Global Investment and Macro Themes

00:06Welcome to NASDAQ Trade talks,

00:08where we meet with the Top T thought Leaders and strategist in emerging technologies,

00:11digital assets, a regulatory landscape and global capital markets.

00:14I'm her host Ji Melnrno,

00:15and join me this afternoon.

00:17We have Alex Guns fund manager at Hepagon Capital.

00:19John Porter, Chief Investment Officer of Newton Investment Management, and Zara Das Mani,

00:24senior portfolio manager at Martin Curry,

00:26a specialist Investment Manager of Franklin Templeton.

00:29They joined me to discuss global investment themes,

00:31what we should be finding attractive,

00:33what to avoid an outlook as we go into the second half of the year.

00:37It is great to have everyone with us.

00:38And let's kick it off and get everyone's macro thoughts here, Alex.

00:42Starting with you from a global macro perspective,

00:45and particularly the impact of what's happening with

00:47the Fed in the US and global central banks around the world.

00:51Well, thanks for having me on the show deal.

00:53It's always a pleasure to be here.

00:55And we think this is generally a very good environment for equities.

00:59Basically, global growth is looking fairly decent.

01:03The path for inflation is heading slowly, but surely downwards,

01:07and central banks are in a position again,

01:10slowly, but surely towards easing.

01:12So this is an environment that should be very conducive to equities,

01:15particularly as earnings momentum is actually picking up at present.

01:20I'd also note that with so much money sitting on the sidelines in cash,

01:23$6,000,000,000,000 at the moment,

01:25there's a huge opportunity to see that money deployed.

01:28Yeah. And John, what I think is interesting and we've been covering this,

01:32on the show quite frequently is that it's very bifurcated.

01:35It feels as if there's two different economies,

01:37two different markets. What are your thoughts around that?

01:39Yeah, I agree very much, hill.

01:42You know, some people have described this as a K shaped economy,

01:45and I think that's an app description.

01:47I think there are certain portions of the economy, larger companies,

01:51more affluent consumers that are thriving right now,

01:54and the higher interest rate environment is not an issue for them whatsoever.

01:58However, I also see other areas of the economy, smaller businesses,

02:02the lower income cohorts of the economy that are really starting

02:05to struggle with the sustained high rates,

02:08and that's becoming an increasing challenge for them.

02:10I think as the Fed looks at the landscape,

02:13they're trying to thread that needle not

02:15over inflating the economy for those who are doing well,

02:18but being mindful, the risks they are

02:20posed for some other elements of the economy right now,

02:23that they're quite concerned about.

02:24Interesting, John, because when we were talking about coming out of

02:27the pendic that it was a K shaped recovery.

02:30And now we're here talking about,

02:31you know a shaped in terms of bifurcated economies.

02:35But Z, let's talk about this for a moment here.

02:37It feels as if inflation is going to be stickier for longer.

02:40So how do you think that impacts the Fed's policy?

02:43Yeah. So our view is that when you're looking at inflation,

02:47you need to look at wage inflation because that's by far

02:50the biggest contributor in the medium term to inflationary pressures,

02:53and wage inflation, whether you look at the US,

02:56at Europe, the UK, remains elevated,

02:59and therefore, there's a potential risk of second in effect on inflationary pressures.

03:05So we've heard from the Fed,

03:06they're being more cautious in terms of the prospects of cutting rates.

03:12We're entering into this cycle.

03:13Our view was always that Central Banks would start

03:16cutting in H two of this year rather than H one,

03:19and more or less that's what's happening even if the ECB has gone one month early.

03:25But we're really getting into this cycle

03:28with monetary policies where central banks are data dependent.

03:32Therefore, any inflation prints will bring volatility,

03:35both in bond markets and in equity markets,

03:39as investors speculate about what could be the next moves.

03:43It's also an interesting phase for central banks in that they're signaling hawkish cuts,

03:50which really sums it up,

03:52which is that they're willing to

03:55cut But reluctantly having to admit that inflation is not where they want it to be.

04:01So it almost feels like central banks have maybe signaled cuts too soon,

04:08and therefore need to maybe make a first cut just to please the market,

04:14but then trying to adjust the narrative

04:16to really highlight that their focus remains on inflation.

04:19And as we know, inflation remains an important battle for central banks.

04:25It's always easier to

04:27reignite growth and to extinguish inflation if there's a second rank.

04:32So it's probably the right approach to.

04:35What it means for corporate earnings,

04:38clearly, there will be an element of potential pressure on margins.

