Speaker 0:
Hello and welcome to Asset T V's Masterclass with me, Robert Peston. We live, as they say, in interesting and uncertain times. Is inflation definitively back on track to the 2% more or less global target

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is the end of free money. The return of bond yields and interest rates of four or 5% un new normal that we've just got to get used to for years and years is the long forecast but never arriving. Crash in China. Finally upon us

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is in is artificial intelligence the kind of industrial revolution that will transform our economies? And will it make us richer or poorer and closer to home? Will the UK stock market finally lose that significant discount that it's been suffering from in relation

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to other markets any time soon? So to discuss these questions that matter to all of us, I have, as usual, a distinguished and brilliant panel. Um, Chris, I go, the chief investment officer. We go up to core investments at A A investment managers Fabiana Fili, the CIO

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looking at equities, multi asset and sustainability at M and G Investments, and Richard Carlisle, investment director at Capital Group.

Speaker 0:
And if I could start. Perhaps I'll come to you. Um, Fabiana first, um,

Speaker 0:
inflation is back. It is the end of free money. What is your view about how successful investment banks have been Are being in terms of, of getting in inflation back to that 2% target, Uh, that we, you know, frankly, um, we, you know, live with as the normal for inflation for years and years and years.

Speaker 1:
Well, first and foremost, it is a pleasure to be here, so thank you very much. Richard, um, different banks, different central banks have achieved different results. So if you look at central banks, for example, and emerging markets have been quite successful in bringing their inflation down, not probably where it should be, but significantly down. But when it comes to the three largest central banks in developed markets so the ECB, the BOE, and the fed,

Speaker 1:
then also their results are very different. We have managed to cut some of that core inflation that we're all looking at. We know that headline CP I might go up again, and that is because, especially for energy reasons for energy prices.

Speaker 1:
But we are in an environment of higher for longer, and this is on the rate side and also on the inflation side. So at some point, the 2% will happen. But when it happens, and how long it's gonna take is really going to determine the way we're going to invest

Speaker 0:
and related to that. Chris, Um, have we just got to get used to this kind of level of bond yields and interest rates? Well, for years now,

Speaker 0:
Yeah, I think we have. Because the prior period was very unusual. Central banks engaging in QE and and zero or negative interest rates wasn't the normal. So we've reverted to something that, fundamentally, is how it should be. Now, the question is for me, uh, even though inflation has come down, will it stay low? Will it stay stable? What do you think? I think it won't. I think we're facing a period where inflation is going to be higher than it has been over the last decade, but actually more volatile as well, which may make central banks,

Speaker 0:
uh, work harder to keep it close to their target. And Richard, it is striking that the UK inflation experience has been significantly worse, uh, than in other competitive competitive countries. Um, I mean I mean and there's sort of 22 aspects to this one is, um it's just been higher.

Speaker 0:
And, you know, we saw only yesterday. Uh, data on wage rises 8.5%. Uh, increase, uh, in wages through, you know, as an average across the economy that looked pretty inflationary. Um, we've also had a Bank of England whose forecasting record has been pretty poor. How concerned do you think we should be in the UK about all this?

Speaker 0:
So I think you know, when a crisis is started by Russia, Ukraine, you know, the proximity of an economy to to that and how reliant you are on on energy from Russia is an influence. And the US being energy self-sufficient on a long way from Russia has helped them. So the UK is not quite in that position. And Germany is arguably in an even even worse position. And I hate to agree with all my colleagues, but we do see, you know, inflation sticky higher for longer. So we have to We have to get used to that.

Speaker 0:
But, you know, I think you would say after a bad start, you know, Central banks have got ahead of the curve, and it is, you know, the worst is past. Investors are good at looking forward. I don't think we need to be too depressed, You know, we're past the worst inflation. We're arguably around the peak of interest rates, you know, and we've done that without generating a major recession in any country. So do you think there is a risk, Fabiana of a recession? Still,

Speaker 1:
Look, there is a risk of further slowdown is fairly tangible. And you start seeing it in the numbers,

Speaker 1:
how bad this is gonna be and how long it's gonna take to have a real impact. That is really something that we have to continue to monitor to monitor with the data. So far, it's not as bad. And that actually still helps the case for risk assets.

