Hello there, and thanks for joining today's webinar. For those joining for the first time, the format that we've followed has for myself to spend about 20, 25 minutes speaking through our latest views and assessment across the global markets and economy and then spending a bit of time sort of going through questions that you might want to submit.

This is the 1st one of the calls we've done since the US election, and so I guess a lot of time in the last couple of weeks has been spent thinking on what does Trump 2.0 actually mean for us all as investors in markets and in general.

And so I think there are a few sort of interesting sort of observations to make here. Firstly, I'd note that in the election itself it was the economy that really mattered. It was inflation that really counted. I think there's been this sense that in terms of individual experience, where we all see, we might see our wages moving higher.

We tend to personalise that sort of move, and we'll say my wages have gone up because I'm working ever so hard I deserve a pay rise. But when you see prices go up then there is a real tendency to say, well that's because the government is not doing its job. And in that context you have ended up with the government being blamed and the Biden administration being blamed.

And, in fact, this is a trend that we've witnessed globally over the course of 2024 on a year-to-date basis. Every election that's taken place this year. We've seen the incumbent parties losing vote share. And so from that point of view, I think the disappointing Democratic showing maybe shouldn't come as too much of a surprise.

But it really does highlight the fact that there is consumer disdain towards seeing high prices and seeing inflation. And so, from that point of view, when you look at the Trump agenda, particularly around areas like trade policy, immigration policy, fiscal policy. There are certainly policy changes here which we would actually sort of note and observe, could easily feed into higher inflationary pressure. And so, from that point of view, I think it will be interesting to see how some of this plays out.

Now, when Trump does take office in January after the inauguration, it looks like all of his team will be in place. Obviously unlike in 2016. He's been wasting no time selecting his picks, and with those likely to be confirmed in the lame duck session ahead of us in the Senate next month. It does mean that on day one effectively, the new administration Trump would in a position to hit the ground running.

Now, when he does so, we think one of the 1st moves he'll make is an executive order to issue permits to drill when it comes to oil and gas production. I think there's a desire to increase exports of oil and gas, also a hope and a desire to actually push oil prices down.

But therein I think there's a bit of an issue in that. If you're really looking to drive prices lower, is it really in the interests of the oil and gas industry to be ramping up production. So from that point of view, we'll have to see sort of how much enthusiasm the idea of the drilling agenda really gets, and it may be, we see a bit of downside on oil prices, but maybe not much as Trump and team might be hoping for.

Otherwise turning next to immigration policy. There will be early moves in terms of immigration policy, but the most effective change here will actually be stopping new immigrants coming into the country. Over the last 3 years there has been really substantive numbers of illegal immigrants crossing the border into the United States. And actually, by stopping those additional migrants coming in will actually be the thing that actually creates the biggest delta in terms of changing the immigration backdrop.

The idea of actually deporting a million, let alone 15 million individuals, I think, is very unlikely to come to pass. It's going to be very difficult to expedite. It's going to be very costly to implement as well, and let's say, where people don't have passports for other countries, you can't simply just stick them on a bus back to Mexico and hope for the best. So from that point of view, I think that deportations will be more limited to a few individuals with criminal records.

But it's interesting. I was just having a call before this one speaking around the dynamics, for example, of the milk industry in the United States. Yeah, that's right milk. Apparently nearly all the milk in the US comes from the state of Iowa, and effectively the story there is. It's an industry that is very much staffed by migrant labour.

Essentially, because the job of having to get up at 4am in the morning every day isn't really the most attractive role to a lot of folk in terms of getting a job. And you're working hard. It's a hard job, there are 10-hour days. And so again, the analysis there is if you ended up with a big disruption of the supply of labour there all you're going to do is end up having to drive up things like milk prices.

And so you can see how changes that you can try and make around immigration policy can feed into a tighter labour market, it can feed into the idea of a bit more inflation. Secondly, you would say that on trade a lot of talk about tariffs, and we do think there will be an early move on Chinese tariffs elsewhere.