04:41Even if we haven't seen that extensively at this stage,

04:45but we would be watching out for any company that struggles in terms of pricing power,

04:50and therefore could have more pressure on margins.

04:53And then we've already started to see more profit warnings in the consumer space.

04:58So the comments earlier about a two speed economy with some parts of the consumers that

05:04are getting hit harder by the higher cost of living crisis is absolutely valid.

05:11Yeah. Well, Alex, let's Gear for a moment here and talk about another area of risk.

05:15Geopolitical risk that we're seeing happening in Europe,

05:18there was a French snap election, and Sara,

05:20I'd like to get your thoughts on this as well after Alex chimes in.

05:23But do you think there's going to be a broader policy shift in the EU as a result of,

05:30how this is starting to shift?

05:32I think what we've seen consistently,

05:35de al is that it's very dangerous to try and infer causality from political events.

05:40And we saw this clearly back in 2016,

05:43with Brexit, with Trump 1.0.

05:46And I think there is,

05:48without a doubt, heightened uncertainty.

05:51But in terms of how we translate that into investment policy,

05:55It's really about sticking to the basics, keeping things simple,

06:00thinking about diversification, in broad multi asset portfolios,

06:04using gold potentially as a hedge.

06:06And whilst I think that the French news is certainly near term uncomfortable,

06:11we need to look at it in the bigger picture.

06:14Mm hmm.

06:16Point of view. Yeah. We would

06:19echo the fact that geopolitical risk in Europe has increased.

06:23And if you look in previous episodes of political flare ups,

06:28the markets tend to overreact compared to the implication.

06:33In this instance, when we were looking at the European elections,

06:37we took the view that

06:39the radical right would increase its number of seats in the European Parliament,

06:45but that the majority would stay with the moderates,

06:48and therefore, European policies would remain unchanged.

06:52In the case of France,

06:53what we were highlighting is that the real risk is

06:562027 rather than 2024 with the French presidential elections.

07:02The development in France has been surprising

07:06by the French president calling for a snap election,

07:10and there could be an increased focus there.

07:14Clearly, the yields on French treasuries are widening.

07:19But what we would highlight is a worst case scenario from this SNAP election is that

07:25the radical right party of Le Pain does get to be in a prime ministerial seat.

07:35There would be what we call in France a cohabitation between

07:39a president that's moderate and prime minister that's more radical right.

07:45It would probably create a lack of ability to make policy decisions, ultimately.

07:53The market could potentially see it as a risk to the European integration agenda,

08:01but we would go back to it's not so much 24,

08:04it's 2027, that will be important.

08:07So if the SNAP elections are a reflection of what could come in 27 with

08:13a potential increased risk of a radical right accessing to the presidency,

08:19then the dynamics could be different,

08:21and then the market would worry more.

08:24Yeah. And then John shifting gears to the US,

08:26I mean, we've seen over, you know,

08:28the past 100 years or so that the markets time to digest a change in regime,

08:34or if it in fact is the same regime,

08:35but I feel like what's happening in the US is

08:37more factoring the discretionary spending that we're seeing,

08:42the government engaging in.

08:45Oh, absolutely. I think when you look at what's going on in the US economy right now,

08:50and I think Alex alluded to this in some of his opening comments,

08:54that the US economy is in a pretty good place right now,

08:58the nowcasting forecast look like we're going to have

09:01a 3% plus or minus GDP for the second quarter.

09:05And historically in election years,

09:07you see, you know,

09:09when this bipartisan comment,

09:11you see a lot of spending and you see a lot of support for the broad economy.

09:14And there certainly seems to be the potential

09:16for significant spending this year to bolster the economy.

09:19So it seems to me, like the risk in the US economy in the short term is over inflating,

09:26exacerbating the inflation problem rather than any threats of a recession,

09:31which is what we've been, you know,

09:32wringing our hands about for a couple of years now,

09:35but it continues to be you know,

09:37out in the future to worry about.

09:39Yeah. Well, let's shift gears and talk a moment, John,

09:43about how you're thinking about portfolio allocation,

09:45whether it's in terms of sectors or asset classes.

09:48Do you look at more holistically,

09:49or is it more down to a fundamental level where there's

09:52some good names and also bad names within certain sectors?

09:57Yeah, at the end of the day, Joe,

09:58I'm a traditional stock picker.

10:00So absolutely align with your later comments.

10:05I think there are great stocks in

10:07every sector and some bad ones in just about every sector.