Speaker 0:
I mean, I see that the some of the big investment banks, um,

Speaker 0:
uh, you know, on the by side on the cell, uh, sorry. On the south side or on the by side, um, are are saying that the risk of a hard landing they think is now relatively small. Are they right?

Speaker 1:
The risk of a hard landing in the near term is small. I would agree. I can't see the signs of that, particularly because there is no real

Speaker 1:
overwhelming credit deterioration, which would, which would add to that hard landing. But, you know, longer term, we still don't know. We really need to understand this higher for longer. How much is going to impact the overall economy around the world

Speaker 0:
Now, if we could just look at the investment implications

Speaker 0:
and perhaps look at Bon yel just for a second? And one of the things that is striking about higher interest rates is they have a short term effect, and then they have a rather different effect in the long term. So, for example, if you look at the UK,

Speaker 0:
one of the problems for younger people, particularly saving for the long term in terms of pensions is in terms of sort of so-called risk free investments. The yields have been so low it's been very difficult for them to build up pension pots. And so there is an argument that says higher higher interest rates. Higher bond yields will be good for young, particularly younger savers in the long term. But the long term feels quite a long way off.

Speaker 0:
The moment. What we're seeing is an economics LA talk. Talk us through what you see as the investment implications of this sort of Wes set of bond yields. Well, I think we now we're in a situation where you can earn quite a lot of interest just on cash, and that's the first time for a long time. Yet we've been able to say that so other assets risk assets have to deliver a lot more to beat that in the short term.

Speaker 0:
I think that's a big problem for a lot of investors who are sitting on cash, don't see a great deal of value in equities or in credit markets, because if you've got low economic growth, then there you're gonna struggle to find an equity that's gonna deliver a return. But having said that, you're taking a longer term view. Uh, I've certainly heard of and and and discussions with people in the market individuals now buying guilts

Speaker 0:
because it you can get 4.5% yield, and that's something that we haven't seen for a long time and and looking at in the the UK, um, but the sort of choice between long short guilts, index linked

Speaker 0:
Where? Where, where Where should we be looking for Bianna.

Speaker 1:
We are actually

Speaker 1:
invested at the long end of the yield curve in the UK. But the UK is not the country we favour from, uh, from the perspective of the government bonds. So we actually do prefer emerging markets where we can get some significant real yields because you have their

Speaker 1:
much higher rates and at the same time, in inflation that has come down significantly.

Speaker 0:
Emerging markets which ones in

Speaker 1:
particular think about Mexico, think about Brazil. These are markets where you have to watch out for currency volatility. And there has been some, uh, as of late. But still, the real yields are very compelling.

Speaker 0:
Richard. In the equity market, where do you do you see pockets of value? So we're global investors and yeah, absolutely. I mean, so first of all, on the inflationary background, if you look at history, if that's any guide, as long as inflation doesn't go over 5 6% for an extended period, actually equities are done pretty well, so that's not too much of a threat for equities. You know, in the if, if we're right and we don't expect a major, high

Speaker 0:
hard landing, earnings growth can continue. And there are some areas like health care. And I know you want to talk about artificial intelligence, which we find absolutely fascinating and we think can if your position correctly give you a great sort of runway of profits, growth and just I mean, it's sort of an interesting question for, you know, for for for sort of corporate management,

Speaker 0:
most of the most of the current generation of people at the top of particularly well, actually of any company have never experienced inflation. Uh, the last time we had an inflation problem, you know, many of them wear short trousers. Um, and, uh, there are sort of challenges for management in dealing with rising input costs. There are also, of course,

Speaker 0:
opportunities. Um, uh, and and you know, we have seen this is something politically quite sensitive companies using the cover of inflation to sort of rebuild margins and net net of all of this, you were saying that actually, you know,

Speaker 0:
historic directly inflation of four or 5%. Not too bad for equities. Do you agree that the environment actually may be quite benign in some ways for

Speaker 1:
corporate, I think we have to be selective, and that's gonna be key because some Corporates have clearly inflated their balance sheets. With that,

Speaker 1:
they thought there was going to be lower for longer and they're going to have troubles going ahead because we do see and I very much agree with Chris, we're going to be in an environment where rates will be higher.

