Good morning, everybody. Welcome and thank you for joining us today for today's webcast. I'm Cynthia Steer and I'm a Senior Advisor at Institutional Investor and will be serving as the moderator today. Today is the fifth and final episode in our webinar series with RBC Global Asset Management: Managing multi-tiered risks, seeking resilience in uncertain times. Today, we'll be talking about assessing a shifting landscape. We're looking forward to an engaging discussion with Mark Dowding, who is the Chief Investment Officer on the BlueBay Fixed Income team within RBC Global Asset Management.

Before we begin, I just want to give us some typical housekeeping tips. First, ask questions. You're encouraged to submit questions to Mark over the course of the discussion. You can do so using the Q&A widget located in the lower left of corner of your screen. We've also got a series of resources from Mark and BlueBay Fixed Income team that compliment today's discussion, and you can access these insights using the Related Content widget on the upper right. You'll also receive a link to the on demand replay of today's webcast. Finally, at the close of our session, we kindly ask you to take a brief survey. We want to do better and your feedback is important. I'll pop back on the screen at the end to remind you to do that and to take the survey and to thank you for staying with us and joining us for this discussion. So Mark, over to you.

Well, very good. Thank you, Cynthia, and thanks to all of you for joining the webinar today. As introduced, I'm Mark Dowling, the Chief Investment Officer here at BlueBay. And in this topic of talking about a shifting global landscape, it seems like a very apposite time, doesn't it, coming on the back of the US election, certainly many investors asking what is the world going to be looking like in Trump 2.0.

So, I was planning to spend a chunk of my time talking around how we see the US, how we see the policy agenda, how we see what's impacting markets over the course of the next few minutes. And then at some point I'll catch my breath and deal with any questions and then we can move on and talk about markets overseas. But I know that this is a US audience and after all that is going on stateside at the moment is enormously topical.

But before I get to the election, just a one thing that I'd sort of start with as a bit of a preface. And that is when you look at the economy today, and I know that the economy was the bigger sort of issue in the election, wasn't it? If you look at the opinion polls. But the honest truth of the matter is, is that the US economy is in pretty rude health. We've got low levels of unemployment. Inflation has come down, ostensibly speaking, we're looking at an economy operating pretty much near at full employment and economic growth as measured by GDP has been really pretty robust. And I think that actually, in terms of recapping this year, I think many investors are being quite surprised, quite dumbfounded by the fact that actually a couple of years after the Fed started hiking rates in response to an inflation overshoot, you didn't actually end up seeing a recession in the US.

You've actually continued to see economic growth remaining pretty solid. But I think obviously, in terms of the reasoning behind that, you'll be pretty familiar with the arguments. But of course, consumers have been shielded from the pain of higher interest rates because of hedging mortgage costs at the lows in interest rates thanks to long dated fixed 8 mortgages. But secondly, we've had the government spending on a very profligate basis. We're looking at a 6, 7% GDP fiscal deficit in the US and that degree of fiscal spend over the last few years, again, has been a big factor that has been supporting growth.

And also I think the other thing that maybe hasn't been spoken about enough is the fact that part of the AI boom that we're witnessing at the moment has actually triggered massive investment spending on the part of big tech in the United States. And that degree of invest spend, again, that goes back into the economy. And that's been a factor that has also been supporting pretty resilient growth in recent times. And from this point of view, I think it's also worth recapping the fact that actually the US economy has really been outperforming all other global economies overseas. We keep on talking about US growth, exceptionalism.

And in many respects, it's really quite striking how well the US has done, how bright prospects, relatively speaking, look. And I guess in that light, it's almost a little bit surprising that in reflecting on the election, the Democrats got quite such a bad kicking as they actually did, given the fact that actually your economy is doing better than many others are overseas, right?

We actually did do a good job, so both monetary and fiscal policy work.

I mean, it did it's job. I think that when I speak about COVID, sometimes, I think I'm a pretty average golfer.

And I think that COVID was this big scary hazard that we had to get across. But like a bad golfer that I am, I know that if I have a scary hazard, I'll always bring out a club that's too big and end up hitting the ball way too far because you don't want to come up short. And in the same way in COVID, the government couldn't come up short, so they effectively had to over club it. The mistake was you didn't take that that stimulus back quickly enough. And that's obviously what triggered the inflation overshoot.

And a phenomenon that we have seen is that although in the US wages have gone up and prices have gone up, almost pretty an equal measure. When it comes to wage rises, people tend to think that the reason I'm getting a wage rise is because I'm doing a good job. It's all about me. But when they look at prices going up, they say that's nothing to do with me. That must be the government over there messing something up. And therefore you end up with governments being blamed. And it's kind of been also interesting to reflect on if you haven't actually sort of appreciated this, that in all of the elections that have taken place globally this year and there've been many elections that have taken place, the incumbent parties in every election have ended up losing support, effectively voters globally are blaming governments for the inflation overshoot.