10:09There's some places that look more favorable.

10:12One of the areas that I see a lot of potential in is the health care area up and down.

10:17I think that there's been a lot

10:20of COVID revealed a lot of problems with the healthcare sector,

10:24and I think there's going to be an awful lot of

10:26innovation in healthcare over the next five to ten years,

10:28they are incredibly exciting.

10:30You look at artificial intelligence,

10:32which is such a powerful theme,

10:33healthcare is going to be one of the biggest beneficiaries of that.

10:36So that's one area that looks very attractive to me.

10:39Energy looks very appealing right now as well.

10:42The supply constraints on the part of the producers is very impressive.

10:47They're being very disciplined in terms of how they deploy their capital,

10:51and I think that's improving the returns for the sector,

10:53and I think that is going to be a good place to

10:56invest from a longer term time horizon, as well.

10:58Right. And Alex, I'd like to get your perspective as well because you tend to have

11:01a longer term thesis looking at different sectors that will help the global economy,

11:06whether through digitization or technology to evolve.

11:10So what looks attractive to you right now?

11:12Well, I think the points that John made were exceptionally valid,

11:16and our R stance has always been very much multi thematic,

11:21combining those top down

11:22secular trends with very much the bottom up stock picking approach.

11:26And just to sort of zoom in on the health care sector, you know,

11:29one area I'd like to call out is, you know,

11:31there's been huge interest in GOP one,

11:34glucogen like peptide drugs.

11:36And actually, we are still,

11:38in our mind, very much scratching the surface.

11:40You think about it like this, 540 million people globally today have diabetes.

11:45Only about 15% of them are in good control of their illness.

11:49800 million people globally are suffering from obesity.

11:53Only about 2% of them are treated.

11:55And then we're just at the very early stage of

11:58treating potentially Alzheimer's using these drugs as well.

12:01And that could again be another multi million opportunity.

12:04So that's the story in healthcare.

12:06With an energy just to cover that off,

12:08we think that the alternative energy story still has a long way to run.

12:13And really, when you frame it in the context of

12:15just how much energy is being used really to power,

12:19anything to do with artificial intelligence.

12:21A AI server, just to give you some context,

12:24probably requires about ten to 30 times more energy than a cloud server.

12:28So we think the whole energy ecosystem,

12:31particularly the suppliers of

12:33grid infrastructure and those who are able to upgrade infrastructure,

12:37there's some really exciting opportunities there.

12:40And that's just two sectors.

12:41Yeah. And there you're aligned with this because I know

12:44your three key areas are energy transition and aging population,

12:47and of course, AI as well.

12:48Yeah, that's right. And what's exciting for long term investors is,

12:53The effectively almost industrial revolution,

12:57as Jensen and Wang has put it,

12:59is coming through as a result of AI,

13:02we would call it techno industrial revolution.

13:05So there are business models used to grow at

13:08five to 6% annualized in the industrial space that will

13:12be accelerating over the next ten years as a result of

13:16the various themes are being boosted by AI,

13:20whether it's robotics and automation,

13:22whether it's cloud infrastructure and all the construction and the building around that,

13:29whether it's cybersecurity or metaverse or quantum computing.

13:35We think there's a very interesting opportunity for

13:40investors to capture some of this investment cycle going on in AI,

13:45going on in energy transition,

13:47going on in healthcare infrastructure as a result of that aging population.

13:52At the same time, what we see is

13:55a potential risk of frost starting to come through in AI.

13:58So we look at a basket of over 50 stocks.

14:02Their share price has gone up by about 44% over the last 12 months,

14:07yet their earnings have only been upgraded by 7%.

14:11So it's important to focus on companies that can monetize.

14:15There are companies, as we know,

14:16that have been at the center of that AI investment spend,

14:21companies like I Vedia and those companies have really shown that

14:25their earnings momentum highlights that they can capture that spend quite forcefully.

14:31So for investors, it will be important to start

14:34differentiating between those companies that will need to spend on AI,

14:37and that might not necessarily monetize.

14:40And those are the recipients of that outside spend,

14:43and therefore they can more readily monetize.

14:46Yeah. Agile, if you don't mind me asking a question,

14:49that I'd love your point

14:51about AI and sort of balancing the short term with the long term.

14:54One of my favorite sayings is people always underestimate the change in

14:58ten years and overestimate in two years. How do you gauge?

15:02Where do you think we are in the AI hype cycle?