There's more this sense for the time being that a global tariff is being used more as a negotiating tool to change behaviour both at a corporate level and a national level. But still I think that there will be some industries that won't be spared, they will be tariffed. Some countries will be hit elsewhere. This idea of changing behaviour it comes back to the idea that at a corporate level. You want to persuade a company like John Deere to bring investment and production back to the United States and get the US economy benefiting in that respect.

Secondly, at a national level, there may be more of a desire for the US to use leverage in terms of trade policy to get its partners to conform to the US agenda on China, for example. This may be pertinent when it comes to the EU in terms of trade discussions. Perhaps we'll have to see how some of this plays out. But again, anything that you'll understand in terms of a theory on tariffs is that it will tend to lead to a reduction in consumption, higher prices, and also a stronger dollar. And indeed, the dollar has been moving stronger since the election.

We actually think the dollar may have further to go. Not only do you have the tariff talk pushing the dollar stronger, but also the economy continues to have plenty of momentum. Ongoing US exceptionalism is also a reason for the dollar to rally as well. So, even though Trump himself may want a softer dollar, not a weaker dollar, it's not quite that straightforward to understand how he might expedite this if his policies are pointing the other way. But again, you've got another facet that is feeding back into this inflationary loop.

Thirdly, you've got fiscal policy, and obviously, I think, a lot of the past tax cuts that were implemented which were due to expire next year we see those being rolled that will keep the fiscal deficit already, where it is at 6 to 7% of GDP. The question is, are there going to be additional tax cuts on top?

Some of this is somewhat uncertain. I mean, part of me wants to think that surely the administration won't just want to ease fiscal policy into an economy that is doing pretty well, operating pretty much in full employment, because all you are doing, then, is adding to inflationary pressure and swapping fiscal easing, maybe for less monetary easing, or even monetary tightening. Wouldn't it be better to hold some of that in reserve?

I also have met a number who are involved in the incoming administration, who like this idea of the whole sort of Lafferesque idea of economics. The idea that if you cut taxes it drives growth so much stronger that effectively tax cuts end up keeping paying for themselves by delivering a much stronger economic situation. So we'll have to see how the ideological line sits on this. But all over this sort of policy agenda, you can kind of look at this through the lens, that, on the one hand, the behaviour of the incoming administration is going to be reasonable, rational, sensible, and not overly disruptive.

But then all of the risks are tilted in the other direction to something that is more disruptive, something that does end up feeding back into driving inflationary pressure, and from that point of view. If you look at trends in inflation itself. We currently see core PCE sitting at 2.7%. It's been trending down this year, but in the last few months it's actually sort of moved more to a sideways pattern.

The downtrend seems to have stalled for the time being, and one of the questions I've really been asking myself a lot is what will be the pain threshold which actually causes the Fed to change its views on monetary policy and actually start to move, to raise interest rates. And from that perspective I reckon if you end up seeing core PCE at 3.5, particularly if it looks like it's on a rising trend.

I don't think the Fed will be able to ignore it. I think it's going to have to hike rates if you actually see that, after all, in 2021, the Fed took their eye off the ball. They tried to look through and move up in inflation that they thought was going to be transitory. And look where that ended. I don't think they can make the same mistake again. They can't be blamed for it, particularly because we have seen this experience of how much the public at large really wants to avoid an inflationary outcome. So when that comes back to our thinking over the course of the coming year on the Fed and where we're going, it leads us to think that you might get one more rate cut in this particular cycle.

I've always tended to think that the Fed might want to do 100 in one go, and they've done 75 already, of course. And from that point of view maybe one more cut in December or January, but then I'd be pretty convicted that they will be on hold watching and waiting to see.

The economy is already doing fine. It doesn't really need or cry out for rate cuts at this particular moment in time. Moreover, by going on hold from January, you're putting yourself in a position where the Fed can sit back and watch for a bit. See what Trump and colleagues actually do and deliver. And what the impact of those changes are in terms of the broader economy thereafter, later, in 2025, if the economy does slow. Yes, of course you can cut further. You could cut rates. Let's by 100 basis points, or even more if suddenly recessionary fears were to return at that particular point.

