Hello there, and thanks for joining at this month's webinar, giving you a bit of an update in terms of our thinking, in terms of the macro views and everything that's going on in the world at the moment. There's certainly plenty to talk about.

Anyway, so jumping straight to it, I guess everything over the course of the past month has been all about the war, all about the conflict in the Middle East, and certainly it's been something that's dominated some of my time, having been stuck in Dubai, having been in a building, hit by a drone. There are certain things you don't expect to live through in life, and certainly it's been a pretty remarkable month, in many ways, to reflect on all round.

But, I don't want to dwell on the past too much. Looking at where we are in markets in the here and now today, of course, those who are watching this afternoon would have seen a couple of hours ago, a recent tweet coming from Donald Trump. The latest tweet effectively being Trump's TACO tweet, in which, effectively, the US president has said that he's ceasing attacks on energy infrastructure for a five-day period on the back of contacts and talks with the Iranian regime.

Now, I think that in terms of this sort of tweet, it is showing you that there is a degree of desperation on the part of the US administration to find an off-ramp here. Certainly, there's been this sense over the course of the past week or so that the administration have been looking for an exit, and have been sounding a little bit desperate in trying to search for one. And indeed, over the course of the weekend, we did of course have this sort of threat that there'd be a 48-hour timeline beyond which Trump was prepared to annihilate, effectively all Iran, bomb it to bits. And it does seem that pressure from others, including those in the Gulf, have really forced a bit of a retreat in the position here.

Of course, the US has the ability to obliterate Iran, but the issue herein is that Iran retains significant capabilities on the military side in terms of drones and missiles. And attacks on energy infrastructure could effectively cause very widespread damage. And of course, if you take out power plants or desalination facilities, not only would you end up with an economic crisis, but you'd also end up potentially in a significant humanitarian crisis as you enter the summer months in the very warm Middle Eastern region.

So, it feels like there's been a bit of a backtrack here. But interestingly, on the Iranian side, there is a bit of a sense that they're giving Trump a bit of the cold shoulder here. They're the ones that feel that they have the leverage. And from that point of view our sense is that Iran here will want to hang out for an outcome, effectively exacting a price that the US is going to be unwilling, unlikely to want to pay. Notably, we think the Iranian regime wants to see, sort of, the lifting of the sanctions regime that's been imposed upon it.

It'll also want to see some form of security guarantee, such that the US can't just replenish its stock of missiles and come back again at a time of its choosing. So, there'll want to be some sort of security guarantee that the regime Tehran feels can guarantee their ongoing survival. And without these two facets, it's not clear why Iran would want to agree to a deal and reopen the Strait of Hormuz.

Effectively, at the moment Iran realizes that it has the stranglehold over this choke point, in terms of the supply of, not just crude oil, but LNG, fertilizer, many commodities which are critically important to the, the global economy.

And so, in a sense here if there is an off-ramp, it'll be one where the US is claiming victory, but Iran will want to be in a position where it's claiming victory at the same point in time, and we feel that that's going to be a difficult outcome to engineer, so there's every chance that effectively all we've really done in terms of the tweet today coming out of Trump is we might just end up reflecting that all we've done is replaced a 48-hour time deadline with a five-day deadline. And I think that Trump, unlike in April 2020 when you can sort of tweet in terms of sanctions and course correct in terms of what you're doing in sanctions, trying to effectively engineer a TACO moment here is going to prove a lot more difficult because it's not just the Iranians that you need to satisfy, but also the Israelis are party to this conflict as well.

And so, getting all actors to the, the table and agreeing a mutually desirable outcome, I think, is going to remain a challenging ask. And so at the moment you're seeing, sort of, markets oscillate wildly between risk-off, risk-on. But I think the one thing that you could say is that even if there is a deal, we are likely to see a legacy of economic disruption. Oil prices won't quickly go back to where they were before.

We've obviously seen impacts in terms of things like LNG supply in Qatar, and so elevated prices may continue to be a feature, even in a best-case scenario. With that being the case, you're likely to see a spike in inflation, but if there is an end to the conflict, a more rapid end to the conflict, then perhaps central banks can actually look through the noise.