15:04Because we're somewhere in that curve,

15:07but, you know, clearly we haven't peaked yet.

15:10And, you know, the peak so could be another 50% move away,

15:13and it's gauging that sort of short term, you know,

15:17irrational exuberance to use a term from the past and balancing with,

15:21you know, the current market is is a challenge. What do you think?

15:26Yeah, you're absolutely right. Well, we think we're still early, and therefore,

15:29there's still more upside potential over the next couple of years or so,

15:34at least, because of the size of the upgrade cycle that's needed.

15:39Notably the hyperscalers, they're in a bit of

15:42an arms race as to who upgrades the cloud infrastructure the fastest.

15:47So the incremental CAPX on what was already high numbers for

15:52the hyperscalers and Meta equates to about $130,000,000,000 over the next three years.

15:59This is incremental compared to what they were looking to spend 12 months ago.

16:05So that to us will drive that momentum nearer term.

16:11But your question is absolutely valid.

16:13When VDA was assessing the addressable market in March 21,

16:18They put that number at $300,000,000,000.

16:2212 months later, they increased that figure to $1,000,000,000,000.

16:26And in March of this year,

16:29they started bringing sovereign AI as another opportunity,

16:33which we totally believe in,

16:35and that's really nascent.

16:36But that got them to increase their addressable market to $2,000,000,000,000.

16:41So even a company that's at the heart of that AI theme is struggling to

16:47assess the addressable market or to upgrade it rapidly enough to keep up with events.

16:53Could I perhaps give an extra nuance to this debate, if I may.

16:58I mean, I think it's really important to distinguish between the infrastructure layer,

17:03which is really where all of the demand and the excitement is happening at the moment.

17:07We think and the application layer,

17:09and it's well and good buying these GPU servers at the moment.

17:14But I think nearly every business with with whom we engage really struggle

17:18to actually highlight what the tangible end market solutions are going to be.

17:23And I suppose the second framing comment might be the following You know,

17:27Cisco's thesis back in 99 2000 was absolutely spot on.

17:31The whole world became totally connected with routers,

17:35and yet Cisco never ever achieved or attained that valuation it had in 99 2000 again.

17:41And I think our worry is that NVDA may be absolutely right in its world view,

17:47but whether that is fully reflected in the price is perhaps more open to debate.

17:51And really, in terms of trying to move the story on to try and think more laterally,

17:56our approach is really to try and think about

17:58second derivatives or indirect beneficiaries of the theme.

18:02Yeah, so for us, we'd be a bit more high conviction in so much that

18:08when you're seeking second derivatives or beneficiaries that are adjacent,

18:14you are increasing the risk of being in areas that are

18:19more competitive where barriers to entry are actually collapsing quite rapidly,

18:24notably in the application and software space.

18:26What we've asked our analysts to do is really kick the tires

18:30very hard around what AI could mean,

18:33both as an opportunity for innovation,

18:36but also as a disruption.

18:38And what we're going to be realizing as investors over the next five years

18:41is that some barriers are collapsing very rapidly.

18:46There's already businesses that are being

18:48challenged by AI because they haven't been able to keep up.

18:51There's debate as to whether some of the big tech companies

18:55are late in terms of capturing the AI opportunity.

18:59There's discussions that we wouldn't have had

19:0118 months ago about is Google going to stay the Go to search engine.

19:05Or is open AI going to be able to have

19:08a much more powerful search engine that's AI power,

19:11and therefore, will lead to that massive migration by users.

19:17Questions we would I asked before.

19:20So when we identify companies that have a quasi monopolistic position,

19:24like NVDA does, that also have scale benefit,

19:29which means the R&D superiority will remain extremely

19:34significant that are able to therefore drive innovation even faster than previously,

19:39we believe that the best strategy is to

19:42actually stay with those companies because you can see

19:45that there the barriers are very high and are less likely to be disrupted. Yeah.

19:52Appreciate 30 seconds we got to wrap the head on.

19:55I find myself agreeing with both of them.

19:57I think that there's some direct plays on AI

20:00in video being a great example that you just can't avoid right now.

20:03I think it's way too early to worry about the peak there,

20:05but there are some electrical component makers, for example,

20:08that are big beneficiaries of the CAPX wave that's coming.

20:11So I think there's lots of great ways to play AI led by active management.

20:15All right, guys. A appreciate the insight.

20:16Thanks for joining us on Trae Talks.

20:18I'm Jie Malno Global Market to Porter at NDA.