gives you any insight into what could be happening in European or US bond markets in five?

Speaker 0:
Absolutely, Absolutely. Um, this was part of the argument that I made about long term disinflationary forces. And, uh, to us. Japan is the perfect example. And the templates are what's led there, uh, to that situation. And we think we're following the same foot footsteps in the rest of the developed world and in China. Maybe it will be maybe 10, 20 or 30 years behind that. But it's precisely for the demographics and then

Speaker 0:
the technological advancements. Um that, um, have led that, um, constant necessity of central bankers and governments to stimulate the economy to the point where you're sitting on enormous pile of debt that you cannot service unless interest rates are, uh to to levels where they are in Japan. And we think that's the perfect template that we're going to follow in developed markets. Not in the next 12 to 18 months, but medium term absolutely

Speaker 0:
thank you. And to come back to the world's largest economy, the US. How how are you thinking about getting exposure to the US equity market? We, because we've talked a little bit about there's been this very narrow group of stocks that have been leading it.

Speaker 0:
But on the other hand, there's lots of other opportunities in the US market. Um, there's also the thing that within asset allocation, the US equity market seems to be in a bigger and bigger part of global equity over there. So how do you How do you think about that and make and make sure you've got enough strategic diversification?

Speaker 0:
Yeah, I mean, it really has become a last part because it it it's been a long term, long, long term outperformer. Um, and what that means for us is, is when we look at the the valuation measures, you know, after a brief, um,

Speaker 0:
correction last year again, some of those metrics we look at are suggesting that the US market it has only been this expensive, um, post covid and during the dot com crisis,

Speaker 0:
uh, and that and that leads us broadly to have some care. We just think that there are better opportunities elsewhere. Um, where where? You're not paying so much for your for your exposures. And you can still get very, very, uh, exposure to very, very good companies. Um, AAA and and and good and good dynamics. You know, we spoke about Japan earlier. Uh, parts of emerging markets also look quite attractive at this stage.

Speaker 0:
I suppose the other element I want to pick up on is if you've got a UK client base. So ultimately your investors have got sterling liabilities or predominantly, how do you play UK allocation, be it equities or bonds in your multi asset portfolio? Because the UK I think it's fair to say, has pretty much since Brexit has been out of favour. Um,

Speaker 0:
it has been out of favour, and because of that currency side of things, we we do have a a more in sterling assets than you would have in a in a completely global benchmark for bonds and equities. We think we think that's the right thing to do for for our clients. And

Speaker 0:
actually, if we think about last year, it was actually a good year for UK equities, Um, that they entered the year ex extremely cheap on all the measures we looked at, Uh, and over the course of a of a year of higher interest rates and inflation and and really, uh, challenging backdrop, uh, the makeup of that UK market. You know, quite a few domestic, reasonably kind of, uh,

Speaker 0:
defensive, uh, sectors, uh, exposure to the parts of the market that were doing well, uh, energy And we we all know the oil price was rising after Ukraine all came together to mean that that UK, uh, equity market held up much better than many other global, uh, stock markets. And the slightly, uh, slight bias that our portfolio had towards the UK was was really, really helpful. OK, we touched on, uh, Lord, you touched on energy. I suppose one thing we've seen is there's been

Speaker 0:
I in in the round, there's been less. Or there's been slightly fewer people who seem to be active supporters of ESG sustainability as themes in the last in the last year or two. I mean, from governments across the piece. Um,

Speaker 0:
if you could have roll things forward 34 or five years, do you think we'll look back and say That was a bit of a fashion that was very early 20 twenties. Or will there be some very fundamental things that have have have come out and have embedded in multi asset portfolios? Other portfolios as well?

Speaker 1:
Well, certainly I think if we look at what's happening in the flow

Speaker 1:
space, we are seeing investors continue to take on those those sustainable allocations really as a as a means of replacing their traditional allocations. So we think it is a long term trend that perhaps is just having those boats of volatility. But ultimately it is proving to be this change in investor behaviour that's likely going to persist.

Speaker 0:
And also, I mean, we hear quite a lot about the the sort of the the greening of the economy, the green Rev Green Revolution. Is it too early to tell whether that's going to be allocations of capital that make investors a lot of money, which is sort of what's being promised? Or it might be traditional infrastructure? We all agree we need it, but

Speaker 0:
God, it cost us a lot more than we thought, but we don't want we don't want to hand it back.