On the other hand, as I've mentioned, if growth remains robust, if you end up with inflation. Going back up towards this pain threshold. Then I see rates going in the other direction. As you weigh these different scenarios together, it does sort of create for me a bit of a pattern where I think you're probably not far from fairly valued in terms of the front end of the curve. So, having had a bias to be short in US rates ahead of the election, post the election we've actually closed that particular view, flattened out that particular risk.

As mentioned we've liked the dollar ahead of the election, but we want to continue to run that position. We think it could have further to go, and we are targeting parity to the euro and a move below 120 on the pound. But then otherwise on rates the other thought that we've had is we need to move to a world where we see a steeper yield curve. And this is something we've been talking about a little bit for the last few weeks and months. But if anything, our conviction on this only continues to grow. If you think about it in terms of fiscal policy, the flat yield curve is creating a green light that's telling policymakers to keep on delivering tax cuts, keep on running very profligate fiscal policy.

And that fiscal paradigm or fiscal debate is only going to change when you actually see that yield curve, steepen up and steepen up pretty materially. If you ended up with cash to 30, steep to the tune of 150 basis points. I think then the country would start crying out for lower, long term rates action that can actually help the construction industry and the mortgage market, for example, at that point in time. Moreover, if you did see that degree of curve steepening.

I'd expect those long end rates to really be weighing on other financial asset prices in as much as you're operating in a situation where you're discounting long duration cash flows at an elevated level, and equity cash flows are long duration, cash flows. And so from that perspective, we think that that could be more of an issue.

So curve steepening is something that we like as a theme. And again, if anything, we've been adding to that as an idea, noting that actually, since the election itself. If anything, the yield curve has flattened as short-dated rates have moved up, and so adding to steepness. Here, we think, is an interesting trade to have.

So that would summarize a lot of the thinking that we've currently got around the US. Lots to cover there. Lots to talk about. I would note that maybe with Thanksgiving coming up, and with some of the picks being made, maybe later this week we can kind of put together the put to bed, the whole sort of initial post-election Trump trade to bed for the time being, and the focus will come on to the next payrolls report and the Fed thereafter, and the Fed meeting in December is going to be an interesting one, because, as I say, it's a live meeting. Do they cut, do they not? What are they going to do with the dot plot? How are they going to react to the new political reality? Let's wait and see.

Sometimes I've been getting asked questions around what's Trump going to do about the Fed. And here I think the answer is nothing. I don't think that for all of his claims before the election he's going to be trying to fire Jerome Powell, because bluntly, he can't. He doesn't have the authority to move Powell as a governor from the Federal Reserve. Moreover, I just think that if Trump tries to pick a fight with the Fed, then this ends badly for him, right. Financial markets will go down, the S&P will freak out and Trump will take the blame if that's the case, and I don't think that's something that Trump desires for a moment. And so I think that's unlikely to occur.

Moreover, I think that having spoken to some within the Trump team, there's almost this sense that with Powell in place still for another 12-18 months, Trump has also in effect got this sort of optionality in that.

And from this point going forward any time there is good news on the US economy Trump can say it's all about me. It's all about the fact that I'm the best president that has ever lived. However, if you end up in a situation where there is bad economic news, you can point your finger and say, that is the Fed's fault. That's Jay Powell doing a bad job, and so that optionality may well end up suiting him. So I don't expect any change at the Fed there.

But again, in all of this we're weighing up. Do we end up with the rational side of Trump? Or do we end up with something more erratic, more chaotic? Time will tell, and history will judge, but we'll be watching and waiting, and as investors, in a sense effectively anticipating volatility, I think this will be my sort at the moment, my theme going into 2025 is like we should expect there to be moments where markets become volatile because we know that Trump is going to say things that are outrageous, things that shock, things that offend.

Markets may well end up overreacting. I've sometimes shared the metaphor about how, if I think back to football, my passion for football and the player Diego Maradona, there was a goal he scored in one particular world cup against England. Not the one with the hand of God, the other one where he went to the left and the right and the left and the right, and basically beat all of the England players leaving them on the dirt. But what's interesting in that passage of play is actually looking at the tracking of the movement of the ball in a much more of a straight direction.