Speaker 0:
Refinancing is

Speaker 1:
coming up, it's coming up, it's coming up and clearly that, for example, will hurt some of those high yield companies that many like at the moment and have been so popular. But I would caution against

Speaker 0:
III. I agree with Fabiana that whether it's by kind of judgement or luck, you know, inflation has actually helped companies because it's boosted revenues and as you say, some have been able to

Speaker 0:
use that to to raise prices. And at the same time, what I found fascinating is how they've managed to keep their profit margins pretty high, particularly in the in the US. So you earnings growth has actually been better than you would have expected. Now the higher rates stay at these levels, the more difficult it becomes, particularly when they do start to have refinancing that debt. And that starts to happen in size in 2024. And also, I don't think we should

Speaker 0:
ignore the sort of political implications of of some of this. If people's living standards are under pressure and they see companies building profit margins, that becomes a reputational problem for companies. Yeah, and and certainly in the in the most sensitive sectors, like energy, as we've seen in many countries with government intervention in the price setting process. And if we do get another round of energy price increases, we'll see the same thing. I mean, we're talking about how you favour

Speaker 0:
emerging market, uh, fixed interest, government bonds, But looking at, um, developed mature economies, Um, you you're not keen on the UK you say, But I you know, would you be more keen on? You know, as as, as, as I say, the European bonds of various

Speaker 1:
in our multi asset strategies, we have a barbell strategy when it comes to government bonds. At the one end, we like emerging markets, not all of them. So we're very selective there, But there are some that to this point, are compelling from a real yield standpoint.

Speaker 1:
And at the other end, we like we still like the long end of the US treasury curve. We actually So what you're looking at there is in the latest period, we feel that rates have gone up quite a lot and they were due to stabilise. So we actually bought into those 30 year Treasuries. And at the same time, if you look at it at the at the

Speaker 1:
if you wanted the longer end of the yield curve, you have that insurance effect. If things really go badly on the risk asset side, that should provide you with some insurance.

Speaker 0:
Now I agree. Um, I think in the short term, we favoured actually the short end of the curve just because you're getting that high yield, uh, relative to the rest of the curve, which is is inverted. And as you go further along, ma sure it is.

Speaker 0:
Yields get lower. But it is kind of a barbell as well, because we feel at some point the economy is going to slow down, inflation will come down further, and the central banks will probably be cutting interest rates next year, so that should benefit those long dated bonds. I mean, let's look at, um, this issue of, you know, momentum or lack of it in the economy. Um,

Speaker 0:
China has disappointed when it comes to the growth that we expected post all of those covid restrictions.

Speaker 0:
How serious do you think the situation is in China? FAA?

Speaker 1:
The situation is serious, but it has been serious for a long time. China hasn't contributed to the growth of world GDP for the past three plus years, first of all, because it was closed due to covid and now, because the economy is slowing down more than anyone expected. So I would say it is probably as low as

Speaker 1:
they can get in terms of contribution to the rest of the world. It could get a little bit weaker, but the government has levers to maintain a floor on the economy. It's not going to do too much to propel it because they have nightmares from what happened in 2009, when a lot of money went wasted. But, you know, we should consider China at this point of time stable, not really a big input for the rest of the world.

Speaker 1:
But nothing much has changed versus what we experienced in the last three plus years. But just to

Speaker 0:
be clear, that there are,

Speaker 0:
you know, some some some sort of structural factors. I mean, one of them, the over indebtedness of much of the property sector, the sluggishness of much of the state owned sector that's been there for years and years and years. Right, so none of that is new. But, um, the geopolitical situation is considerably worse. I mean, I you know, I,

Speaker 0:
uh, was in Hiroshima for the G7, and all the language of Western leaders was around. We just got to bring strategic industries nearer to home. We, you know, we it's not just supplying technology to China. We just cannot be as reliant as we have been on

Speaker 0:
manufacturing and supply from China. That surely is a long term drag on Chinese growth. It it

Speaker 1:
is. And you are already seeing the impact of that. You've seen a lot of French shoring so moving production to countries that are more in line where on values India has benefited from it and you start seeing

Speaker 1:
large IT companies moving manufacturing from China to India so clear and and Mexico is another beneficiary. So clearly there is a change. But what doesn't benefit? China benefits some other countries. And

Speaker 0:
and Richard, tell us about that. I mean, do you? When you look at the world, say, Well, if if you know we are going to be

Speaker 0:
diversifying away from dependence on China, we when I talk about Western Western economies as it were, where do you see which economies do you think are benefiting most and where, therefore, should investors think about putting their money? Well, just just on China for a second. If I may, we we've painted a gloomy picture. I mean, there are areas that are going well. I mean, you know, Chinese tourists have been boosting the

Speaker 0:
the demand in duty free shops around airports around the world. And you look at Louis Vuitton and et cetera, and they've had a good tailwind from from tourism. We see, actually, tourism in China is growing quite well, Even though the whole economy may be quiet, you know, we can find health care companies that have got really a excellent technology and B good growth trajectory so we can find still still find interesting places to work. And actually, I was rather stuck out there if you saw, uh, China. I think this year will be the world's biggest motor vehicle exporter because this enormous amount of money

Speaker 0:
they put into electric vehicle technology around electronic electric vehicles. You know, some of those have fascinating technology that doesn't even exist in the US.

Speaker 1:
And I may, if I may add, if you look at the top 10 performing stocks in the MS CIA. Actually, the very top performer wasn't a US stock was a Chinese mainland stock and John in the light. And if you look at how many US stocks were in the top 10, there were two

Speaker 1:
in we all know. But it was only on the fifth at the fifth place,

Speaker 1:
Meta 10th place. But above that, there were two Chinese stocks. So China and I very much agree with you. Richard is still presenting some really interesting investing opportunities.

Speaker 0:
But which other economies, Richard Well, um, you know, the US looks the most resilient economy and you know when as global investors, you know, when it comes to investing in NVIDIA and Amazon and Netflix, et cetera. Where there is the US market is the leader and there is no European

Speaker 0:
alternative. Then we invest in the market leader that happens to be US domicile. But they the PE premium of the US market versus, say, Europe does grow and grow. So in industries like health care and the the oil sector, where you have a choice of either buying a European company or a US company, we just find the European ones look cheaper and cheaper relative to the US. So where the industry, broadly in sectors where there's a global presence but the the European discount grows and grows? And and I mean,

Speaker 0:
would you agree, therefore, that if we're looking at businesses whose presence is global, um, that there is an advantage in perhaps staying closer to home in terms of where you invest,

Speaker 1:
it really depends on the businesses. For example, I would agree that the same logic applies to some UK listed stocks that there are some excellent companies that have worldwide exposure and they are cheaper because the overall UK stock market is cheaper and those are excellent investment opportunities. Give us an idea

Speaker 0:
of the sort of thing where you you you

Speaker 1:
You know, if you look at some of the energy stocks, if you look at some of the capital good stocks, I mean, there, there are there are a number of them. And don't forget the banks. Also, Banks, you have some very strong banks here that are more exposed out to outside of of the UK than here in, uh, in, uh, to the local micro

Speaker 0:
economy. I mean, let's just pick up on that for a second. Why is there this UK discount? Why is it that you know, particularly internationally minded investors

Speaker 0:
don't seem to like the UK, But I think that there's you've got to consider the kind of macro overlay and the political overlay and we've had a, you know, a few years now of of uncertainty at the political level with several changes of Prime Minister, we had the debacle with the Liz Trust budget a year ago, and that has had an impact. I think, on foreign investor sentiment towards the UK

Speaker 0:
and we and we are still in that situation where there's political uncertainty with the election next year. So I think that is certainly one aspect to it. Do you think investors are anxious about a labour government? Given that this is a, you know, a labour party that is very conspicuously moved towards the centre? I don't think they're anxious at all. No, II. I think you know what investors need is some

