AI Booms, Fiscal Strains and the New Macro Regime | Allocator | Ep.32
Summary
Macro Regime Shift: The guest emphasizes a transition to a sticky and spiky inflation regime driven by supply shocks, geopolitical fragmentation, and demographics, implying steeper yield curves and higher term premia.
AI: He highlights an AI-led investment boom (data centers, software, IT) boosting growth near term and potentially adding cyclical inflation before productivity gains deliver disinflationary benefits.
Information Technology: Tech spending is a key growth engine, with concerns about index concentration and valuation balanced by prospects for a broader equity market participation beyond the U.S.
Emerging Markets: High-conviction view with improving macro reforms, lower-than-expected volatility, and potential decoupling; EM currencies appear materially undervalued and benefit from a weaker dollar.
China: Constructive outlook with resilient growth, gradual exit from deflation, and targeted policy support via the new five-year plan focused on advanced manufacturing, tech innovation, and consumption rebalancing.
US Dollar Weakness: A modest multi-year dollar decline is expected, supported by policy alignment and global growth broadening, aiding EM assets though the dollar’s traditional risk-off behavior may be less reliable.
Hedge Funds: Favored as diversifiers in this new regime, with macro and multi-strategy funds expected to contribute more meaningfully to portfolio resilience versus the 2010s.
Gold: A preferred allocation as a debasement hedge and diversifier amid shifting stock-bond correlations, supported by central bank buying and fiscal/inflation concerns; no specific tickers were recommended.
Transcript
rates and cutting rates. Boss long bond is Mr. Haven. It keeps going higher. So I mean Greenspan and Bernanki called it the the bond yield conundrum. I've been calling it the reverse conundrum today because everything seems to be the other way round. So I think the underlying dynamics where we're seeing steeper steeper yield curves, rising term premium in bond markets, that all looks to me that it's quite consistent with the uh with a concern around debt, a concern around fiscal dominance, a concern around fiscal inflation risks. coming back to the four in a in a way that we just were safe to ignore all of that for the last 20 years prior to the kind of COVID pandemic. Imagine spending an hour with the world's greatest traders. Imagine learning from their experiences, their successes, and their failures. Imagine no more. Welcome to Top Traders Unplugged, the place where you can learn from the best hedge fund managers in the world, so you can take your manager due diligence or investment career to the next level. Before we begin today's conversation, remember to keep two things in mind. All the discussion we will have about investment performance is about the past and past performance does not guarantee or even infer anything about future performance. Also understand that there's a significant risk of financial loss with all investment strategies and you need to request and understand the specific risks from the investment manager about their product before you make investment decisions. Here's your host, veteran hedge fund manager Neils Krop Len. Welcome or welcome back to another conversation in our series of episodes that focuses on markets and investing from a global macro perspective. This is a series that I not only find incredibly interesting as well as intellectually challenging, but also very important given where we are in the global economy and the geopolitical cycle. We want to dig deep into the minds of some of the most prominent experts to help us better understand what this new global macrodriven world may look like. We want to explore their perspectives on a host of game-changing issues and hopefully dig out nuances in their work through meaningful conversations. Please enjoy today's episode hosted by Alan Dunn. Thanks for that introduction, Neils. Today I'm delighted to be joined by Joe Little. Joe is global chief strategist at HSBC asset management. He leads the firm's macro and multi-asset research, sets the house view on global markets and long-term asset allocation, and is the author of HSB Fleet C's flagship, House View. He's been at the firm for a number of years, and before that was a an economist at JP Morgan and a global macro PM. Joe, how are you? Great to see you. Great to have you on TTU. Thanks a lot, Alan. Great to see you. Thanks a lot for having me. I'm a longtime listener, first time caller to the show. So, it's great to be on. >> Great. No, delighted to have you on and looking forward to hearing everything you have to say about global markets and asset allocation and all you're hearing from your investors as well. I know you speak to a lot of different clients in Asia in particular and do a lot of travel. So, very much will look forward to hearing all of that. We do like to start off by getting a sense on how people got into markets and economics in the first place. So what got you involved uh back in the day? >> Yeah, if some time ago now I I mean I studied economics, Alan, so I guess that was that was where I I sort of started thinking about macro trends, maybe becoming aware of financial markets, but I always thought I'd go into some sort of policy role being a a a SPAD or some sort of special adviser working at the Bank of England or