And it's really his movement that's throwing the competitors all over the place. And in the same way I sometimes wonder if, with Donald Trump, it's all very deliberate. He delights in creating chaos because he's thought that by shocking, offending, saying outrageous things. He can throw his competitors off balance. And in doing so negotiate against them much more effectively. If he's the one who is actually controlling the narrative. So this is his modus operandi. We kind of know it now. We should have known it for a long, long time.

Ever since back to the days that he had the book, the art of the deal. This is the way in which he is behaving. But it does mean that expect volatility. There will be times when markets under react sometimes when markets overreact. But if I were to sort of picture myself almost like a surfer on a surfboard sitting in the ocean. It's almost like I'm sitting on the board waiting, waiting for the wave to come, and as the wave comes, then you want to paddle hard. That's the moment where you want to try and make some return and then sit back. Relax, wait for the next wave to come with positions pared down appropriately. So that's kind of the way that I think Trump world Trump 2.0 should end up working.

It's almost like a sense where I'm sure at some point in the course of the coming few months there will be a moment where stock prices are materially higher than today, and there will probably be almost certainly a point in the next 12 months where they are materially lower, there will be this volatility. There will also be an opportunity to identify winners and losers.

But in all of this volatility that can be quite confusing, I would say that it's volatility in itself, which is actually what creates the opportunity set for active investors like ourselves to actually monetize that volatility in terms of Alpha through active returns. Moreover, I'd also say that in as much as this volatility is being driven by volatility in policy and politics. I believe that here at BlueBay we're actually well placed to be able to be on the right side of some of that and capture that volatility to our benefit.

Over the course of the past month. We've enjoyed strong investment performance which I don't really want to go on or boast about. But I just do highlight this ability to deliver active returns through that particular area of focus which has been something that's been a competitive strength on our part.

Now, at this point in time, I realize I've spoken for 20 minutes on the United States. It's leaving me no time to really cover much else going on in the world. But so much of the focus has been about the US recently. I just think very quickly in Europe the story is, the economy is weak, certainly, in contrast the US.

The big question next year, as we go into next year is, are we going to see a moment where Europe says, “Look we need to do something. Are we going to deploy fiscal policy more materially?”. I think ultimately they will end up having to, because otherwise you're going to end up with economic crisis. And then that leading in turn to political crisis.

But just for the time being I think that any material move on greater fiscal deployment, or any move towards more of a single market agenda again may well need to wait until after the German election, so we'll be waiting for that at the end of February.

Otherwise, I'm just back from a week in Japan last week. Things in Japan are evolving in a much more constructive fashion. We see the fact that the pool of available labour is shrinking is really recreating this move up in wages, and you can see the ageing of the population is becoming a positive inflationary driver on the back of that. It seems that the Bank of Japan and others are lifting their expectation, for where neutral interest rates may sit.

And so, therefore I'd expect the BoJ to be hiking in December, and from that point of view we think that the yen can do well against the euro. If you think about it in Europe you see, rates cuts, if anything, on an accelerating path. Rates in Japan are going in the other direction. That differential is narrowing and it's going to become much easier for Japanese investors to own European fixed income on a currency hedge basis which was part of the theme of some of our conversations there over the course of the past week, which I think is interesting. But euro-yen, we think, is a currency cross that is looking interesting to us.

Meanwhile, 10-year JGBs, we think that yields can go quite materially higher over the course of the coming year. We think that one and a half on 10-year JGBs will be the next target, having broken above 1%. And it certainly strikes us that elsewhere in the world the 10s 30s yield curve is too flat and needs to steepen in Japan. It's already too steep and needs to flatten effectively. The 10-year point in the curve in Japan, we think, is too rich largely because there have been years of yield curve control where it's that 10-year point on the curve that the Bank of Japan was seeking to control the price of.

Anyway, with that I did want to leave some time for questions and so let me go to the Slido app and see what we have here. It looks like we've got a few questions coming through.

And before I forget it, I did want to say, I do hope that we'll see some of you at the Fixed Income Market View Seminar that we're hosting here at Blue Bay tomorrow. So do go ahead and join if you've got the chance. But otherwise, turning to some questions here.

“So what is your stance on European growth after last week's PMIs?”

