Video Q4 Market outlook webinar

Matthews, Daniel   0:00
Good morning, everyone, and thank you for joining the Q4 Market Outlook, which this time we've called Political Fireworks Market Consequences. For those of you that don't know me, I'm Dan Matthews. I'm the head of portfolio management at Aegon. And later on in the presentation, I'll be joined by Daniel Douglas Wright, who is an investment manager on our team.

Dan is controlling the slides. So next slide, please, Dan. Thank you. So, let's start with the learning objectives. Very straightforward. The objectives are to describe the market themes over the last quarter, analyse and identify the changing economic background, and be able to explain our views and convictions across asset classes.

00:36

Next slide. So how are we going to do that? We're going to start as always with our investment philosophy. Then we're going to look at the economic background and market themes. We're going to do that in two sections.

 

The other Dan, not me, will take us through inflation, government bonds and equity market leadership. And then I will turn to the political backdrop, including today's US midterms and a little bit on the UK fiscal challenge and the budget. We'll finish with quarterly performance and our asset class views and we will of course take questions.

 

The Q&A is there on the side of the application. That's also where we'll put the CPD certificates at the end, so watch for that later on in the presentation.

 

01:16
Our first slide, as always, is the investment philosophy. For those of you who joined us before, you should recognise this. For those of you who haven't, this is something we put into every presentation we do because it matters to us.

 

The world around us changes, often quite dramatically, and we think the best approach to that changing world is to try and view it through a lens, which means we make consistent decisions against that sort of changing backdrop.

What does that mean? It means we believe that markets are not fully efficient because guess what? Investors are human. Excitement and anxiety takes prices further than fundamentals justify. And against that backdrop, we try and take a zoom out and take a longer-term view. We use that to help us cut through the noise. We don't ignore what's changing around us, we just try and find the longer term pattern.

We think that valuations matter. A good economy or a good company is not automatically a good investment at any price. Equally, the opposite. A difficult economic backdrop does not automatically mean that every investment is unattractive.

 

And then finally, and probably as absolutely no surprise, given that what we do, we believe that asset allocation is an important driver of risk and return. Our job is to bring all these different things together and balance the opportunities with the risks that we're being paid well to take.

02:29

So, with that, let's look at the themes we have for this quarter. First, equity markets have remained resilient, but leadership has narrowed. Strong headline performance doesn't mean that that strength is evenly distributed. We've had a bumpy few weeks, but we've still seen some pockets of real strength this quarter.

 

Secondly, government bonds now offer very attractive income. But we've got persistent inflation and fiscal risks, and that means that that income is not necessarily a completely free lunch. It will certainly come with volatility.

 

And third, unsurprising, given today in the title of the presentation, political uncertainty. Not the announcements themselves, not the elections themselves, but their consequences for inflation, for borrowing, for confidence, for the things that matter to long-term investments.

The thread connecting the three is the gap between the apparent resilience of the economy and the pressures that we see bubbling underneath. And with that, I'm going to hand over to Dan, who's going to take us through the economic and market backdrop.

Douglas-Wright, Daniel   03:25
Thank you, Dan.

 

We can start by looking at inflation and how it continues to remain stubbornly high.

So, whilst inflation has fallen substantially from its 2022 peak. It does remain above central bank targets in the UK and the US. And whilst this is occurring at the same time, the path for interest rates has started to diverge. Central banks are no longer responding to a common global shock. Instead, they're increasingly having to respond to different domestic combinations of inflation, growth, different fiscal policy and labour market conditions.

 

And this matters because when inflation is closer to 4% than the 2% target, it’s going to restrict what the Bank of England and the Federal Reserve can do in cutting interest rates.

 

And this is one of the themes we expect to continue looking ahead. This theme of a multipolar world, greater policy divergence, more uncertainty about the outlook for inflation, particularly as the conflict in the Middle East continues and demonstrates how quickly a geopolitical shock can feed into markets and the wider economy.

04:45

And I highlight two of these areas here, which have really been the principal drivers of inflation. On the left-hand side, we can see food price inflation continuing to rise. And then the right-hand chart, we can see oil moving sharply higher over the quarter. So once again, moving above $100 a barrel. But reflecting the fast-moving nature around the conflicts or the news flow around it, oil is back below $100 amid hopes of a renewed ceasefire talk.

Investors are going to be watching this keenly as continued disruption to energy and fertilizer trade
coming out of the Middle East creates this uncomfortable mix for policymakers. Higher energy and food prices weaken households’ real incomes, which, if that were to persist, can slow economic activity.

 

But what it also does is raise inflation, so making it more difficult for central banks to support growth by cutting interest rates. So, the economic impact is potentially stagflationary, weaker growth alongside more persistent inflation. We do not see this as a base case, but we do see it as an emerging risk factor.

 

06:04

And this inflation shock is not only going to affect central bank policy, it also has consequences for government finances. And this chart shows the fiscal balance across advanced economies with projections out to 2031 shown in purple. And historically, deficits, governments spending more than what they have coming in, increase during periods of economic stress as governments look to support their economy. We can see this back in the global financial crisis and we can see that with the pandemic.

 

What is striking today, though, is that they're expected to remain comparatively large, the deficit that is, even outside of a recession. And part of this is higher price pressures, putting a strain on government balance sheets. The period of low interest rates, that period of cheap, easy access debt was or looks to have been a historical aberration. And with interest rates rising, this increases the cost of servicing that debt.

And this issue is then going to be further compounded when you consider that many governments right now are also facing structural spending pressures from aging populations, infrastructure demand, and the debate of guns versus butter or defence spending versus social spending.

07:32

It's no longer just a thought experiment and is very much a live issue as countries look to bolster their national defence in light of a more fractured world.

 

And when we put all this together, the result is that deficits are expected to remain around 5% of GDP. That means in the absence of a productivity boom or tax receipts rising materially, governments must continue issuing debts at the same time that central banks no longer are going to be acting as large price insensitive buyers.

 

Instead, there's going to be a greater onus on price sensitive private investors, who are going to have to absorb an increasing amount of this supply. And these investors will likely demand higher yields and greater compensation for that inflation risk and fiscal uncertainty.

 

08:30
And this is part of the reason why yields in developed markets are at their highest level in decades, reflecting those concerns of above target inflation, expectations that interest rates will remain higher for longer, larger fiscal deficits and increased government borrowing.

 

The UK, as I'm sure we're all aware of, has been particularly exposed because of the economy's sensitivity to inflation. It's, shall we say, a challenging fiscal position and political uncertainty. And you can see this on the chart with the green line, which looks at the 10-year yield in the UK rising above 5.2%.

 

However, what this chart also shows is that this is not just a UK story, but it's a global story. This repricing has been painful for many bond holders because rising yields means falling bond prices. But after this sell-off, government bonds now arguably offer their most attractive returns in the last 20, 25 years.

 

09:36

Because when we think about what's happened over the last 10, 15 years – very low yields, investors had limited income and took on considerable duration risk. So, at today's yields, bonds provide much more income, creating a large cushion against further increases in yields and greater potential for capital growth if yields do fall.

And we can see this here when we look at the prospective return of investing into UK government bonds today. There's quite a lot going on, on this chart, but hopefully in less than two minutes I can explain what we're looking at. And we'll start by looking at the left-hand side where we have various maturities of UK government bonds ranging from 2 to 30 years. And then along the top, we have the change in yields and then a matrix showing the return outcome for investors given either a move up or down in yield.

 

The green denotes a positive total return over the next 12 months, whereas red denotes a negative total return over the next 12 months. And if we focus on that central column, this assumes that yields are not going to change.

 

And what we can see in this scenario is that the return is approximately 5% to 6% across much of the curve. And that is primarily the income that investors now receive for holding UK government bonds.

 

11:05

Where it becomes more interesting, though, is if yields begin to move. So, if yields fall, those returns are going to increase because investors now receive both the income but also that capital gain as bond prices rise.

And we can focus on the 10-year bond, and we can see that a 50 basis point decline or half a percent decline in yields could produce returns of around 10%. So, whilst there is still downside if yields rise materially, particularly at the long end of the curve, this was when yields were close to 0. Investors now have that income cushion.

 

One would have to see more than a 75 basis point rising yields. So, the UK 10-year yield reaching close to 6% for a loss to occur. And that is what we describe as asymmetry in government bonds.

12:01

Turning to equity markets. Equities in contrast to bond markets delivered positive returns over the quarter, albeit not in a straight line. And this slide looks to explain why equities have continued to perform despite higher interest rates and that challenging macroeconomic backdrop.

 

On the left, we have US after tax corporate profits, as a share of GDP. And we can see that is close to record highs. Companies, particularly large listed companies, delivered robust earnings in Q3, supported by solid performance from technology companies and AI related infrastructure.

 

And we saw that the blended year over year earnings growth rate, so the aggregate earnings growth rate of US equities, is now over 30%, which is the third quarter where we've seen earnings growth in excess of 25%.

And this matters because equity markets over a long enough time horizon are going to be valued by the profits they generate and cash flows. And whilst we have seen the consumer savings rate fall in the US, a potentially difficult environment for households does not automatically translate into an equally difficult environment for the performance of equity markets.

 

13:28

And then if we look at the chart on the right, this shows how the composition of that profit has changed. And we can see that technology's share of corporate profits has more than doubled since 2016, while its weight in the index has increased by an even larger amounts.

 

And sitting here today, there are two interpretations of this very much glass half full or glass half empty. The positive interpretation is that the largest technology companies in the US have durable business models, high margins and supported by strong secular growth. Their larger market works therefore reflect genuine growth and profitability.

 

The more cautious interpretation is that market capitalisation, the size of the company, has risen even faster than the sector's share of profits. That suggests expectations have increased considerably and leaves the market more dependent on a relatively small number of companies continuing to deliver exceptional growth.

 

So we have strong profitability providing A fundamental support but investors are having to pay a premium to get access to those companies, which creates valuation risk, particularly when that profitability and performance are becoming increasingly concentrated.

 

14:57
Now that is not a new feature in US equity markets. And this chart compares the quarterly returns from the US technology sector with the rest of the US equity market. And in recent memory, technology has more often than not outperformed the wider market. And we've seen that for much
of this year.

 

So, one of the takeaways from this is that markets, its headline index return, can sometimes give an overly reassuring picture of the underlying market. US equities may be rising, but a growing proportion of that return is being generated by a relatively narrow group of companies.

 

Narrow leadership by itself does not mean the market must fall. Momentum can continue longer than expected, particularly when it is supported by those strong fundamentals. However, what concentration does increase is vulnerability.

 

If the dominant companies of the day. That would be the enablers of the new artificial world, India, Microsoft, Alphabet, disappoint. There's a change to investor sentiments. There may be insufficient strength elsewhere in the index to offset this decline.

16:16

And then going back to the theme of momentum, so investing into companies that have performed strongly over recent periods, we can see a recent example, or two recent examples in fact, of what happens when sentiment changes.

 

I mentioned that momentum is a powerful market force. As stocks perform well, they're going to attract more capital, their index weights increase, and the strength of that trend can encourage further buying, which can create material returns while the trend remains intact. But momentum can also unwind very, very quickly. Think of it as taking the stairs up but going down in the lift.

 

17:01

And this chart shows 2 sharp reversals we've seen this year. The first followed a strong advance through the first half of the year as trends established last year, particularly around AI, persisted until June, when we saw a fall of 20%.

We then had a subsequent recovery in shoe, but then that experienced a further decline of 14%. So, the takeaway from this chart is going to be that these quite large moves in markets did not require a deterioration in the economy. Far from it, in fact, the health of the US economy is remarkably robust. But what it did reflect was a change in positioning, a change in expectations and investors' appetite for risk.

 

And this is relevant when market leadership is concentrated and valuations are elevated. If many investors are going to be holding similar positions, even a modest change in that narrative can trigger profit taking and forced selling.

 

And with that on the topic of narrative and sentiment, I'm going to pass it back to the other Dan who will cover what we see in the world of Politics.

Matthews, Daniel   18:19
Thank you. Right, we now turn to our section we've called political fireworks.

 

Clearly, this is pertinent given the day we're speaking on. America goes to the polls today to vote in the midterms, but we've also had a budget in the UK, not so much fireworks and more of a damp squib. But nonetheless, it was significant, even if it was significant by its almost lack of impact.

I'm not going to attempt to forecast what is going to happen in the midterms today. I'm happy to take some questions on that. We can speculate on it at the end. But to be clear, we do not run the kind of fund that invests based on the day-to-day whims of politics.

 

Politics does impact what we do, but via policy and deficits and household budgets, the longer-term things that ultimately flow through into sort of growth and inflation. You shouldn't expect us to be moving our Portfolios around based on a single political event such as a budget or an election, but you should expect us to be thinking about their longer-term impacts whilst maintaining our valuations lens.

 

19:16

With that in mind, we're going to look a little bit at today's midterms.

 

Let's start with the historical pattern. The President's party has usually lost House seats at the midterms. There are exceptions, 1998 and 2002, but there is a clear tendency for the President to get punished. It's not a rule, but based on history, it is the most likely outcome. And based on polling, it's very much the most likely outcome from today's election.

We do, however, need to separate the House from the Senate, so the two parts of the US Parliament. The Senate operates on a very different cycle that runs every six years, with some seats coming up for election every two years.

 

And so, the outcome of any election depends very heavily on which states happen to be voting on that day. If a large number of Republican states are voting, even with a significant Democratic swing,
it's possible that the Democrats don't take control of the Senate. So, the national political mood doesn't mechanically translate into the same result for both parts of the US system.

 

20:12
As Investors, of course, the core issue for us is that kind of longer term, what does the outcome change going forward mean? Today's outcome for the Senate depends very much on which poll you look at, with most suggesting that the Democrats will win, leaving Trump as what they call a lame duck President.

 

A Republican win for the Senate, however, is well within the margin of error. It is unlikely the Republicans win both the House and the Senate. So, either way, it looks like some flavour of divided control.

 

What does that mean? Divided control normally means that new tax and spending legislation is a bit harder to pass. It probably constrains further fiscal stimulus. It probably doesn't do a lot to change plans that are already in place.

 

20:51

Gridlock also doesn't mean that political uncertainty disappears. The President has quite a large amount of power over foreign policy. And so, things like trade policy, trade wars, the war in Iran still remain significant trigger points going forward.

We also, of course, have the potential for the administration's response to disappointing results being, a bit tricky and accusations of impropriety being made. It's worth noting here that some of the states take a long time to count their votes. So over the next week, even if the election runs perfectly smoothly, there is a window in which both parties are likely to increase their rhetoric around the election being unfair, simply due to the fact that the count is taking a long time.

 

We've seen this story before. We saw it last time the US went to the polls, where the slow counters are accused of being slow because they are changing the results or interfering in some way.

 

In practice, they're just slow. But nonetheless, it can it can help sort of fuel a new cycle and create volatility.
21:53
So let's start by thinking about what the US voter cares about.

 

The slide here gets to the heart of the story. And in the poll here, 71% mentioned at least one economic issue. Immigration and health care also feature prominently, but economic security is the key leading theme within the US going into the election.

 

It's also worth bearing in mind that people mention affordability, and affordability is not necessarily the inflation rate. In finance, we talk about inflation all the time. But if inflation reduces, that doesn't mean that prices return to where they were.

 

Households are not sat around their Bloomberg terminals waiting for the latest inflation print. They're sat around their dinner tables, comparing the price of their supermarket shop, the price of their fuel bill, the price of their mortgage with what they remember paying the previous year.

 

We've all done it with our friends where we've reminisced about how things used to be cheaper in the old days.

 

22:42
It's these facts on the ground that can impact votes. The financial markets can be doing really well because corporate profits are doing very well and there is an AI boom. But when Americans make their choices in today's midterms, they aren't really thinking about those economic statistics. Their immediate question is whether their wages and their disposable income stretch far enough. And,
by way of example, fuel and housing are two particularly sort of visible tests of that.

So, let's start with fuel. As a British person, it can be very hard to understand the American obsession with fuel.

America is an enormous place, and it is very much built for cars. Fuel is a direct outflow from the household balance sheet. It's also something that you purchase regularly. So, you notice the price going up. You have to top up your car every week, every so often. And most people, it's a purchase that's not optional. You can't choose not to fill your car. If you don't buy fuel, you don't go to work, you can't take the kids to things, you can't live your life.

23:40

We all know why this graph looks the way it does. The war in Iran has created enormous pressures on the energy complex. And so, we see that the price of gas there going up and this flows directly into consumer balance sheets.

 

The other line on the chart here is diesel. That one flows slightly more towards business. It matters for trucking, distribution, moving stuff around the economy.

 

This is why an energy shock can be one of the worst things to face as a central banker, because it weakens people's real spending, while at the same time making inflation very hard to control.

Housing, slightly different version of the same affordability problem. Again, housing in the US works slightly different to the UK. Typically, in the US when you buy a house, you borrow for a very long time, so around 30 years or so. In the UK, if interest rates rise, typically so does your mortgage. Not immediately, because maybe you've got a two-year fix or a five-year fix. But eventually the interest rate catches up with you and you have to pay a higher mortgage rate every month.

 

In the US, because that mortgage is fixed, interest rates can rise. But guess what? Your mortgage doesn't. If you stay where you are, your mortgage stays the same. And the two charts on the slide show this.

 

24:50

In 2022, the left-hand chart, most people had a mortgage near to the current rate. So the red line is the current rate at the time. Whereas today, if you look at where the red line is on the right-hand chart, almost everyone has a rate below the current mortgage rate.

 

This creates a lock-in effect. A household might want to move for work, they might just want more space or for family reasons, but yet high rates make that very hard to do. At the same time, if you're a first-time buyer, you don't have any benefit at all. You face a combination of probably elevated house prices due to inflation and having to get a mortgage at the higher rate.

So, what you end up with is this uneven effect where existing borrowers are insulated from an immediate shock, but the market starts to grind to a halt. And for voters, the frustration can be quite significant. You're in a situation where the American economy is doing well, GDP is growing, we're seeing corporate profits rise, but that doesn't necessarily translate into an affordable home and the feeling of success when prices are rising.

So fuel prices and mortgage rates are two different examples of where what's been happening in the Middle East and how that's been pushing through into inflation and monetary policy can become very personal for people on the ground.

 

And as we saw earlier, the first slide of this section, this is the kind of personal issues that typically plays out when people go and vote. And as a result, the incumbent, in this case Trump and the Republicans, most likely get punished.

26:15
That said, I'm going to end this with a bit of good news. This is a sort of different historical perspective.

 

We saw in the first slide of this section that historically the sitting party's President gets punished. What that often means is you get this kind of sort of hung parliament situation where the House and the Senate are run by different parties.

 

Generally speaking, the market's quite like deadlocks, provided that the situation going into the deadlock was not a bad one. So, if the status quo is okay, markets quite like the status quo to remain.

 

Typically, when politicians are doing things, someone wins, someone loses. Who the winner and the loser will be is inherently unpredictable. And so politics is just a source of volatility. It's harder for a business to plan when the path of taxation or regulation is unclear.

 

When politicians are not able to do very much because of a split power base, guess what? Predicting that they're not going to do very much becomes much easier. And historically, as a result, the year after the midterms has been generally a pretty positive one for markets.

 

27:14
That said, we aren't building our portfolios based on the political calendar. We run an investment team, we don't write horoscopes. This is a nice little sort of historical average. It's not a forecast. So this is not a prediction for what we think will happen next year in the US.

Our view on the US is based on the valuations, the economic outlook and the likely outlook for volatility. As it stands, we see the US as an expensive market, exposed to quite a few difficult challenges, for which you're paying a pretty significant price of entry.

For us, the midterms represent another volatile moment for a precariously balanced but currently strong US economy. And we're comfortable with our underweight going into them given the market backdrop and the market prices.