something like this. And it was a bit of a happy accident in the end. I stumbled into a great role at at JP Morgan uh in in London. Um working with some terrific um people in the equity research, equity strategy team, macroeconomic team. Uh and I love that combination of macro and thinking about in investment markets. So I had this um yeah I had this idea that markets were markets in ideas and you could have this laboratory for um testing your theories about the world battle them out in the domain of of investment markets and then like you said I I sort of spent this time as sellside economist then I was a portfolio manager for a little bit these days I'm a buyside strategist but I've always worked in macro um and and asset allocation and today in my my current role at HSBCs and management like you said >> and in that roles you said the house view and you write a lot of um thematic material I guess in terms of how the macro regime is evolving etc. Um I mean day-to-day does that what does that look like? I guess speaking to a lot of different types of investors. Is that it? >> Yes. So we're a global asset manager. We manage uh $850 billion over 20 locations worldwide. My my responsibilities sort of divide into three different zones. Firstly working a lot with the research analysts and portfolio managers um in the UK and then around the world in our in our different manufacturing centers helping them with uh decision support. We often call it investment decision support you know macro perspective on events helping think about um alpha signals or or making them aware of some of those macro risks. Um, and then like you say, a big part of what I do is traveling um to see investors in in different locations, talking to the media, getting to do podcasts. We call it thought leadership, which is quite a grand title, isn't it? I do my best to live up to that label. And and then the third part I do is um helping my boss, the global CIO, uh coordinate and look after the the global investment platform. So sort of variety of management and leadership responsibilities that that go that go with that. So it's pretty varied actually. I get to do a lot of very different things and meet a lot of very interesting people. >> Very good. Um well I mean you we we mentioned kind of your work on kind of thematics and kind of the big picture. So probably the obvious place to start. I mean most people myself included you know reading your work we're all in this view that the the macro regime has shifted somewhat in the last number of years versus the previous decade. So maybe just to give us a sense on you know what do you think are the most important elements of that regime shift and the the the aspects that are most pertinent to to the investment uh culture today? >> Yeah, I mean that that's a great question to to start with. I I think it's helpful to think about where we've come from and then where we are in and maybe moving moving towards because I I draw a big distinction between the environment that we found ourselves in in the post financial crisis world versus where we are to today and it maybe even predates the financial crisis to a certain extent. But the the environment of the 2010s was was very much one of um flexible supply and and demand as the key uh driver of pertabbations volatility in the macro cycle. So we sort of ended up in good growth or bad growth environments depending on how events were playing out. But all of the while it was low inflation, deflation, not inflation as the primary sort of side of of the probability distribution that we were worried about as regards inflation. And the reason that that environment came about is is is because supply was abundant. Geopolitical situation was very stable. We're uh coming to the end of the phase of hyper globalization but still in a very globally connected uh extended supply chain situation. demographics was very favorable in terms of the um uh integration of the uh global economy uh as well. And of course tech big part of the story. And now if we contrast that with with where we're sort of moving to and and maybe heading towards at least three of those following winds which kept inflation low and kept the growth environment strong are are becoming more headwinds. So tailwinds to to headwinds particularly around the tricky situation in in geopolitics and global economic fragmentation particularly around uh what's going on more broadly in globalization as that shifts to regionalization something particularly we're seeing in the Asia uh trade data especially but is also a a phenomenon elsewhere uh and also demographics shifting um as working age populations decline everybody is concerned about Japanification all of a sudden. So that means that there's a heavy burden weighing on tech and to kind of keep this benign growth inflation mixed over the last 20 or 30 years back still on the road. My worry is that we've entered an environment where supply shocks are a much more dominant source of economic fluctuations. And what happens with that Alan is as you know is you get not just growth volatility but also uncertainty uh stickiness and and spikiness in the inflation regime as well. And that has profound consequences for how we want to think about asset allocation. >> Yeah, it's interesting. I mean I definitely um kind of very much hear all of those points and you know when when we came out of co and then the war in Ukraine these were themes