Well, it's bloody depressed, that's what it is. I've been to Brussels recently, and they're about as downcast there as they've been for a long, long time. So I just think that Europe is in this difficult place. How can you be competitive in European industry when you're paying on energy cost 2, 3, or 4 times what your competitors are actually facing, you just can't deliver.

That's why you have people like Mario Draghi making the forceful argument that Europe has got to invest. It's got to deploy fiscal policy to accelerate decarbonisation. What's the alternative going back to Russian gas? I don't see that happening any time soon, so I think there is just a very difficult situation, and I think that Europe would be in recession in aggregate if it weren't for the fact that at least in the Southern European countries things are looking a lot better than they are in the North.

But honestly, it's a bit of a picture of stagnation and the metaphor that we've been using with policymakers on the continent is very much Europe is the boiling frog. Are we going to get the moment the shock that actually causes the fog to leap out of the hot pan of water? We hope it comes before it's too late.

And maybe Trump is the shock that can actually get Europe there. But, as mentioned at the moment, there is a sense of despondency at the moment that nothing is really happening in the absence of any real political leadership in either Paris or Berlin.

Next question, “What is the expected result of Trump's policies on growth? Is it balancing out against the negatives of tariffs and demographics?”

Well, in terms of growth here I would say that the policies that he has in place is a bit of a double-edged sword, right, for example, on tariffs. There will be a school of thought that actually can the US achieve some tariff dominance if they're using the threat of tariffs to bring investment and production back to the United States to make America great again. Can you end up benefiting the US economy? Well, maybe if that leverage, if that sort of bullying of others as the world's big economic superpower plays to your favour. Otherwise on immigration, anything to cut immigration that's not going to be helping growth.

But if you do end up delivering fiscal ease that will accelerate the growth trajectory, and from that point of view that would be more of a growth positive, but of course, as already covered, it comes with inflationary risks.

Next question “Is the move in fixed income in Europe versus US overdone?”

So here European yields have been outperforming US yields of late. Is that overdone? Actually, I don't think so. If you go back to what I was saying and thinking here, if anything, I think that you're slowing down the amount of rate cuts the market would have been discounting in the US.

If anything needing to accelerate those rate cuts in Europe. Just think for a moment if Trump does go ahead with tariffs, and then that decimates the European export sector. What then? You're in an even bigger economic hole, aren't you? So from that point of view, you can actually see why the ECB may need to do more than it is currently doing to actually step in and support growth.

And the last question, “What are your thoughts on gilts?”

Sorry I hadn't actually covered the poor old gilt market. At this particular meeting I ended up overlooking my country of home, but I think the reality here is that the gilt market has been underperforming other markets of late, partly because there have been some disappointing data also, because I think that in a way the UK is vulnerable to the idea and narrative that funding costs are rising because UK interest rate debt expenses are so elevated within the budget as yields go up. Then that is basically collapsing any fiscal space that you had.

Indeed, Rachel Reeves has made all of her projections on assumption that in the course of the coming year interest rates are declining and bond yields are declining. Actually, bond yields have been going up, and when it comes to interest rates, I just think it's going to be very difficult for the Bank of England to cut rates, because inflation is too high. Wage growth is too high. We have seen a move higher, I think, in UK inflationary expectations. It's limiting the ability to do much when it comes to fiscal policy, monetary policy. And as mentioned the fact that those borrowing costs are going up is collapsing the fiscal space Rachel Reeve has.

Moreover, if you end up in a situation where in the world there is more focus, more scrutiny on sovereign debt sustainability, because we've already had the Truss tantrum in 2022 effectively. We're always going to be vulnerable in this country effectively. We're a bit of a canary in the coal mine, and from that perspective, yes, it's one that leaves us in a dangerous position, so we wouldn't want to be bullish of gilts at the moment. That said gilts have now performed quite materially, and so I wouldn't want to be short at this point, I actually think the better view is actually to be expressing more of a short position in the British pound.

With that I'm going to close my comments. I think I'm done questions. Thank you very much for joining today. This is the last one of the year, so I wish you all a very happy, enjoyable end of the year, and let me be the first to wish you a very merry Christmas, even if it is a month early, all the best. Bye.