28:03
So, going closer to home and turning to Westminster, we have our own political predicament, not dissimilar in a weird way. Households want relief from the cost of living, businesses want support for investments, and the government has to balance these demands with borrowing costs in a world with higher inflation, largely due to the war in Iran and the amount of energy that is imported into
both the UK and Europe.

 

Combine this with a difficult environment in which everyone is searching for someone else to blame and you find yourself having to do a very difficult budget indeed if you are the Labour Party.

So, what happened? Against this backdrop, we saw Labour enact what many are referring to as the do no harm budget. So, trying to thread that needle of supporting confidence without undermining credibility and avoid making a fragile private sector backdrop any worse.

 

The chart shows that they've kind of done that. Here we see there's a series of bars. I won't go into the detail of the bars, but broadly they show the changes in borrowing and tax for the coming five years, including the first bar being this year into next year.

 

29:08

The key message is that the size of the borrowing it's showing us is largely unchanged. The bars aren't changing a huge amount. What you can see is the blue bit at the top, which shows the change as a result of policy. And that shows us that Labour's policy is still contributing positively to borrowing rather than restraining it. So, their policy is still adding to the fiscal burden.

 

We can also see that those blue bars become negative in 2029 and 2030. This is from Labour's future promises to tighten the purse strings. Almost every political commentator suggests that this is probably not going to happen. It would require them to be cutting spending going into an election year, which is a very difficult thing to do if you would like to win the election.

Either way, what's happened is Labour have chosen to frustrate the backbenchers rather than frustrate the bond market investors by having a budget that contained very little significant change and some tinkering around the edges.

 

Our team has been constructive on gilts for quite some time, largely on a relative basis and not completely on their own versus the US, and largely because of facts outside of government control, such as different inflation backdrop, a different growth story.

 

But because of that, the government has remained a risk factor for us against that fundamental positive story.

 

As it stands, for now at least, the government appears to be allowing that fundamental story to play out by having a fairly muted budget.

30:38

So how has this played out over the quarter?

 

These are sterling returns and they're for the three months to end of September. That's the green ones and the year to the end of September in pink. So that's the end of Q3. Q3 was not a uniform rally back to the market concentration and leadership. We saw Japan, Pacific, the UK and the US post positive returns. Europe and Emerging Markets were weaker.

 

The broader story is, as Dan mentioned, the resilient growth in corporate earnings supported equities, despite A challenging geopolitical backdrop.

Government Bonds, pretty much the opposite story. They came under pressure as yields rose. UK investment grade and high yields also delivered negative returns.

It's just an important thing. Attractive starting income does not necessarily protect against short term losses when yields move against the investor. We are at that point of the cycle where we're likely to see some volatility in fixed income as an asset class, even if we do think you are capturing a very good all in return over the longer term.

 

31:39
Energy, of course, was another part of the story. Renewed Middle East tensions brought higher oil prices. The pink bar on the far right is oil year to date. It is literally off the chart to make the chart readable.

 

Our funds, of course don't hold commodities. So, whilst we are exposed to what's happening in oil via equity and bonds and the flow through from inflation and government policy, we don't hold any direct oil positions. And so, we aren't directly exposed to the volatility that is coming within oil prices from the conflict in the Middle East.

32:15
So that brings us to our current views. Global equities are currently neutral, and within that we favour the UK and Japan. We have an underweight in the US, again, largely due to those valuations. We think you pay a significant price of entry to participate in US equity markets.

 

Bonds are similar. The overall position is neutral. Again, we favour UK government bonds, we're underweight investment grade, and we're underweight overseas bonds.

In the US, we see a bit of a stronger demand impulse, partly on the back of AI spending. And so the inflation risk makes the rate outlook there more challenging than in the UK. And so, we don't think that treating gilts and overseas bonds as interchangeable is appropriate. We favour gilts over the international counterparts.

 

32:58

Unsurprisingly, if equities are neutral and bonds are neutral, cash therefore is also neutral as the balancing item.

Taken as a whole, best way to think of positioning is as a selective approach rather than a retreat from risk. Yes, we are neutral at the class level, but we believe that the underweights and overweights represent an appropriate balance of taking advantage of the right opportunities whilst not overextending ourselves into what is potentially an AI-driven overstep towards the later end of the economic cycle.