you very much he heard from policy makers as well um even central bankers talking about the supply constrained world now against that obviously inflation has come down obviously it's still a little bit above target um when you can you would you say you can see all of these elements in the data now or are these more things that you will will continue to influence the trajectory of inflation o over time. >> Yeah. I mean, cyclally, we've seen some stickiness in in inflation, haven't we? If you look at the data in particular for uh Australia or the UK or or the US, the sort of those Anglo-Saxon economies, if we can call them that, inflation does seem to have got a bit stuck. Um, I mean, if you asked if you asked to guess what the inflation target was for those central banks just by looking at the inflation dates, you'd guess 3%. You you wouldn't guess guess two. And and I guess the environment that I'm envisaging is is is not something that's particularly dramatic in terms of really decisively changing the inflation trend. It's more of a nuance. So what I would say is that the 2% inflation which had been a bit of a a peak during the 2010s, central bankers were struggling to get to 2% inflation, serial undershooters of the inflation target. That becomes more of a flaw in the way that I would think about it now. It it means it's a bit subtle. It's it's it's a it's a nuance rather than, you know, something more dramatic suggesting that it's going back to the ' 70s. That would not be the way that I would want to characterize the the situation. And I think you are seeing elements of of that playing out in in the data. Um we have had a little bit of a puzzle I think for many economists this year about why the tariffs in the US are not playing out more obviously in the in in the key CPI readings. I wonder if actually what's going on there is a little bit of a delayed effect that could come through in 2026. Um some of the economic research that that we've been quite persuaded by suggests that most of the tariffs about 2/3 have been affecting uh profit margins and about onethird has been passed through into the inflation data. Now as policy uncertainty slips away tariff uncertainty falls away. All of these economic policy uncertainty measures are are dropping quite quickly now. Firms might regain a little bit more confidence, bit more pricing power and suddenly we see a bit of a delayed kickon in terms of how tariffs are playing out. So, I I think it can be a a a near-term theme, a 2026 theme, particularly with policy impulse positive in 2026. I I like the way that you phrased it at the start because it is as much as anything the way that we want to try and understand the economic regime as being one of sticky and spiky inflation. And and that's quite different to what we've experienced in the past. And I guess we're going to talk about it, but it has big effects in terms of thinking about bonds and currencies and stocks and all the asset allocation decisions as well. >> Sure. Well, as it is kind of we are recording at the end of November. It'll be out in early December. It is the time of year where everybody every strategist on the street has their 2026 outlook. Um now you did talk about positive policy impulse. So that maybe suggests that you do see some positivity coming where um you know we we've had from the data we've seen obviously the the data is very patchy at the moment the general sense is labor market weakening in the US and some downside risks to growth but looking ahead it sounds like you're a little bit more upbeat on the outlook is that fair to say >> yeah we we're still taking a moderately pro- risk allocation in in how we're building uh portfolios and a lot of that is connected to a a sense that the most likely outcome is is a bit of a muddle through um policy impulse is is positive next year. We've got Fed cuts, not lots, and I think they're going to be uh constrained a little bit by this sticky in inflation backdrop, but but still a a cutting environment. Tariff policy uncertainty is falling. The fiscal story and what's going on in the industrial policy side, a really big boost to growth. So I think a lot of people have looked at the AI boom, what's going on there, but it's all the derivative sectors as well where you're seeing a big investment boom and all of that is important. I I guess what's different versus maybe what we've become used to is how a faster cadence of growth might begin to generate inflation pressures a little bit faster than many analysts are are expecting. So we um that's how we're we're sort of thinking about it in in the in the central scenario. Um what I would expect alongside that is that growth comes together a bit more globally. So the US exceptionalism idea has been this story that US growth has been the big relative winner. Markets of course going with that too. But as we look at the GDP um scenarios for 2026 and also think about consensus around around profit expectations as well there there is a sense that those expectations seem to be a little bit more globally aligned Europe, China picking up um uh much more US relative advantage slipping away a a little bit and that's quite important because it speaks to something that we've been positioned for and thinking about in investment portfolios which is this broadening out of stock market behavior. So yeah, reasonably constructive in terms of our core scenario. I mean, we run a few