So I don't think we should be that surprised that the Democrats lost and lost pretty badly. I'd also say from a market partism perspective, it looked like a pretty obvious outcome. I've got to say that I was in DC back in September, came back saying 85% done. The question is, is it going to be a split Congress? Is it going to be the sweep? It looked pretty clear. We were meeting senior Democrats at the time who all, from our perspective, looked like they had given up and they were all talking about the different things that they were planning to do after the election.

So although the pollsters were trying to make it sound like a close race, and CNN wanted to portray this as a very close election, it wasn't really a very close election. And I think markets were largely expecting the outcome that they've got. But obviously the magnitude of the win, I think was very powerful. And the fact that Trump now has a very strong mandate, a stronger mandate than he had back in 2016, I think it is something which is significant in terms of what it can mean in terms of the policy agenda.

And so I've been speaking to some of the appointees that have been made in the in the last couple of days in terms of the Trump transition team, trying to get my head around how you sequence this, where things are going. And I think that there'll be a few things to look at in terms of the upcoming policy delivery. I think the three sort of lenses to be people are very focused on is what happens in terms of immigration policy, trade policy and fiscal policy. Now, on the immigration side, what we really know is, I mean, the first thing, to give you my sense of Donald Trump.

I mean, here I'm speaking to an American audience about your president. But, and also, I'm going to use soccer as a metaphor, which I again, I almost owe a double apology, but the reason I use soccer as a metaphor is there was a famous football player called Diego Maradona. He scored an amazing goal against the English team many years ago, not the one where he used the hand of God. There was another one where he was zigzagging all over the pitch and he left half the English team on their backsides. He managed to meet that many defenders.

But what Maradona was a master at was going this way, going that way, throwing his opposition off balance all of the time. When actually, when you look back and you look at the tracking movement of the football through this particular passage of play, the pool goes in a straight line. And it's kind of my metaphor that I've always used about Donald Trump. And it goes back to the art of the deal. Effectively, Trump says outrageous things, stupid things, almost deliberately to try and throw his opponents out of kilter because that way he's able to negotiate against them, get a better outcome, get a better deal.

This is his modus operandi. It's always been a bit akin to this. And so from that perspective, when it comes to immigration, is he going to be deporting 15,000,000? No, he's not. Is he going to deport a million people? Never. It's not going to happen. Actually, the biggest delta on immigration actually comes from slowing the inward movement coming in, turning off the tap that's letting people in. That's the delta that you have. And actually when it comes to deportations, yes, you'll be trying to round up some folk who have got criminal records or you'll be telling people who are in an assignment application that they've got to serve that out sitting in Mexico, not sitting in the United States.

But in terms of the delta that we kind of think, in terms of some of the Trump team that I've been speaking to that they think gets delivered, probably won't be massively different to what happened under Obama, if I'm very honest. All of that said, this narrative, this direction of travel tightening, the labor tightening on migration compared to where we've been in the past, relatively speaking, is a tightening of the labor market and a net-net, somewhat inflationary. The other thing to say about deporting people as well, it's really expensive, right? So it costs a load of money to send a load of people on planes and buses all over the place.

So it's another reason why don't believe the hype. A lot of that is just big numbers, talk big, but really the bark is worse than the bite, I think is really the narrative. The second thing to say is.

Mark, let's talk about inflation, because what that really is arguing?

So I'll get there in just a moment, but I need to cover the fiscal side and the trade side because it all links together on inflation you see, because I think that the immigration bit is maybe a little bit inflationary. When you look at the next leg of this, we have trade policy.

And on trade policy, it's all about tariffs. You've heard Trump talk about tariffs, this beautiful word, the word that he loves. But again, I actually think that a lot of what we're hearing in tariffs is actually going to be more of a negotiating position. He wants to change the behaviors of businesses and countries. He wants John Deere making machinery, agricultural machinery back in the States, not in Mexico. He wants the Germans spending more money on building its military. He wants to achieve an agenda where other countries fall in line with the US position on China, for example.

So there's lots of things that the administration wants to achieve and tariffs are a bit of a tool to that end. So I think that the idea that you're going to get a rapid move to a global tariff, kind of unlikely in my opinion, but the threat of tariffs will be there and you'll certainly end up with the tariffs being put on Chinese goods maybe up at 60% or something pretty material. But Trump is looking for wins. He's looking to do deals, he's looking to achieve outcomes through these policies. But again, I think the bark is a bit worse than the bite. But net-net, this is another thing, Cynthia, that is going to add a bit to inflation. And then we have fiscal policy. And on fiscal policy, we know that the past tax cuts are going to get bold and they're going to get bold quickly. So that's going to occur. In addition, there are these ideas to cut corporate taxes and these other taxes in addition to this. Now, I think that there may be a bit of an issue here in terms of how much can be done because there has been this sense that they're publicly talking about using tariff revenue to actually pay for tax cuts, but I'm not sure how much tariff revenue really gets raised in practice. And so that may actually limit how much you actually sort of bring in terms of additional tax cuts.

All of that said, we've got a deficit, that 7% of GDP. If anything, it's only getting larger. It's not getting smaller. This again is adding into inflation. So all of these things, net-net-net, all adding a little bit to inflation. And furthermore, when you look at the economy, the fact that you're giving growth a bit of a shot in the arm as well, this is also something which, if anything, is taking you in a more reflationary direction.

Even the rally in the stock market, the fact that credit spreads are going tighter, the fact that financial conditions are easing, again, all of this feeds into an outcome that points towards a bit more inflation than we otherwise would have seen. And because of that, you've ended up with a situation where markets effectively are taking away expectations of rates being cut in 2025. As recently as September, I think that we were expecting sort of, I don't know, 100 or more off rates in 2025. Now that's only at 50 basis points of rate cuts for next year.

And actually it seems to me that what we're looking at is a situation where the Fed might cut rates again once more come December, or if not December, in January. I think the Powell would like to do one more cut to get 100 done. But thereafter, we may end up in a situation where the Fed's on hold and the Fed's on hold and won't cut anymore unless we end up with the economy slowing. But I'm not sure there is going to be slowing in the first six months of the year. So I think we could be done for rate cuts for the time being.

And when I think of the year as a whole, there's a chance that we do end up with a rate hike. If we do see some of these inflationary impulses coming through. Don't rule out the fact that this time next year we're not talking about the Fed hiking rates, not cutting rates. The only thing that you would say though, is that in assessing the Fed reaction function between 2025, there's obviously more scope for the Fed to deliver rate cuts if growth slows, than there is a likelihood from them to tighten by the same quantum if things are running a bit hot.

And that's largely a function of the fact that when you look at interest rates today, you're still operating with an interest rate which is above the neutral position. And so from that point of view, I think that when looking at the yield curve in the US, we've thought that if you end up with one more cut that takes the mid on Fed funds to like a 437, 432 thereabouts. That being the case, a two year note around about sort of 425 we think is fair value. If the two year note got up to 450, I think it starts looking cheap. But conversely, against that, if you look at the back end of the yield curve, it's a rather different story because in the back end of the yield curve, I'm more concerned about the debt level.

I'm more concerned about the fact that you've got this profligate fiscal policy. And for those of you who've studied economics, what on earth is this country, this USA doing with a fiscal deficit of 7% of GDP when you're running full employment? It's kind of bonkers. If you end up with a recession, you could end up with a double digit fiscal deficit. I mean, this is the stuff of sort of basket case economics, but still with the US is persisting in that direction. And the reality is they're persisting in that direction. Why? Because they can get away with it.

And you know what, when I go to the Capitol Hill, when I spend time with senators and congressmen and other policy makers, the thing that really strikes you is this sense that they've worked out this very, very clever idea. The clever idea that they've worked out is that people like tax cuts. If you give tax cuts, you get more votes. And that situation will hold up until the moment in time when delivering tax cuts, incrementally speaking, pushes up interest rates to the point where it brings down asset prices and then inflicts pain.

And when you actually cross that paradigm, actually fiscal responsibility is going to be what gets you votes. But we're still quite a long way away from that. And furthermore, we have recently been in this situation where the government has been able to borrow 30 year money at a rate lower than the cash rate. We've had an inverted yield curve and that inverted yield curve is telling policymakers you've got nothing to worry about, keep going, keep cutting taxes. Effectively, an inverted yield curve has been a green light for policymakers to continue down the path of fiscal irresponsibility. But at some point we think that there will be a bit more of a push back by the market, now partly in the course of 2024, nearly all the issuance we've seen is incrementally through treasury bills.

But going forward there's going to need to be more longer dated debt issuance. And as there is, we think that is going to weigh on yield valuations, particularly at a time when we think there'll be less demand coming out of Asia. We think that China and Japan won't be buying as many Treasuries. And so this debt is going to need to be funded more and more domestically. That being the case, that will only occur if you end up repricing that debt. So we think we're going to see more term premium. We think you're going to see a steeper yield curve.

So at the moment, although we're quite happy with the front end of the curve, we're still quite cautious at the back end. So I'm still running short duration. I've been running short duration since the Fed met in September. When the Fed did 50, I said recession risk is done for the time being. Get yourself short. It seemed counterintuitive, but get yourself short duration because we're on a ride with a pretty robust economy here. And so still in a short duration trade with that expressed through the 30 year asset and here I think the 30 year yields can go up towards 5% come the end of the year.

And ultimately speaking, that yield curve, between cash and 30 year rates, I think needs to steepen to about 150 basis points. It'll only be then, Cynthia, that actually we're in a world where policymakers start saying to themselves, you know what, we've got to do something about longer dated rates. We need to do something to bring lower long dated rates down because it's hurting mortgage the applicants too much, it's hurting that housing market. When you reach that point, I think you reach more of a pain threshold. But again, we are a long, long way from that at the moment. So for me an obvious investment conclusion here as we move into 2025 is going to be a curve steeper.

I know it's a bit of a consensual view. It just makes a lot of sense. And in this in this particular occasion, I think the consensus trade is the right trade. From that, where do we go?

Mark, I think this is a lot to unpack, but one of the things I got out of your first comment was the fact that a lot of us think that while Trump is transactional, he's very uncoordinated. So you're arguing that he's quite coordinated in some of his responses and some of his thought processes, you know, behind the scenes. So I think that's important for the audience to know.

And also on the audience side, if you have questions, put them in the Q&A widget. We do have the first question is, how do you think Trump's approach to the Federal Reserve and monetary policy are going to look going forward? You've already touched on sort of the path of interest rates and inflation, but you know the institution itself is under some duress.

So, exactly, and here I've half answered the question, but it does beg this question, what is Trump going to do in terms of interfering with Fed independence? And here I think the answer is nothing.

I mean, he's going to do nothing because if he tries to interfere with the Fed, it's going to cause dislocation in financial markets. He doesn't want the S&P selling off. He's no idiot from that point of view. So no, I don't see Trump interfering directly in that way. What Trump definitely will do is any time there's any good economic data, it's all about Trump. Anytime there's any bad economic data, it's all about that idiot Powell. That's the narrative that we'll get used to seeing.

That's the way it plays out. I mean, in a way, Trump has got nice optionality on Powell from that point of view. Now, when his term ends, we're pretty confident he gets replaced by Kevin Warsh. He'll be the pick. Again, he's pretty mainstream. But again, going back to this narrative of, yes, Trump looks like a madman. I think he may be a madman. He may be a crazy man in terms of what he says, but actually in terms of what is done, what is delivered.

We saw this in the last Trump presidency of 2016. Actually, he said a lot of daft things, but actually what was delivered a lot of time was a lot more mainstream, a lot more considered. And from that point of view, I think there is more rational thought going into some of what's going on than some media commentators would have you believe. The other thing that I've been speaking to the transition team a bit about is they're saying that one of the first things they'll do on day one. Or the first thing to say is that they're announcing all of their picks at the moment.

We might get Treasury Secretary today, if not by the weekend, but a lot of the team, is being put in place. We're actually thinking a lot of these get confirmed by the Senate in the lame duck session so that you're actually ready to go on the day afterward, inauguration day, which I think is interesting and a big departure to what we've seen in the past. But the other thing that I've been told is day one, what do you get on day one? Day one, you're getting executive orders around energy, drill, drill, drill, that narrative. There'll be permits here, permits here, permits everywhere.

This desire to ramp up production, deliver more oil for export, but also push down energy prices, I think is a key part of the narrative. I was speaking earlier about some of the policy agenda being a bit inflationary. Trump is hoping that he can offset some of that by actually lowering energy costs. And if you bring down energy costs, it benefits your blue collar workers. What people care about in the US, I'm told all the time, is the price you're paying at the pump. And Trump, I think in his first term, I think a gallon of gas was at 2 bucks 50.

I'm currently told it's around 3.10 or thereabouts. And so there's a desire to bring down gas prices by bringing oil prices down. The only thing I don't really know is if I'm an oil company, how much do I want to get my drill out, if I've got a president committed to screwing the price into the floor, that there's a bit of a quid pro quo here, but we'll have to wait and see. But that will be part of the narrative on day one. Again, it'll be an executive order on closing the border to new migration at that point.

You turn off the tap to stop people coming in. That's almost the easiest and most effective thing you can do to actually control immigration flow. So these are these are some of the early steps. But when I speak to some of the team who are part of the transition, I don't think I'm speaking to people who are complete idiots and complete buffoons. They think they've got a plan anyway, or that's how it's being presented to me. It'll also be really interesting what Donald, I'm calling him Donald Musk.

I think that's probably the right way that we should rename the chap now, isn't it? He's gone so far down that particular agenda. But I think older Donald Elon Musk, it's really sort of interesting me in terms of the role that he's going to be playing in terms of the department of government efficiency. And here I think the thing that I've been really reflecting on is his takeover of Twitter, which at the time looked like madness. He was destroying value left, right and center. He created havoc in Twitter.

He was firing people all over the place to the point where you thought the whole Twitter, the thing might actually shut down and it got rebranded as X. But you look now in hindsight, what a clever son of a gun, right? He basically has ended up with this media platform to be a mouthpiece, a megaphone for his views, Trump views. And it's been enormously effective, hasn't it? But I do wonder whether Musk coming into government in the same way, trying to slash through bureaucracy, slash through departments, I wonder whether he'll be as much of a disruptor in that respect as he was in the whole sort of Twitterverse.

And so it'll be interesting getting back to DC. I know that you were in DC today, Cynthia, getting the mood around town. They're going to be a lot of people looking for another job sometime soon.

We were talking about the housing market this morning. So again, agreed. Couple things. First of all, your comments on Musk, I think are so thoughtful. You know, I think of on the monetary side, both fiat and crypto currencies on the one side. And then I want to go back to the trade policies, you know, particularly about China and we all expect it to be more aggressive in the second term.

How do you think that's going to play out? But let's go back to this question about fiat and cryptocurrency. Is it the noise or is it something in reality?

Yeah, well, just to complete on Musk, I think again, I'm still struggling with this idea of do we end up with, you know, the good Musk, the brilliant engineer, this visionary chap who has figured out how to catch a space rarket with a pair of chopsticks. Do we get him or do we get some sort of narcissist, richest man in the world partnering with the most powerful office in the world to deliver his own sort of rather narcissistic agenda?

I don't really know. The jury's out. I do think that intrinsically it feels a little bit unhealthy, a bit uncomfortable to me. But when it comes to your question on crypto, look, I don't know. I think for the time being, maybe a lot of the easy money has been paid. I think that the reality about fiat money and crypto is that ultimately tax authorities need to raise tax dollars, right? And if you end up with Bitcoin becoming a medium in it of exchange and you're cutting out the ability to tax, then this is something that's distressing to all governments worldwide, which is why you've got central banks talking about launching their own forms of digital currencies, a digital euro or digital pound and maybe a digital dollar.

Who knows? For me, Bitcoin really is an asset that either you think of as digital gold and it's all about trying to arbitrage supply versus demand. And what you're reflecting on is the fact that there's some countries in the world where basically you don't know where to stick your money because you might not want to be in the dollar. Because if you're in a country that falls out with the United States, the dollar's not a safe place to store your wealth.

So that can drive moves in supply and demand. Other people will just pump crypto as a means of getting rich quick. And that's kind of the bubble investing, being smarter than the next guy and getting out before the crowd. I think a lot of the easy money in that sense has been made before. So crypto has been a great trade on a Trump win. I'm not sure how bullish I would be about it from here. But hey, I'm no crypto expert myself.

I'm probably too old to be any good at that, aren't I?

Well, we're all sort of thinking fiat versus crypto and maybe that's the story to be written. But what about global supply chains, currency constraints? You know, in a prep call we were talking about old fashioned country risk. Thoughts on that?

I think the first thing I'd say around country risk is again, it goes back to the point that US may be printing a lot of debt, but at least it's got a bit of growth.

It's growing quite nicely. The problems elsewhere in other parts of the world, for example, in the continent that I'm sitting in here in Europe with my dark skies behind me, it all feels dark outside at the moment in Europe, it all feels gloomy. When I was across in the EU recently meeting with policymakers, they're about as depressed as I've known them for years and years and years. And there's a bit of a sense of a malaise in Europe at the minute where the future just looks very, very uninspiring and the youth in society are becoming pretty disenfranchised.

And so it's a bit of a worrying time. You take a country like Germany, it imported cheap Russian gas under a blanket of US security protection, which you've received free of charge in order to build cheap exports to flock to the Chinese. That model is completely broken. They're having to reinvent the whole way the country works. You've got VW closing factories, you've got Siemens CEO saying Germany isn't somewhere you can invest. You're paying 3 or 4 times for energy in Europe what you're paying in the US way and other trading partners. And so it's just not competitive.

And so Europe is struggling. Now, on the back of Trump, the one thing that I would say here is actually, as the US is slowing down its rate cuts, there's actually an argument that economies like Europe, we actually need to accelerate our pace of monetary easing. And actually what we're seeing is European yields at the front end have been rallying in anticipation that Europe actually tries to counter the threat of tariffs while actually weakening the euro by cutting interest rates more quickly than the Fed does. And so again, it's interesting to see these relative perspectives both through the policy application and what it may mean around trade wars and all the rest of it.

But when you sort of feed all of this back into country risk, sometimes I'm asked about is there going to be a Minsky moment? Is there going to be a moment where there's a big bond market tantrum in the United States like we had here in the UK, you might remember under our rather infamous Prime Minister Liz Truss who thought that she could get away with super profit to get fiscal policy only for markets to call her bluff. The thing though that I would say in the United States is I think that although debt levels are arising at an alarming rate, although we're looking at a situation where the interest rate expense that the Treasury is having to find every year to service the US debt is getting bigger and bigger and bigger. It's now more than 4% of GDP, which is as high as it's been at any point pretty much in the last 40 or 50 years, although you've kind of reached that sort of level, I'm not that concerned that you're going to see that sort of tantrum that we witnessed in the UK, that sort of moment where US credit quality is really called into question in that respect. Albeit, I do think we're going to be in a world in 2025 where there's just an abundant supply of government bonds.

And some of the more financially literate within your audience may actually have sort of caught onto a theme recently in markets where we've seen a very aggressive move in government bonds relative to swap rates. We've seen a big tightening of swap spreads in the US and globally, 30 year swap rates in dollars are actually 80 basis points below the level of comparable US Treasury yields. Why is that the case? Well, a lot of that is down to the fact that there's just too much government paper. Government paper is too abundant.