33:34
To sum up, the economy remains resilient, but the resilience is uneven. Inflation and higher rate expectations are weighing on bonds. Stronger earnings have supported equities, but they're quite concentrated in a small group of market leaders. We've seen some volatility this last couple of weeks because of that.

 

Today's US midterms put affordability back at the centre of the political discussion. Those pressures will continue no matter what today's outcome turns out to be. For us, the response is not to try and predict every political headline. It's to keep that consistent, valuation-focused approach, diversify, and actively assess the risks that we're being paid to take.

At the moment, we view the economy as being later cycle, with some sections being positively overextended, but we really do believe that selective opportunities remain and the funds are well positioned to benefit from those.

That's all I have for you today. Happy to take any questions if anyone wants to put any into the chat.

34:42

Someone has asked whether the recent sell-off changes our view on markets. I'll go with that first, Dan, and then if you have anything to chip in, I can, I'll let you come in as well.

 

The short answer is no. In fact, it fits with our existing view of markets, to be honest. We've always thought that the U.S. is to use a cheesy term, priced to perfection. And so that makes it vulnerable to any surprise. When people have extreme expectations, the chances of those expectations being not met become much higher.

 

And we've seen a lot of that particularly in the AI space, especially in the chip space, where those companies are beneficiaries of the AI build out, which is, going to happen. Maybe not as fast as some people believe, but expectations have run even further ahead of that.

And so, what we've seen is very much in line with the existing view rather than changing the view. We expect, a fair few more of these bumps in the road as the AI team plays out, I think.

Douglas-Wright, Daniel   35:53
Although Friday gave us an insight into what happens when we start to see that sentiment deteriorate, or if not deteriorate, more questions asked on AI and what is AI going to become.

 

Because when you think about the size of the US tech companies now, the Mag 7 alone, well collectively, are about $23 trillion in market cap, probably slightly less now after Friday. And when you think about the rest of the market trading on much comparatively lower market caps, it does not take a lot for those unloved sectors to move.

 

That's why a 1% fall out of your big tech names can see a 2-3% gain on against some of those unloved sectors like healthcare or consumer staples. So, I think for us really, it was just insight into that rotation playing out.

Matthews, Daniel   36:51
Excellent. We've had one other question, which is, what do we think will happen in today's midterms?

 

I will attempt to answer that and then if we've had no other questions, so I'll draw it to a close after I have.

 

The polls typically are slightly more accurate for the midterms than they are for the main election. And so, there's no strong reason to doubt what the polls are saying. So, the most likely outcome is that we see the Democrats take the House.

 

The Senate polls are slightly tighter, but they do suggest the Democrats will also take the Senate at this point. But I think it's within the margin of error, so it could go either way. But either way, we're going to see the Democrats gain some power back within the US system.

 

What does that mean for markets? Unless you get a significant shock, probably not a lot. Markets can also read the polls. And so, a large amount of that is priced in.

37:48

There are some smaller races that may actually impact markets slightly more. There's A governor race in Texas where the Democratic candidate is very much against building data centres. And there are a large number of data centres due to be built in Texas. And so, we may see some market fallout from results that you probably weren't expecting and have never heard of between two people that you've also never heard of that actually have a bigger impact than the main results.

 

So, we may see an upset somewhere there that causes specific stocks to suffer on the back of it, although those are low probability events. Texas is likely to go Republican and remain as is. So, there are a few smaller races that you might want to look at if you want to get a specific stock view, but our view is that they will largely pass relatively uneventfully, provided, of course, that everyone behaves themselves.

 

The tail risk is that the Republicans lose and Donald Trump does something in response to that, either in Iran or domestically that causes a greater amount of volatility. And we're watching that keenly.

 

But again, given the way the funds are positioned, it's not something we're concerned about. We are positioned for, again, the US being priced to perfection and so a little bit of volatility within the US market is not going to make much difference for the funds or their positioning.

 

I think that's probably it for us today.

39:14

Thanks again for joining us, we really appreciate your time and hopefully see you again next time. Thank you.