different scenarios. Of course, we can talk about the risks, but the core scenario is one where we think that policy impulse is important. Little bit of a an inflation challenge, cyclical inflation challenge that comes along alongside that. But but this idea of a broadening out of market performance can mean that there's still quite a lot for investors to look at and think about in 2026. And obviously, you know, from a markets perspective, but it's not, you know, it's not um totally removed from from the economy. It's been an important driver of the economy as well has been AI and AI spend. Um and more recently we've had some I guess uh reassessment of the merit of that the the amount of spending and and the return that ultimately will be acred and and um you know the you know also from a I guess from an earnings perspective future um questions on on I suppose the durability of those uh revenues. Well, yeah, you know, from an economic perspective, how do you see this? Um, and also from a market perspective, some people draw the parallels with the mid 90s that that that that was a different era that was in the old regime. Do you see that that kind of parallel or is that um from at least from an economic valuation or an equity valuation perspective? >> Yeah, it's a it's a great question. I I was asked the other day which um year the current uh um situation is is is most like. I thought it was a really fun interesting game to play because there's so many parallels with the '9s. I was rereading the old book of Michael Lewis, the new new thing. I don't know if you've read that one, but he he chronicles the the dot story in in typical Michael Lewis fashion. It's it's it's a great read and and going through that now, you can sort of see the similarities between between that era. um the economists writing about indogenous growth, productivity story, all of the investment excitement around the the dotcom mania as well. So there's a lot of parallels with the uh late late '9s. I mean I think the big difference is around market valuation. Maybe the difference also around what we see uh in in terms of the the broad global growth environment, the economic the trade environment and and this notion that I mentioned at the start where the way that I would characterize the system is with a little bit more volatility, uncertainty, uh uh shock behavior coming from the supply side of of of the macro system as well. So in in in a way you've got this slightly strange blend where some parts of the economy are looking a bit like the '9s, other parts maybe bit more like the 60s. Um and economists have talked a little bit about the K-shaped economy all year where you have this lopsided nature to growth. Some sectors really doing very well and winning, other sectors struggling a a lot more. So I I think that's a kind of a nice way to to think about it. In the very near term, I' I'd certainly see the AI theme as as as a big investment boom. We can see that very clearly in the economic data. The excitement around data centers, the spend on data centers is overtaking more conventional forms of of investment. First half of the year, the US economy, all of the growth pretty much is explained by uh data center, software, IT, tech in investment. So there's very clear sort of uh um shovels in the ground investment going on. Then the sort of economic question is how long does it take before the supply side starts to react to all of that in a more positive way? Where's the productivity story? Is is that is that coming through in the data yet? A little bit, but maybe not quite in the really big way that that the tech optimists expect. And that's when you get the more disinflationary force. So 2026 still feels as if we're putting heat into the economy. It's going to create a little bit of cyclical inflation, but the question later is whether or not the AI theme is really a big positive supply shock. And of course, a lot of that is going to come back to the idea of how much labor it displaces as as as well. So there's an awful lot to think about. And and then in markets too, there's many dimensions around index concentration, relative performance in different countries to to to reflect on also. And I mean obviously we're talking very much from a US perspective in terms of the you know the impact of AI on on GDP and the the kind of the fiscal imple impulse. Um outside the US obviously Europe we've had the the loosening of the debt break in Germany and a bit more optimism on on on growth. I I I I was at an event. I saw um Isabelle Schnabble speaking last week or the week before saying she thought things look pretty stable in Europe and if anything upside risks to inflation and then obviously in China and Asia where you spend a lot of your time a different growth dynamic. know I mean maybe taking the Asian perspective China has been muddling through I guess uh do use your expression um how do you see China's growth trajectory and in the context of the overall emerging markets and Europe as well you know taking the kind of global perspective on growth and not just the US >> yeah I mean it's really interesting to to reflect on what's being go going on in in in Asia I mean in in the in the markets we've seen super strong performance in Asia and China in particular, but so much of that is coming from the rerating of the stock market and then the currency effect. Actually, not that much is coming from profits growth. