So as folks as you will have noted in
the program, we have been asked to take up a very interesting topic, investing
in a world without order, something. Sonya, I know you have given a lot of
thought to. Let's begin with this, if I may.
How is it that investors. Ah, it's not just a matter of whether
they appear to be. It's clear that they are so sanguine in
the face of such a complex and unpredictable state of global affairs.
Good morning and thank you very much for having me.
And you are absolutely right. If you just looked at the media
headlines these days and you see what's what's in there, you could get very,
very negative. You feel like the world is falling
apart. Particularly tragedy is everywhere.
It is tragedy everywhere. Humanitarian tragedy in particular.
And then you look at markets and it seems it's a parallel universe because
everything seems to be going quite well. And I think we have to be very honest
that the market is a discounting mechanism.
And unless these geopolitical issues really affect growth, inflation, and
hence monetary policy, we will not take note.
Now, this is the status quo and we shouldn't rule off that.
Of course, geopolitical events have the ability to influence markets and of
course create a lot of disruption and volatility.
Do you see a disconnect? Right now, we don't see a disconnect
because if we look at the economic impact of the geopolitical conflict
we're currently seeing, there is none on growth and inflation, on growth and
inflation, that is very important. Of course, we are seeing always
commodities and currencies and commodities normally are the ones that
will react. But even there we have seen just
immediate spikes which normally have normalized by now.
As you well know, there are lots of people who make a lot of money warning
about geopolitical risk. How do you decide what risks actually
matter? And which ones are just noise.
That is the art of the art of the possible.
Because of course you're right. Geopolitical risks and the possibility
of a tail risk event has gone up dramatically.
So I believe that, yes. And as investors, we should not ignore
this. The biggest question for you as an
investor is can I hedge against it? And unfortunately, there the answer
normally is no, because it's either too expensive, you miss out on the upside.
So what you can't and impossible to time.
It is impossible to time. The only thing you can do is prepare.
Do not try to predict because so far we have seen with with both events,
particularly in Ukraine, Russia and now in the Middle East, I'm not quite sure
anyone really would have forecast that. And yet again, if you look at the market
reaction function afterwards, if you ignore the volatile element right at the
outset, it actually would have been wrong to de-risk at that moment.
And I think that is the important takeaway.
Now, we haven't even talked about the fundamentals yet because they will
matter a lot more, particularly in the in the near term.
But it is very important that geopolitics and to that extent,
political events very often only have a very immediate noisy impact rather than
a long term lasting impact. I will get to those fundamentals in just
a second, but I would like to stay on Taylor Riggs for just a moment.
Is that to say that, A, you don't do any telling risk hedging and B, the way you
describe that, it sounds like a it sounds like a fool's errand.
So let's let's put it in context. We are moving towards a multipolar
world, and that is inherently uncertain. And as such means, we have to prepare
that volatility will be higher. Trying to hedge this, as we just said,
and predicting it is close to impossible.
So diversification will probably matter a lot more going forward than it has
over the past 15, 20 years. That is important to take away because
it is the understanding what a potentially more fragmented world will
do to the investable universe and the opportunity set.
The reason I ask is because I would imagine that there are many people in
this room who are constantly pitched on Out-of-the-money put option strategies.
Surely there is attractive opportunities to do so, but
we wouldn't suggest that this is the right investment opportunity simply
because if you look at the your time horizon, that is what matters bleed over
that period of time because absolutely. Because hedging only matters if there's
an immediate short term time horizon that you need to meet, then put options
could actually be a very useful tool, not if you are investing for the long
term. So let's talk about the fundamentals.
Give us your view, your macro, the macroeconomic analysis that feeds your
investment strategy. And that is so important to understand
right now, because if I talk about the parallel universe and the disconnect, it
is, of course, the fundamentals that currently matter and that is driving
markets. And we have this beautiful let let me
put it this way, a beautiful triangular relationship between growth, inflation
and monetary policy, which has been so supportive to risk assets around the
world. Why is that?
We have had very resilient growth, particularly in the US and of course in
India. And obviously with the news overnight,
that is an interesting topic to look at. We have had inflation that clearly is
coming down, but obviously now proves far stickier than originally expected.
And we had the expectation far stronger at the beginning of the year that we
would see a number of rate cuts. And that, of course has fuelled risk
assets, equities in particular, because that is kind of a Goldilocks scenario.
Now what is the risk? The risk is that the path is incredibly
narrow and if you currently look at consensus forecast, they all sit in a
very small square of expected growth and inflation, and that always should at
least raise a little slack that there is risk potentially to such a
narrow forecast. But it is so far a very decent path
because we have inflation that's coming down.