In Europe, it's really curious. You actually see, if you look at corporate bond spreads, corporate bond spreads relative to government bonds look really tight. Actually versus bunds, we're at the tights of the year. Versus European swaps, you're at the wides of the year. Simultaneously, moves in swap spreads have been very powerful and part of that speaks to country risk, part of that speaks back into the fact that you've got different supply differentials in different markets. That said, just a quick word on credit. I think the narrative here when it comes to credit more generally is that in a world where you don't have a recession, credit's doing OK, credit can perform, the technicals in credit continue to look good.

So we've been positioned long of credit, long of risk assets. We knew Trump was going to win. We wanted to be bullish. Now that Trump has won, we're actually reducing our exposure. We're flattening down our risk. We actually think that in a world where yields have gone up in Treasuries and the curve may be getting a bit steeper at the long end, we want to take less risk. And the thing that really strikes me is if you want to make money in a Donald Trump world and a Donald Trump presidency, the thing to try and get your head around somehow is, it's a bit like, I'm almost imagining it, like I'm sort of surfing on the ocean.

Not like I can surf, British people can't surf. We don't know how to do that. But I've seen it on the TV, and you get these people on surfboards and they'll kind of wait for the wave to come along, and at just the right moment, you paddle really hard, and that's where things work out really well for you. And then the waves pass, and then you stop paddling. You sit back and relax. In the same way with Trump, we know that there's going to be episodes of volatility. Wave after wave after wave of volatility will hit us because we're going to end up with all those stupid comments, all those random things hitting us.

When they do, there will be occasions where markets overreact. There'll be other times when markets may under react. It will be in those moments, you have the opportunity, the volatility that Donald Trump is gifting us as active investors is an opportunity to really deliver active returns. And then when the waves passed, you flatten out the risk and you sit on your hands for just a little while. Cynthia, back to you.

So Mark, I was going to bring that up, but you have just brought up, I think one of the seminal things in a Trump environment is the fact that holding bonds or stocks passively in an environment like this is probably not as good an option as it was previously. And so active management counts and is important at this point. Any thoughts on that?

It's actually quite easy beating benchmarks in fixed income. Shh, don't tell anyone, but it's kind of easy to do it because we have the new issuance of securities all the time. We've got term premium, credit premium, liquidity premium, volatility premium. If you kind of know what you're doing as a fixed income investor, you should be able to make money on a routine basis. And frankly, it depresses me a lot of the time that people aren't more active than they are. A load of money is run really badly, particularly in the United States. You've got this shocking product core fixed income. Everyone just is a benchmark hugger.

It's useless on management. Useless, useless, useless. It's easy to bang out good returns if you know what you're doing. I don't want to boast, but I do want to get people off their hands. I want to get people excited about active management because there is an ability to generate return if you've got skill. That's really what it's about. And I'm speaking passionately because I care about this. We are investing people's savings.

We're investing people's futures, right? So being passive, I just don't think is good enough. And sorry you've got me on my pet topic. I'm on my high horse. I'm probably sharing stuff I shouldn't be sharing, Cynthia, and I'll probably get told off by compliance for doing so, but still, I don't care. I can only say it how it is.

But I agree with you, in an environment like this, this is an opportunity for active management and where paying higher fees counts, all right, and gets you where you want to be. So if you are sitting back as an investor, OK, what are a couple of the global trends as you start to, like, we're getting into December, we're just sort of ending up the calendar year and you're thinking about trends for the next year.

And so I don't disagree with you, you know, fixed income index investing has always been a scratch my head kind of thing. So let's talk about sort of long term trends, differences in trade policy, and maybe a couple of other longer term, you know, trends that are really going to start to impact portfolios during 2025.

It's a great question. I think there are a couple of long term trends I can give you, but only a couple. One would be yield curve steepening. I think you're going to get curve steepening as I said in the US because there needs to be more term premium because there'll be too much debt and fiscal policy is not going to change.

I think that eventually you're going to end up with Europe deploying a lot more fiscal expansion as well. They need to do it. They need to build their military, they need to decarbonize, they need to have a new industrial strategy. So there's going to be more debt issuance. It should mean steeper yield curves in a number of countries. So that's something that I can say, it doesn't sound exciting, but you can make a lot of money out of investing that theme if you do it right. The other thing that's clear to me is Japan is a country that's actually doing well at the minute.

Everything in Japan is going in the other direction. Interest rates are going up. I think they're going to hike in December. They're going to carry on hiking through the course of next year. It's kind of odd that in Japan for a long time where we saw an aging society and people thought aging societies meant that you ended up with really low inflation, well, you did for a time, but what's happening now is we noticed that after people hit 75 years of age, there does seem to be a marked drop off in economic activity.

As a result, the supply of labor is rapidly shrinking in Japan. And guess what? Wages are going up. Wages went up 5% this year. They're going up 5% or more next year. You're seeing more wage inflation, ICE inflation in Japan, and yields are way too low. So I can speak passionately about being short in JGBs is an obvious trade to me. They're two thematic ideas. But the other thing I need to say in response to your question is sometimes people want to say, what is your view for the next 12 months?

What's your economic forecast for next year? Where will the 10 year yield forecast be this time next December? You know what, if I'm really honest with you, I'll put my hand up and say I don't bloody know. At some point economic forecasting gives way to economic guesswork. And the further you look out, I think the more difficult it is to see. And the truth of the matter is that I think we're kind of in a world where you've got all sorts of economic uncertainty, you've got political uncertainty, you've got geopolitical uncertainty, lots of things can be happening.

So I would take from this that the way that you want to think if you want to make money is you try and sort of focus your investment time horizon on where are we going in the next three to six months? Because that's the bit of the road in front of me that I feel that I can see with a bit more certainty. And from that perspective, I'll tell you that for the time being, we want to be long the dollar, the talk on tariffs is pushing the dollar stronger. At the moment, we want to be long of credit because we don't see a recession coming.

But at some point, we might want to be a bit more cautious if we're in a situation where yields are higher. I want to be careful when it comes to asset classes like private credit and also private equity. Why? Because we're going to be in a world where interest rates are staying higher for longer than they were in the last cycle. And what does that actually mean? That means that's toxic for anyone who's running too much leverage on their balance sheet. You have like direct lending as an asset class.

All of these underlying assets are levered 6, 7, 8 times and you end up with all of your free cash flow from these companies being eaten by debt service costs. So you got to end up with a lot of direct lending structures going evergreen because they can't give you your money back. So be quite careful there. I think a lot of dumb money is going to private assets at the moment. The smart money went into private assets ten years ago, right? That's where all of the smart people I speak to, they were allocating at the time, but it's not the time and the moment to go in that direction if you want to be in high yielding areas.

We like distressed debt in Europe because there's loads of opportunity. We like European bank risk. I don't like US bank risk. I mean, it was kind of a little bit odd, wasn't it, on the election. We ended up with the regional bank index in the US rallying really hard on the day, rejoicing that they're going to have less regulation. This is not how you fix the banking problem in the regional banks, folks. So be a bit more cautious there.

But European banks are boring. They're safe and they yield a lot. So these are things that we like. So we can point to things that are good, things that are not good. But if you have a global remit, there's lots of spots you can look at and you can say the valuation is cheap there, the valuation is expensive over there. So we'll see how we're going. Maybe we should go to a couple of the questions, Cynthia.

We have been going to a couple of questions. We've got 15 minutes left. On the yield curve and liquidity, I think one of the points you made is you're going shorter and one of the things is keep a little bit of dry powder. Do you agree with that statement or not because that gives you the opportunities in evolve to market.

Yes, I do. Yeah.

We have another question about, with the potential for renewed trade disputes under another Trump administration, are there any regions that you think are more vulnerable? Now this goes back to our country risk question. You know, in our prep session, we were talking about Mexico, or obviously China, you know, any thoughts on that?

So I think Trump will threaten to pull out of USMCA. That's bad news for Mex, right? He might do that to leverage a better deal in terms of taking migrants back, right? So this is something to be watchful for that I'm a little bit worried about. I think he might be a bit tough on Canada because he just personally can't stand Trudeau. But at least Trudeau will be gone in the middle of next year and it'll be Poilievre who's going to be good mates. He's actually more Trump than Trump himself in some respects.

Otherwise, I think that globally speaking, you'd say that Trump doesn't like the Germans. He'll go after the Germans and maybe a bit the French, but I think the Brits get a pretty decent deal. So the only thing I can say positive about my own country is at least Donald seems to like us a little bit more than some of our neighbors. And I think that he'll be relatively soft, relatively kind to Japan because he kind of needs Japan in the context of the Asian Axis. So yeah, you can point to others where I think he'll be tougher and some of this will be down to personal bias and he will want to negotiate at a country to country level. He doesn't like dealing with entities like the EU.

Let's go back to your to your comments about sort of Trump being very transactional but very coordinated. A lot of us and the world is looking on the sustainability side for a broad thing. Any thoughts around that in general?

I mean, personal opinion, I find it a little bit depressing, a little bit sad that the climate agenda has been tossed in the bin seemingly by the likes of Trump and the incoming administration. And I hate the fact that the whole ESG thing has been politicized.

At the end of the day, I think that we all live on the planet together. We'd all like to end up with a better outcome together. So trying to move things in a constructive direction should be in all of our interest. But look, at the moment, it feels like you have different jurisdictions. We have different clients in different places with very, very different attitudes towards this. I'd always say that from my perspective as a credit investor, ESG is the other side of the coin to your credit analysis.

It's helping you identify credit stories you want to avoid, but also you'll have opportunities for engagement where you can change behavior. You can actually leverage your position in markets to actually beat folk up and deliver a better outcome for your portfolio and for the planet at the same time, that sort of win-win situation. I'm delighted when you can actually speak to those specifics. So look, I don't think that climate change is going away, is it? It seems to be all around us today. So I think that although it's become politicized, I still think it's going to be incredibly important for many of our investors.