Speaker 0:
clarity, policy, uncertainty. But I think you also got to you got to add I'm an English person. So you got to admit that the UK corporate sector has not been as innovative as the US. Look at the biggest 10 companies in the UK. They all existed 30 years ago. Look at the biggest 10 companies in the US. Hardly any of them existed. I mean, one of the things that I found very striking the other day. I looked at the biggest companies in the world in 2000 and the biggest companies today. Um,

Speaker 0:
in 2000, there were three British companies in the top 25. 2 of them were sort of tech. If you think that Vodafone and BT are sort of tech, but they were in the world's big 25 biggest companies. We don't have a single. There's not a single British company in the top 25 anymore. And there there's there's sort of one or two nestling around number 50. Um, or I mean this This is

Speaker 1:
worrying. But you know what is really interesting? That there is actually

Speaker 1:
an incredible number of smaller companies that particularly hover around universities in the UK. And they're extremely innovative. They're out. There is a lot of potential, particularly in that kind of lower size private market. We invest in many of them. We really find, um, some incredible opportunity. Why

Speaker 0:
is the UK not good enough?

Speaker 0:
It turning these brilliant, smaller companies into global giants? I mean, you know, you know, one obvious, famous recent example is, you know, deep mind absolutely amazing World leading A I company. We want to come on to a I, but it's owned by Google now, And it was a British company.

Speaker 0:
Why? Why is it that we have to sell out? Uh, you know, in order to acquire scale I, I just don't think we have the depth of venture capital and and PE in this country compared to the US. So it's that, you know, they can muscle in and buy these,

Speaker 0:
uh, early stage companies, and we're not protective of them. Some countries would protect them from being acquired by non domestic companies. We don't do that. And, you know, we've obviously seen that over the great controversy over our arm being first of all, sold to a Japanese company and now listed in America rather than listed in the UK. It's fine. In fact, it's a great Cambridge success story, so I want to ask you quickly about arm

Speaker 0:
um, in terms of investor sentiment. This is one of the biggest technology IP OS in, uh, a long time. It seems to be going, having been a bit bumpy along the way, but it now looks as though there's a lot of investor demand. How significant will, you know? Will post arm uh, IP O sentiment be for general confidence in technology? Do you think?

Speaker 0:
Well, it's joining one of the hottest areas in world investment. If you think of the NVIDIA TS MC, a SML, um, grouping of companies, then the the the interest and excitement there, it is difficult to imagine it getting to a higher level. I mean, my little statistic that you know, NVIDIA added more market value than any company ever in one day when it had its rise just shows the level of interest in it. So it is fascinating. We find it a great place to invest. And, you know,

Speaker 0:
these are companies arm in particular, but also a SML and TS MC have enormously defensive business models. So they're great investments. And and still, even though these stocks have gone up in value very significantly over a couple of year, period still value there, we still hold them. So we hope so. Yeah. And and But now let's broaden it to this issue of this industrial revolution. Um,

Speaker 0:
uh, which we think is now properly underway as a result of generative artificial intelligence. And actually, you know, um, other forms of of of a I, um,

Speaker 0:
talk to me about how significant you think this is both in terms of economic transformation and, you know, investing.

Speaker 0:
I think I think significant in terms of we think the speed with which it could develop If you remember. I'm old. You know, the Internet revolution took a long time because people needed to have broadband installed that slowed the thing down. But there is no technology hurdle for for, you know, large language models to being adopted immediately what we're doing, You know, there are two ways to invest in it. You've got the tools, the NVIDIA that help build the large language models. We're trying to find business models that would benefit from

Speaker 0:
a I being added on. And we think there are some. You know, if you just think of Microsoft, they can add on, um, a unit to to their team's business. They can charge $30 a month to give you an A i generator summary of every meeting. And that's just the start. The information they gather with them that is an enormously additive. And if we look at the kinds of businesses where we know a I can

Speaker 0:
cut costs, increase efficiency, everything from sort of banking to accountancy to consultancy of various sorts um,

Speaker 0:
are these Is this a reason to buy these businesses? There

Speaker 1:
is a lot of opportunity, all sorts outside in technology that comes from a I, um, and by the way, I agree with Richard A. I is not new. Um, I have a team that has been investing in public equities in a I since 2016, so there were already opportunities before. But what we're seeing right now is the interface. The chat GP T, for example, is

Speaker 1:
giving us is just making the use much more pervasive, easier for everybody. And this also means that it won't only be the enablers such as the N videos that will take advantage of this theme. It will be some of the providers, some of the enterprise software companies that will be able to apply a I to the products that they sell to their

Speaker 1:
customers. And then it will be those companies that, as you correctly pointed out, will be able to utilise a I to become more efficient in many different sectors.

Speaker 0:
And I think that the broader economic implications are huge as well, in terms of potential additions to productivity as we've seen in other industrial revolutions in the past.

Speaker 0:
Uh, and that will be a public good. I think if you take something like health care and the use of a I technology in in cancer detection, early stage cancer detection, imagine if that becomes something that allows us to treat cancer much earlier. More successfully, the reduction in cost in national health budgets that would come from that, uh, you know, is something that is a public good, a public benefit. I mean, I should point out that if you look at previous industrial revolutions,

Speaker 0:
although in the medium to long term economies get richer and people on average get richer, there is normally a shock period where, uh, you know, when people get displaced by machines, they struggle to get decent jobs or to maintain their living standards. So I do you know, my own personal concern at the moment is whether, you know, governments are taking seriously enough the potential negative impact on individuals living standards

Speaker 0:
in the short to medium term, which could be quite significant. Yeah, I mean, something like 6% of the US workforce are long distance truck drivers. And you know they are. We have We have DH L drivers earning 100 and $50,000 a year. I mean, that just speeds up the efforts of self driving cars and sort of self delivery. And we've just seen recently that Tesla is investing, you know, investing in an enormous amount of money in yet another supercomputer that leisurely will you know, enhance their ability to create,

Speaker 0:
you know, robot replacements. People.

Speaker 1:
Look, Robert A. I is going to create winners and losers, particularly at the very beginning. It is a huge competitive advantage for some companies, but it's not that just supplying a I is going to transform a company. You have to already have a base of your business. You have to have data that a I can actually mine

Speaker 1:
and make more useful for the company. So there are a lot of different signs that we have to look at when we invest in a company to really believe that they can be helped by a I Can I just ask you

Speaker 0:
one question, which is sort of intrigued me. I very rarely remember. Um, a technological shift like this, where there has been

Speaker 0:
one astonishingly dominant player like NVIDIA. I mean, the fact that they almost all a I seems to be dependent on these GP US that they manufacture.

Speaker 0:
Is that sustainable? Surely at some point they will emerge a serious competitor.

Speaker 0:
Um, if you think so. NVIDIA designed the GP U. They're made by TS MC using a SML technology. It's a fascinating question which of those three companies has got the sort of defence against competitors? You know, I'm I'm sure people like Arm and other chip designers are throwing lots of money to replicate what NVIDIA does. Our investments are actually biassed towards TSL MC and a SML where we think they have defendable positions. We do invest it in

Speaker 0:
video. It's been fabulous, but we worry about you know, how many years they can keep. Their advantage is that because manufacturing, you think, is more defensible than the underlying Yeah, it's more difficult. You look at TSM CS lead over, say Intel, and it's growing as time goes on, because their their use of technology has been fabulous and no one else can make the three nanometer chips that will power your next iPhone. That's a great issue there. I mean, we've talked about,

Speaker 0:
you know, potentially investing in businesses whose productivity could increase as a result of A and I. We've talked about, uh, you know, essentially investing in the foundational stores, businesses, WWWW. What what other? I mean, where else should we be thinking about a I do you think

Speaker 0:
I think you know areas like cyber security continue to grow as a as a general technology theme because the more technology there is, the more things are at risk. You're using bigger and bigger sets of data. You want to protect that data. So I think

Speaker 0:
cyber security has been one of the best performing sectors this year, and that that is likely to continue.

Speaker 1:
And we recently look, uh, wrote a piece called Beyond NVIDIA. You can actually find companies that can benefit from A I and I benefit from a I across all kinds of industries, some of them

Speaker 1:
most boring industries. So there are companies in Japan that are telecommunication companies. And one of them, for example, is investing in a new, photonic way of delivering data. Because with a I, particularly when you start utilising not only data but also video, you need a lot more ability to process the data and a lot more speed.