We have growth that is approaching a soft landing and we have at least the
expectation of rate cuts. I think the ECB probably will go first.
You mentioned equities. We've seen a pretty substantial
expansion in the multiple on on stocks in the past several years.
Is there any value left in equities? So the yes, you're absolutely right.
We have seen highs in most equity indices.
We are not at the highs in earnings. So you're absolutely right.
Multiple expansion has been a big part of the positive free term profile of
equities. But we have seen earnings growth as
well. So there is not a complete disconnect.
But what you are seeing is if you look at the equity returns versus the
fundamentals, you are seeing that equities have quite a big step ahead of
what the fundamentals are telling you. So equities have clearly bought in the
idea that growth will remain very resilient and as such is always forward
looking. And what?
About to happen. That's another little risk flag, because
if, of course, particularly on the manufacturing side, you will not see
that strength coming through. You might see some disappointment in
future earnings. And if you do go looking for value in
equities, which of course you do, where are you finding it?
It is very much thematically driven. And of course, the elephant in the room,
which I'm sure everybody's interested in, is the Magnificent Seven.
I was just about to get there. I know you would.
This is why I thought I should get ahead of you, because they are clearly such a
big driver now of the market, and yet we're seeing at least some disconnect.
If you look at one of the Magnificent Seven, they obviously didn't have a very
good start to the year. But, you know, I'm sure the question is,
is there a bubble? And if you look at the fundamental
earnings delivery of these companies, no, there's not.
They have incredibly strong balance sheet.
They're normally cash positive. So what you normally would look for,
obviously, before we are seeing stress in the market, is those signs yet to I
think that they will be the drivers again.
No. If you look at history, then it is not a
given that, you know, you have winners of the past, of course, would be the
winners of the future. We all use that disclaimer.
But if the importance is if you strip these out, valuation levels do not look
stretched, this is the importance. Headline levels are normally not a good
guide to find investment opportunities. So it is far more to understand
structural drivers. We had a lot of hype around obesity
drugs and we have seen hence in Europe, pharma companies benefiting the most.
We are looking for the growth opportunity in this shift in the growth
opportunities we just heard from from Annabel, the idea of decarbonisation
that the transition to a green economy, these are structural drivers that will
fuel opportunities that we actually we are quite keen to look at.
We are in the early stages of what could be a massive reorientation in global
trade. How are you pricing that into your
investment strategy? That is a very, very important factor.
It's difficult to price immediately. So this is all about understanding, you
know, putting yourself in the shoes. If you're running a multinational
company, how are you thinking about your global supply chains?
How are you thinking about potential risk premia of operating and producing
in specific areas and specific countries?
And does it require you to make changes that are there?
So is there disruption arising from a potential anti-globalisation pathway?
And how do you react to it? Again, there's risks, there's
opportunities, but it's understanding these.
We had a first taster right during the pandemic of what it means if you disrupt
global supply chains. And I'm pretty sure this is used at
least as some sort of a blueprint for companies to potentially rearrange
themselves. So we've now addressed trade
reorientation. You mentioned decarbonization.
Do people appreciate how inflationary the de-risking or decoupling from China
coupled with the energy transition actually is?
No, It seems that we still believe that we're going back to the normal, you
know, inflation pattern if there is anything like it, because let's let's
face it, the period prior to the pandemic and the inflationary shock was
everything but normal. And so I'm sure that this market is
still grappling what a normal inflationary environment should look
like. You haven't even mentioned politics and
fiscal policy and everything else that we are seeing, because I'm glad you're
weaving it in. We're coming to the US election, I'm
sure in a minute. But you're absolutely right.
It is the understanding of how this will change the inflationary backdrop we
have. We did run the analysis, particularly on
the energy transition. It is inflationary.
All else equal. Of course, there's always adaptation.
We are changing as consumers, but you have to assume that there's quite a lot
of inflationary pressures in the system. And as such, it's very interesting if
you consider where we've just started beginning of the year not long ago, and
we were expecting six rate cuts from the Fed and we're now talking about flat to
potentially up. It is an almighty shift in the way we're
looking at inflationary pressures. That period you referred to between,
say, the global financial crisis and the pandemic was indeed a historical
aberration and not just in terms of inflation and monetary policy.
Are we living in a new regime? It appears that we're living in a new
regime, a new regime characterised by geopolitical risk.
There's more inflation and with it, as you've just explained, higher rates.
What else belongs in that characterisation of the new regime is
it's whatever you want to call it, neo populism, illiberalism, What we're about
to see play out in the US election, not just the US.
I've mentioned the India election already.
It is very interesting in the way we're seeing the electorate responding.
There is a few commonalities across most of the elections.
Inequality is one of them where we're seeing a level of backlash now globally
to the implications and of course, exacerbated by the cost of living
crisis. On the back of the inflationary shock
where we are now seeing protest votes being put forward towards the incumbent
politicians or of parties in general to say, you know, things need to change.
The focus on growth and the and the global approach has not led to a more
equal distribution in society. And with a cost of living crisis, you're
fully exposed. Now, the level of inequality we're
seeing this in Europe with a big shift to the right.
We're now seeing it in the US play out. But even in India, I'm very sure
inequality played a big part. Why Modi couldn't extend his his
majority because India is such a lopsided country as well, where the
level of poverty and energy poverty, for example, as a as a starter is just still
so pronounced unless you have sensible policies to put forward.
I can see why people say we need change heading into this Indian election.
Were you overweight or underweight India and what are you doing now?
So we were very excited because the obviously the the inclusion of the
government bonds in indices is still a big deal.
It is too early to tell. We've seen the equity reaction
yesterday, which is normal because it's clear that he will need to acknowledge
that there has been, to some extent a protest vote and that the pro-growth,
pro-business reforms probably need to give way or need to be balanced in in
trying to focus on what he has hurt. So that would not necessarily be
business or equity positive. But let's face it, the stock market had
such a decent run it for the time being just takes the froth off.
We are still very excited because of course, the inclusion of the of the bond
market means it's just the opening up. We haven't seen India been a major
participant because it was very difficult for foreigners to participate.
So again, too early to tell. We are not changing and of course are
still excited about the the inclusion of the bond market.
It is easy to talk about geopolitics because it is so in our face.
But I do want to give you an opportunity to talk about something else that's
fundamental to your investment strategy, and it's a term that you use, which I
find quite amusing. Granola.
Explain. Yes, it's the European answer to the
Magnificent Seven. You know, it's but it's the healthier
option because it's mostly pharma and health care.
You might know that actually Novo Nordisk now is the largest European
company and they are a major beneficiary of the obesity drug.
So it's Mpic is the is the main name and or trade name, let's put it this way.
And of course, there has been a lot of excitement, not quite at the level of I
give it to two investors, but. It is really about the idea of what we
could achieve. If it was, then it really is delivering
what so far it seems to do. Because if you then consider the
potential positive side effects around diabetes, heart related diseases, that
there's a lot we can think about and this has actually fuelled a lot more of
this of of the excitement in Europe than of course I has has in the has in the
US. Do you think it'll get its day.
Yeah I think so. So far so good.
And we are seeing of course and that's it is very important fundamentally if
you look about the opportunity levels, the US of course has surprised us
because it has been so incredibly resilient and we are now looking,
particularly in the upcoming election on signs for fiscal policy, because I've
mentioned it earlier, the fiscal deficit in the US is at a level now where I'm
very sure the market will focus on what the two parties will say on the
extension of fiscal policy, because eventually we will come to the point
that the bond market will say we are happy to finance your fiscal deficit,
but we want higher yields, particularly at the long end, that you think the bond
vigilantes are coming back now, at least some term premium.
Let's not call it vigilantes. But you know, there's no term premium
right now. There's nothing and factored in for the
idea that both parties actually seem very pro fiscal.
Now, Europe is coming from the other side because their growth has been so
anemic that with now a slight recovery, you probably have a little bit of it's a
different level of excitement. One is still expecting for the
overstimulation of America to continue with and Europe.
We've obviously been at the extreme other end with Germany driving the
austerity narrative and as such, you know, have not having had the same
positive impact on the economy. Sonia, here's where I'd like to end.
You're an active manager. Active management is hard With more and
more technology finding its way into financial markets, whether it's machine
learning or now generative, I. Do you feel.
More optimistic. But the prospect for delivering excess
return Alpha as an active manager, or is it going to get harder still?
No, I'm very excited actually, because I think I can be an incredibly enhancing
tool to the investment process in a way that you just have to be far clearer at
where you want the human to add value and provide the value.
Now, having been an active fund manager myself, you normally lose the alpha in
the areas you haven't focused on, not the areas you have focused on.
So if you can use AI to help you with and the portfolio construction process
for you to focus really on, on what delivers the value add, I think that's a
perfect combination. And let's face it, the particular when
it comes to the integration of responsible investing factors.
That's where I would like my team to focus on, not necessarily on the overall
portfolio construction and that I'm very excited about.
Ladies and gentlemen, please join me in thanking Sonia loud.
Thank you So.