However, the risk is that if we don't see a quick off-ramp, we could end up looking at scenarios that look increasingly ugly in terms of what the energy shock means in terms of a stagflationary supply shock on the global economy. I think in some respects, you could say that when we had, sort of, COVID, you ended up with a market in energy where effectively you had a demand shock and supply had to retrench to a point where it corrected in line with the demand.

But this time around, you potentially have an ongoing, enduring supply shock that if supply is shuttered out, effectively the only way to effectively correct for that will be a correction in demand. And in that respect the one thing that we would infer is that if you're requiring, sort of, energy demand to retrench, this isn't going to be something that is happening on an equalised basis.

That is to say that, when it comes to the United States, effectively they're energy independent. They don't need the oil and gas that come through that strait in the Middle East. It's going to be those countries that are dependent on those imports, and in particular those who might be dependent on third parties' refined product.

And in this respect countries that have ended up effectively overlooking energy security, outsourcing carbon-intensive industries to other countries in the name of environmental policies, I think that this could be actually an area where we see some countries more heavily exposed.

And from that point of view we do think that the economic downsides are going to be much more pertinent in Europe and a number of countries in Asia than is the case for the United States. Certainly, if we end up seeing a protracted period of extended moves up in oil prices, this is going to have recessionary consequences, we think, in the context of the European economy. And it really puts policymakers in quite a squeeze.

When it comes to the governments, the fiscal authorities, obviously they're being sort of pushed to deliver support to consumers to protect them against higher energy bills. At the same time, if you end up with economies slowing down and jobs being lost, that will also have an impact in deteriorating deficits.

Furthermore, everything that's playing out again is going to speak very loudly of the fact that investment in defense can't be delayed. We need to accelerate this critical expenditure. And so, from that point of view, I think a lot of the direction of travel is pointing towards fiscal deterioration.

On the other hand, when you think about central banks, although central banks might want to look through the noise of a temporary shock to higher energy prices. And herein, I think that the US Federal Reserve will be the central bank most inclined to look through any short-term up-move on inflation. Particularly because it's just so difficult to think that a new chair such as Kevin Warsh will want to come in raising interest rates, when all the time he was effectively put into his job because Trump really wanted a Fed chair who was going to deliver rate cuts. So, I think that the bar to actually hiking in the US is going to be challenging.

But in the context of the ECB, for example, we see their reaction function sort of premised on the idea that actually for European policymakers if you move quickly, it means the aggregate move that you'll need to move in rates will be less than it otherwise would be. I think the ECB thinks of this as a mistake they made in 2022, when they delayed policy tightening for too long. And so, we think that they're likely to be the most trigger-happy central bank.

But we've also been surprised in the course of the past week; we thought that the Bank of England would be much more reticent in terms of conveying, sort of, the idea of higher interest rates, partly because we thought their reaction function was much more predicated on how they looked at output gaps. And with the UK economy already underperforming going into this stagflationary supply shock, we actually thought that that would be another reason why the Bank of England would be pushing against early rate hikes.

But actually, Bailey and colleagues on the MPC last week were surprisingly hawkish. And on the back of that, we've seen some very substantial repricing in front-end rate expectations. Indeed, in the context of the UK, we started the month with the market projecting two rate cuts; we've now reached the point where the market's discounting three policy hikes.

Some of that overshooting expectations partly is reflected of the fact that a lot of investors who'd been betting on lower interest rates in the UK, including ourselves I might add, have been sort of forced to close risk, close positions down, as you've actually had that sort of reversal in thinking. And that sort of stop-loss pressure in an environment where liquidity has been thin has seen some very, very extreme price action, we would say in terms of short-dated sort of rate curves.

The same has been true in other markets, and generally speaking, you would say that in the midst of market moves, it's actually been moves on duration and moves on rates which actually have been the most profound in terms of the sort of policy shock.

To this particular point, by contrast, I'd say that relatively speaking credit has been relatively well-behaved. Moves in markets and credit markets have been relatively orderly. And I think partly because the US S&P has been holding up okay, you haven't seen a point where you've seen really major dislocations at this particular moment. So, if anything, we would infer that if you end up in a situation where you see protracted difficulties, there's actually scope for there to be a bit more pressure on credit. And if anything, over the course of the past month we've seen ourselves adding to credit hedges, turning a bit more defensive, because we do feel that, sort of, credit has been a little bit on the complacent side.

But of course, a lot is up in the air at the moment, but again, I'd highlight again the fact that the eurozone is the economy that could be more exposed on a relative basis. I'd note here that the IEA have said that the shock that we're seeing in the energy market is probably bigger than we saw in the 1970s across the two combined oil shocks. And you can understand that if we end up taking out effectively 10 million barrels a day, which is the amount of supply that's being currently lost, clearly this is something which is really pretty profound in terms of what it could mean in terms of its implications if an extended conflict persists.

I think all along there's been this sort of desire on the part of markets to think that actually the war would be relatively short-lived, and so investors have been wanting to look through it. And so again in credit, there's been a reluctance to actually sell risk that you may then need to buy back again. And so, this has also kept positioning relatively close to home. And we've continued to see over the course of recent weeks ongoing issuance in terms of IG credit.

So, we continue to see the markets functioning okay, but the question from this point forward will be whether that can actually continue to hold up if we end up seeing a prolongation of the stress in the Middle East. And certainly, it felt prior to Trump's comments earlier this morning, that we could be reaching a point where markets were starting to break down and dislocate to a greater degree. And again, I think the view from Tehran here will be actually it's financial markets which actually are putting the pressure on Trump.

So, the last thing you actually want to do is engineer an outcome where you actually help Trump out by causing or allowing the S&P to rally. So, from that point of view, if you want to keep the pressure on Trump, you keep the strait closed, you keep the missiles flying. And effectively, you keep the pressure on financial assets and look for that to continue to put pressure on Trump, through his approval rating, and everything else.

Of course, the idea that Trump floated over the weekend in terms of annihilating, sort of, energy infrastructure, I think some will actually make the point that this would actually be tantamount to a war crime, were the US, of course, subject to the ICJ, and certainly it does seem that a lot of others have been trying to calm him down and row him back.

But again, I think that there is this sort of moment of some sort of desperation, some confusion. Otherwise, I'll probably leave my comments on the Iran conflict there, largely because I'm aware that even as I sit here talking to you, I don't know what's going on on the screens. You never know what's going to be the next tweet in 10 minutes from now.

But broadly speaking, I think the thing that we've been saying over the course of the last few weeks is we've been advocating a risk position which is very close to home. This is a very uncertain environment, you want to be aware of complacency; you don't want to run a lot of risk. And so, effectively we've been trying to collapse tracking error, collapse VaR in strategies that we've managed. I'd say that in some strategies, it's been easier to do that, relatively speaking, than others.

And in terms of our credit strategies, our emerging market strategies, we've been holding up well. We've come into the conflict with relatively light position, and in EM I think we were pretty quick to de-risk. I think sometimes the mindset of EM investors is you sell first, you ask questions later, and maybe that discipline this time around has been one that has actually been the right call to make, a beneficial sort of starting point that actually makes it a lot easier to weather the storm.

Otherwise, I would sort of note that another theme that has been in markets in the background has been some of the building issues in private credit. I think these will continue to grow louder, if anything, over the weeks ahead. Given that the asset class has been seeing rising default rates and a slew of negative headlines, the last thing that private credit needs, on top of some of the other worries that have been manifest, is the idea that rates are going up rather than down.

Obviously, when you've got a lot of leverage, the hope was that lower rates would actually ease the burden on some of those highly levered entities. So, if rate cuts are now off the table, and even if rate hikes start coming back onto the agenda. this is a further blow for those levered names in the private credit universe. And so that's obviously an issue.

In addition, we would note that inasmuch as you're looking at a more challenged economic backdrop, this speaks of elevated recession risk, it speaks of elevated risk of defaults in terms of a forward-looking trajectory. So, in addition to interest rates going the wrong way, you've also got the idea that corporate earnings may go the wrong way, you may end up with higher default rates.

And thirdly, I'd also note that in private credit effectively you kind of need to attract new money in order to give exiting money the route out. Effectively, you rely on re-upping funds in order to keep the whole sort of show going.

But increasingly, I think some of the bad headlines we're seeing in private credit, some of the negative headlines that we're seeing in terms of the macro backdrop, I think this is making investors potentially more risk-averse, less likely to allocate new money to private credit. That being the case, it's not clear how some of that money currently in existing funds will be able to get out, and you'll end up with some of those locked-up structures made evergreen because it's just not possible to actually take your money out at the end of the formal fund structure itself.

So, these are things to watch for. Of course, I'd also note that investors in the Middle East have actually been very big buyers of asset classes like private debt. We just don't see them buying again soon.

I think another sort of market to touch on which is interesting is commodities and gold. You might be wondering, why on earth is it that when we've got all of this uncertainty in the Middle East, and we've got inflation risk building, you'd expect gold prices to rally, but gold prices have actually fallen quite sharply over the course of the past month. I think this speaks to the fact that there have been a number of hedge funds who have had speculative long positions in commodities like gold and silver. This has been true on the retail side too of course. And obviously, when you enter into a stop-loss situation all of those positions get collapsed.

So, effectively it's speaking about how gold has almost become a risk asset. I know I've had questions on this call about the behavior of gold prices, and I've said that gold prices aren't really a great indicator of what's happening in terms of the macro environment, in terms of read-through for inflation or anything else. They are behaving in a more speculative fashion.

But the other thing to also highlight that I think has been an interesting story in the last few days is some of the central banks who have been accumulating gold reserves have actually started turning gold sellers. Governments are needing money from somewhere, so why not sell down some of your gold reserves, book some profits there, and use that to help fund defense? For example, a central bank like Poland has been doing that in recent days.

Otherwise, in FX, the dollar has gone a bit stronger over the course of the past month. I think the consensus was to be selling the dollar going into the conflict, and so it's not surprising that the dollar has acted as something of a safe haven. If we see a continuation of the conflict, one thing that I feel very sort of clear on, I may have mentioned earlier, is the US will restrict energy exports of refined product to Europe. I think that's going to really hurt Europe. If it happens it will protect what's happening in the United States. You will see a widening between WTI and Brent, if this is the case, and actually you will end up insulating the US economy from the worst of the moves up in prices.

But if you, if you do go down that path, then again, I think that intensifies the idea of the economic downside on Europe, and some Asian currencies, where those countries are energy importers, like Thailand, like India, for example, or a couple of short positions that we're running from that point of view. But generally speaking, although we think that in the near term, we could be going into an environment where the dollar behaves as something of a safe haven and trades a bit stronger for the time being.

I think, ultimately, as and when this conflict ends, it wouldn't be surprising to me if a lot of investors are looking to allocate a bigger portion of their portfolio away from the United States in future. Ultimately, what the US has done here, I don't think that he's going to be winning the United States too many friends, in various corners of the world on a forward-looking view. Some of this felt I think to many in the world, like an avoidable conflict that the US has ignited.

And so, from that point of view, I think some of the trends that were actually trends that we were talking about at the start of the year, and the back end of last year about, sort of, asset allocation away from US assets could re-establish themselves at a later point in time, but I don't think that's where we are in the here and now. So, just in the very short term, I think the message is hunker down, don't take too much risk, avoid accumulating losses, weather the storm, and I think that there'll be a moment in a few weeks from now where we may be able to look out with a bit more clarity.

I don't believe that the tweet today is the big moment where you turn around and buy. I don't think it is the big TACO that maybe some are looking for as a catalyst to buy risk assets. I don't think this thing has come to an end just yet. Of course, I'd love to see peace, I'd almost love to be wrong in my thinking here, but still my sense is that the conflict is far from resolved at this particular point.

With that, maybe I'll end my questions before I start turning this into a bit of a rant. I'll go to some Q&A and I'm turning to my phone, so the first question is do we expect any tax or levy on a forward-looking basis for ships transiting the Strait of Hormuz?

So this, I think is an interesting idea. Effectively, if the Iranians end up in control, why wouldn't they seek to tax the transit, effectively blackmailing, others in the region into effectively rebuilding their coffers? Certainly that's,

a threat or a danger. I think, obviously, there'll be a strong international pushback against this. These are international waters. There's no legal basis for doing something like this. So, I don't know whether any such payments may be under the counter or behind the scenes, effectively hush money.

But you don't feel that governments should be operating in such a way, and so again it speaks to the fact that it's going to be very difficult to end up with an outcome where Iran is able to walk away from this looking like it's in a stronger position, effectively with even more leverage than people thought they had, than was the case before the conflict.

Second question is on refined product shortage. Is it a more important than inflation driver than crude itself?