Speaker 0:
We we've been talking about some quite important themes. There's another theme that's been on all our minds for some time, which is the road to net zero. particularly on my mind today because we're talking on the day that, um,

Speaker 0:
chief executive of BP, uh, has uh, you know, rather suddenly left the company as a result of, um, developments that have nothing to do with climate change. Um, but but it it But it's put, you know, in a sense, BP from the centre into one's mind because one of things that's quite striking is it was ahead of the pack in saying it was going to reshape its business to be net zero by 2050.

Speaker 0:
Investors didn't really like that. The shares underperformed it, then decided it announced it was going to slow down the path of net zero and was going to be more in hydrocarbons for longer. And its share price rose 10 15

Speaker 0:
percent. Um, this is all very tricky, isn't it? Because on the one hand, all of us would say, you know, long term, Actually, it's gotta be good not only for the planet, but for business to reduce carbon emissions. But when investors are rewarding carbon spewing businesses,

Speaker 0:
this is all quite difficult. The

Speaker 1:
truth is, we need transition, so we still need hydrocarbons to get us to the point where we can be hydrocarbon free

Speaker 1:
and the real if you want focus needs to be to invest in companies that are not rogue drillers that do not hurt biodiversity set for, for example, Think about the Arctic. Think about oil sands, but really understand that you're still going to need gas. You're still going to need oil to some extent in the hope that we're going to soon get to that greener world.

Speaker 0:
And I you got a layer on top of that. The complexity around complexity around clients in different regions having very different perspectives. I mean, if you do a client meeting in Sweden, you get a very different message. And if you do a client meeting in Texas and you know, for A for a global asset manager, you know you need to be able to cope with those different references. And that's one of the things we're doing is trying to be more flexible about the the the the products and the exclusions we give to different investors around the world.

Speaker 0:
I think there's no question that investment strategies that are responsible or focused on ESG or climate change biodiversity are going to continue to grow. Um, but you don't think because there are some who argue we're we're somewhat in reverse in all of this. But you you actually think that the underlying underline is is it continues to grow and and that will, you know, it necessarily needs a change in the economics if you, you know, we could talk

Speaker 0:
about carbon taxes and the fact that they aren't accelerating, particularly the move away from fossil fuels. But there are other policy areas which we need to see happen during this transition period. But we should be investing in those companies that are on their own path to transition and will benefit from those policy changes in the

Speaker 1:
future. Completely agree with Chris. I mean, that really needs to be the long term horizon from an investment standpoint

Speaker 0:
now related to all of this. We talked earlier about the impact on energy prices of Putin's invasion of Ukraine. Um, we have had more global shocks in the last few years than we had in, you know, the previous 2030 years. And is it are we just going to have to get used to, uh, a more dangerous world in that sense?

Speaker 0:
Um, it's It's difficult to say, isn't it? But the recent recent experience tells us that companies have to focus very much on their risk management. Um, because we got covid we've had, you know, we have the banking crisis. We had covid we've had

Speaker 0:
Russia's invasion. We've got deep worries about the Indo Pacific region and China, you know, There, there, there there are potentially. I think it's encouraging. Is that you know, on the whole economies and and companies and households have been fairly resilient throughout all these shocks, you know, why aren't we having a hard landing today? Because there's some inherent defence against

Speaker 0:
those those shops in the in the system. Whereas I think China perhaps is a little bit different because China's balance sheet has been badly affected. And I think, you know, consumers have been resilient because in many ways governments have bailed them out. You look at government borrowing, pre covid covid comes along and you know we get lockdown payments. Financial crisis comes along, we raises government borrowing. Energy crisis comes along,

Speaker 0:
you know US debt. Government debt to GDP has gone from 60% to 100% through these crises. I mean, there has to be a point where a crisis comes along and the government can't buy this. I mean, one of the big debates in America at the moment is indeed, um, around the sustainability of its debt. And obviously it's an even bigger I would argue right now conversation in the UK. And there's, you know, again, 20% points added to debt GDP and the

Speaker 0:
UK during covid. Um, there is a question about our ability to absorb another shock of that magnitude.