So one of the questions we have is, we've talked a little bit about tariffs and trade policy changes and trade agreements, but we actually haven't then connected it into the idea of how we look at multinational corporations and their global. We all know the studies that say, you know, 60% of multinationals are sort of sourced elsewhere. And so you always have to look at this complex. You know, in America we sometimes said you can buy a multinational and then you don't have to buy outside the states. How do you look at this issue today?

I guess looking at this through the lens of Trump again, and sorry to keep bringing it back to the orange one, but if I go down that path, I'd say that he's trying to affect changes in behavior, isn't he? He wants John Deere doing agricultural machinery in the United States, not in Mexico. And by having tariffs and the threat of the tariffs, he's hoping to change corporate behavior as well as behavior at a national governmental level, right. So he can achieve different policy objectives both at the corporate level and the national level through some of these policies.

So that's what I think he's interested to push upon. The one thing that economists would typically say that tariffs is a bad thing, less trade is a bad thing. And in aggregate that's certainly the case. But you can end up with winners and losers. It all depends on your producer surplus relative to your consumer surplus. If you actually start looking into tariff theory and the distribution of winners and losers. And there are some that I speak to in the current administration or the administration who will be coming who have this idea that US can achieve a degree of tariff dominance. They can actually stand to reap more of the benefits by imposing tariffs and disproportionately will be trading partners that are losing out.

And there will be this line of thought in DC that actually, in an era of free trade, what we've ended up doing is making Chinese citizens more wealthy with a better standard of living, the time when many Americans have actually been left behind and forgotten about and are no better off today than they were 20 years ago.

I think this idea of outsourcing, this whole concept of the impact in the American middle class, we've got a lot more conversations on that coming. John Deere to me is one of the prime examples people use in case studies about the multinational and 90% content effective.

Let me just ask one question that and then we have time for maybe one last, we've got one last question. On the John Deere, if we follow the thought of bringing back more manufacturing into the state, the end result, is it inflationary or no? How do you think about that?

Look, it's a good question that you raised, right? So arguably the answer is yes, because in a way, the reason you're building that machine in Mexico today is because the labor cost in Mexico is lower than it is in the United States.

Ergo, if you make the same unit in the United States, it's going to cost you more, it's going to have a higher price, it's going to add to inflation. So from that point of view, you would expect it to add to prices, but it's not always quite as simple, quite as straightforward as that. And some of this will vary a bit from sector to sector, but lots of uncertainty ahead. Again, the same, lots of volatility ahead. I can't tell you what's going to happen with some of the craziness around this, but volatility is something that we can get used to.

So another question, what are your thoughts on China delivering consumers stimulus? Do you think it's possible that both China and the US are going to be equally stimulating, right? And how would this impact your thoughts around country selection?

Well, I think the Chinese have, I mean, they've got a massive property crash like the US had in '08 or Japan in the late 90s. Effectively, they've been doing lots of piecemeal, bits of easing, bits of easing, almost fit feeding to the market a bit of a time and it's always kind of underwhelming. Moreover, what Beijing has been trying to do has been export its way out of a crisis. But the world doesn't want more Chinese exports.

What China needs to do, they need to empower their consumer. They need consumer demand, but Beijing doesn't want that. They don't want, Xi doesn't want to empower a generation of consumers in China because you can't control them. And so that paranoia, I think is really holding China back. It's limiting its growth. And so when I look at China on a medium term view, I'm sorry, China is the country that gets old before it gets rich. Japan was the country that got rich before it got old.

So more bullish Japan than I would be on China. But yeah, when it comes to country risk, we can look at sort of financial risk, we can look at military risk. There's so much more that we could talk about, isn't there, Cynthia? But I know that we're pretty much at the time where we're coming to the top of the hour. It's time to wrap up. And I hope folk online have been enjoying the conversation and I haven't created too much offense or too much question.

We have one quick question.

Yeah, go for it.

US versus German rates, any thoughts on those?

Yeah, German rates. So the ECB's got more room to cut than the US has at the current point in time. I think the ECB is likely to do more. And in a way, Christine Lagarde, who I know, she's quite a smooth political operator. And so she won't like the fact that Trump won. She won't like all the tariff talk. She can kind of have the opportunity to get a revenge early by actually cutting rates by 50 basis points next month if she wants to, deliberately weaken the euro down to parity, then bring on your tariffs all you want. It doesn't really matter too much, right? So it'll be interesting to see. But generally speaking, I think that you like euro rates. The only thing you need to be careful of is after the German election at the end of February, this is the moment where Germany might say stuff it. We're in such a bad situation, we need to go big on fiscal as well. At that point you want to be more cautious on euro rates, but for the time being we like euro rates relative to the US.

Mark, this has been a fascinating discussion. We're now at the end. I've taken away, you know, active management is going to rule the day for the next couple, and transactional, and Trump is more coordinated than you think, right? So thank you everyone for staying with us today and remember that you'll be able to get the replay. And again, thank you for being with us as we had this conversation about assessing today's markets amidst a shifting landscape in the world. Again, thank you.

Thank you, all the best.