Speaker 1:
It's probably going to be a mix of both. To be fair, I think we're going to need kind of traditional energy type of investment. But as well we're going to see this continued, uh, allocations to the the green type of infrastructure, particularly if we look at the Inflation Reduction Act in the US. It's going to be a kind of

Speaker 1:
key support going forward for those types of investments. But it's not just this long term way of looking at kind of this change to to net zero, but it's actually playing up now. And we do think there are pockets of opportunity in looking at very specific, uh, ways of ways of playing that. Have

Speaker 0:
you got an example of how someone's playing that? I mean again, we just through things like ETF flows

Speaker 1:
So certainly, when you look at, like renewables, clean energy, those are some of the areas that are that are standing out in terms of where we have seen flows, perhaps not as much this year, but certainly this long term trend that does seem to be where investors are are allocating to

Speaker 0:
thank you and Alex on, Um, I want to get your thoughts around how commodities are likely to affect inflation. I mean, whether it's,

Speaker 0:
uh, I suppose there's two arguments. Either things like the oil price go up so that will be inflationary or the oil price will go up. And that will be disinflationary because people have to sort of shut the shut the factories, they can't afford it, which can't be you. And I think there is an element of truth in both Um I think the biggest risk near term to, um uh to the macroeconomic outlook is again the resurgence in energy prices. And, um, not so much the actual level that you see right now in terms of brand oil prices. But,

Speaker 0:
um, the time, the length of time that we stay at those levels, the longer we stay at, say, brand year 95 or 100 the longer it becomes not just a, um, a high line inflation, but it becomes embedded in, uh, in the actual core inflation numbers. Um, but, um, to to To that extent, um, that's quite a quite of, um, opportunity as well. In bond markets, we think as well because over time we see this as a tax on consumers. Um, with already strained portfolios as other

Speaker 0:
already mentioned Depleted, um, bank accounts from covid. Um, checks and stimulus consumers have less now to spend, uh, on on pretty much anything and another in the coffin of, uh of the soft lending would be the prolonged, um, increase in of energy prices and how long we stay there in terms of, um, of of natural Gass. OK, thank you. We've only got a couple of minutes left, so I want to just pull some of these themes together and and just get a final question. Same question to each of you.

Speaker 0:
Given what we've discussed today, how can that help investors pull together a properly diversified portfolio? Um,

Speaker 0:
law of Can I come to you on that first, either with the strategist hat on or just in terms of some of the interesting things you're seeing with Black Rock fund flows in? I guess

Speaker 1:
the way we're thinking about it at Black Rock is it's to be nimble in the new regime. So this so it's really about taking more granular approaches to equity allocation. So rather than taking block exposures like you may have in the past, it's seeking out those tactical opportunities and

Speaker 1:
areas where we think this economic damage that we foresee coming, coming is really already in the price. So that's the way we're positioning. And it's about kind of being nimble from a strategic asset allocation, as I mentioned earlier, looking at it kind of more timely through throughout the year rather than just taking a set it and forget it type of approach. And if

Speaker 0:
someone said on the back of that sounds like you're running a trading book rather than an investment portfolio, what would you

Speaker 0:
What would you say? I

Speaker 1:
think there's There's two ways of looking at it. I mean, yes, location is typically seen as 12 to 18 months, strategic as 5 to 10 years. But we because we are in this new macro regime of elevated volatility, we haven't been in this type of environment for quite some time. This really does require the need to be quite nimble in allocations and making more frequent changes than has been in the past to try to generate that alpha.

Speaker 0:
Thank you, Alex. A similar story in fixed income very much. I very much agree with, uh with Laura We have tremendous opportunities in the market today. We think, um, one of which is, uh, with fixed income. Um, we think already agree. Uh, bonds are back, and they haven't been as attractive in in a very long time. But the ability to be nimble and agile and flexible in how you allocate your exposure and where in fixed income markets will be the key to driving your return. So I absolutely agree with with Laura on that point. Thank you.

Speaker 0:
Final thought I'd had a slightly different characteristics to it, which is, um, an environment that at times will also reward patients. Um, when we identify, um, markets that that that look cheap to us. Uh,

Speaker 0:
sometimes the right thing to do is to be patient and to accept that there may be a more volatile regime. Um, and and and things don't go up or down in straight lines. Uh, but But actually, um, if we overreact to short term noise and step away from the process that has has has brought the success that we've had so far, um, then we can end up in a really difficult place. So we actually think it's a time where, um, Identifying those areas where we we think we

Speaker 0:
investors can make money over the long term. Uh, and be patient, uh, staying in them while being disciplined and kind of making sure that the the the the investment case still stacks up is is is the way we'll be putting together our

Speaker 0:
When you say patient, how long can you afford to be patient for?

Speaker 0:
Well, that's a good question. Uh, the way we think about it is the valuation measures that that we look at, um, work best over the long term. Only over any given three months, six months. Um, whether you you buy you buy an equity market or a bond market, that whether that metrics look cheaper, expensive, that that's not the main driver. There's lots of different, uh, investors operating in market.

Speaker 0:
It's that, uh, there may be are being earning seasons. Everyone has their own objectives in the way that they may be responding or, um, trading the data points that come out. Um, we know very much, Um, what what drives us and what we believe in and that that is stepping back, identifying those longer term views and and and and we have absolutely the the the culture, Uh, and the the

Speaker 0:
to be patient in them as long as, um, the investment case continues to stack up. We have to leave it there. Thank you so much for watching. Do stay with us. We've got some information coming up in just a second on how you can potentially use this as part of your structure. Learning. Just remind me to thank our fantastic panellist in the studio here in London today. Anthony McDonald, Laura Cooper and Alexander Pls from all of us here. Goodbye for now.