Speaker 1:
You know,

Speaker 1:
the question that investors used to ask themselves over the past, You know, 10, 20 years, that a plus that I've been in, uh, in this industry has always been What do we think is going to happen? The question you have learned to ask yourself now is What are we not seeing that might happen and how can we prepare for the unknown unknowns?

Speaker 0:
But there's also, I mean, just to go back to where we started.

Speaker 0:
We're almost out of time. But we know if you've got thoughts on this, um the the the the the the sort of big,

Speaker 0:
um, potentially very worrying phenomenon is we have now got governments UK government, US government and paying rates of interest arguably in real terms that are greater than the underlying growth rate of the economy, which means that you get into a situation where simply paying the interest bill is going to inflate government debt. Um,

Speaker 0:
and that is generally you would regard as a position that is unsustainable. Over the, uh, medium term may be easier for the US because it's still the world's reserve currency. But for an economy like the UK,

Speaker 0:
you know, essentially, if interest bills on themselves are going to swell the national debt, that's a problem, particularly if you have inflation linked debt, which we do. It's even more expensive. Yeah, that's a major concern, I would have thought. I do worry about the UK because there's huge political dissatisfaction with the state of public services, and the response to that politically is throw more money at it, as we've seen. How do you How do you How do you, in a sense square, the competing,

Speaker 0:
uh, imperatives? On the one hand, you've got to get the debt down. On the other hand, people want decent public services. Yeah, it's difficult and you need growth. You need economic growth and we you need more than 1% growth that we have in the UK, which presumably is why all of us have to hope that artificial intelligence is that stimulant. And, um,

Speaker 0:
I mean, are you sort of we talked about from an investment point of view, the potential of of artificial intelligence. But do you think around the West? It could be we? We're in a low growth. We're in a low growth climate in the West as a whole. Do you think I I is the thing that could lift us?

Speaker 1:
It's a tool, so we need to use that tool well, and we have to also know how to use it. So

Speaker 1:
for governments, it will be up to their understanding of what they can do with a I to help companies and the public companies will definitely be very willing to apply a I. The public is very interested, but it has to be also regulatory support because don't forget A. I is going to also create some significant need for new regulation and

Speaker 0:
and retraining of people who

Speaker 0:
to fall out of the of the employment system. Because of a I becomes really, really thinking about the fiscal side and making public sector more efficient. There's huge opportunities. That must. Now we're almost out of time. Um, I just want to ask all of you simple question, sort of in the round sort of positive, negative, indifferent for the coming year. And and and relatively speaking,

Speaker 0:
where would you put your money over the next year? Global equities. We are past the worst of not knowing how interest rates needed to high how I need to go to control inflation. We're past the worst of inflation. It doesn't look like we're going to have a recession. We've got exciting things like a I and healthcare in the pretty category. On equities in particular,

Speaker 1:
we like diversification selection. We are quite neutral between fixed income and equities. We like to stay to the higher end of quality

Speaker 1:
and also think about longer term themes that are really structured. So lower carbon economy, infrastructure and innovation and a I

Speaker 0:
Yeah, I'm not going to say anything different. I think global equities is the place to be. But what I'm interested in is how emerging markets change over the coming few years. As China perhaps is ex growth, there are other opportunities. Places like Indonesia, Mexico, you know, some of these big population growth countries, which are difficult to invest in now, but they have huge potential for the future.

Speaker 0:
So many thanks to all of you. Chris. Fabiana Richard. I thought there was a gripping discussion. I say my takeaways are actually, you know, our distinguished panel. Relatively optimistic about particularly the investment potential of equities. Uh, also, you know, Bonds. We think Fabiana thinks may have found a level, which is great. Um,

Speaker 0:
none of them are currently forecasting that sort of horrible hard landing that we've been fearing any time soon. Uh, a I you know, particularly obsessed with a I, um maybe, uh, the tool that will allow, you know, things we're all desperate for, which is a bit more growth, more productivity,

Speaker 0:
uh, in the economy. So yes. Complicated, yes. Challenging times, but also exciting times. So that's all from this edition of Asset T V's Master class with me. Robert Peston. See you next time