Yes. So in terms of refined product, this is a real issue and so, here what that means, for example, for petrol prices, gasoline prices is very significant. You have shortages there, also of others like jet fuel as well. And you're likely to see that spread diverge materially. And I said earlier how you may see a modest move in terms of the spread between Brent and WTI.

If you look at Middle East sweet crude, here the Omani benchmark is already trading north of $150. Moreover, if you've lost a lot of refined capacity, actually, the reality is we could end up seeing more of a parabolic move in things like jet fuel and petrol prices, up until the point where you effectively destroy demand.

And then bring that market back into balance. So, it will almost be the intersection of supply and demand curves, which will actually end up determining the price if you end up with those markets shut out for a material length in time.

Turning to the next one, private credit stress: Is it a contained issue or an indicator of broader problems?

So here, I would be, I was saying at the start of the year, I didn't think that the issues we were seeing in private credit were necessarily a harbinger of problems across the broader credit market. I mean, last year, we heard Jamie Dimon talk about cockroaches, and I pushed back at that metaphor.

I thought that when First Brands went down, this was more of an example of corporate fraud. It looked more like Enron or WorldCom in 2003, rather than something we were seeing in 2007. So, I did make that sort of point of difference.

Moreover, we were highlighting that in terms of, like high-yield corporate bonds, you may be looking at three to four turns of balance sheet leverage in terms of the individual issuers in that universe. But that could compare to seven, eight, nine times the balance sheet leverage in the private debt direct lending space, which is why you were more exposed to the pain of higher interest rates in private credit.

So, we did think that the pain in private credit was more localised than elsewhere, but obviously, if that market really sells badly, it is going to have an impact. It's going to contaminate what we see in bank loans. It's going to contaminate and feed into high yield. It is going to cast a bit of a shadow across markets more broadly. Of course, it could create some losses for banks, but we don't think the losses for banks are going to be very material, because these losses are going to be very widely socialised across the financial system.

So, I think it is something that could be more of a problem, but I've never thought that a private credit blow-up would be if you like a 2008 event, partly because there's no stop-loss selling in private credit, there isn't such a leverage within banks to actually create the conditions where you have a widespread sort of financial market event on the back of a meltdown in private credit, if indeed you do have one. We think it's more of a slow burner that sort of drags things down for a longer period of time and takes longer to resolve.

That's the way that we've been looking at it, but obviously, at the moment, we've got a few issues that we're dealing with all at the same time, and if you've got problems building in credit because of recession fears anyway, if you add to that what's happening in private credit, it's something that has the ability to make a challenge backdrop even worse.

And then perhaps a last question for today, views on duration.

So, here on duration, I'd say be flat for now. When I look at what's priced into money curves, pricing three rate hikes in the UK feels like too many. Pricing three rate hikes in the ECB feels too much as well, I'd kind of argue. However it's very difficult to actually push back on some of the pricing at the current point in time, because we're in this moment of dislocation, we're in this moment of position capitulation, and I don't feel that that has fully finished.

Also, there is a scenario here where if things go really badly wrong in the Middle East, we're talking oil between 150 and 200 bucks, maybe at $250. Pick your price. And in that sort of scenario, we could be seeing an energy shock that's taking inflation to 6%. We could see a rerun of 2022; we could be seeing a rerun of the 1970s. We don't really know.

And so, trying to press that tail, and what could happen in that tail, is something that I think weighs on inflation, because you are kind of trying to make a probability-weighted assessment here. And so, from that perspective I think it's too early to want to buy duration until you've got more clarity. And the thing that, of course, we are seeing is duration is not a hedge here; it's not a hedge to risk assets. You may have recession fears start to build. But this, if as we saw in 2022, you can end up with recession fears at the same time as you can see higher bond yields.

So, I don't think that duration is something that we want to take a very active view on just for the time being. We just need markets to settle down, calm down. We need to be able to be in a position where we can look at the landscape. With a bit more clarity than is the case today. But, certainly in the short term, it's been a challenging few days to keep up with. There's plenty to talk about, plenty going on, and let's see where this US President leads us next.

But with that being the case, I wish everyone on the call very well. Hope you're navigating these turbulent times successfully. It's been a pleasure to host this call today, and hope some of the content that's shared has been interesting or stimulating, and hope that many of you get to join again the next time we do one of these in a month from now. I'm sure there'll be even more to talk about at that point in time, but for now, thanks very much.

Goodbye.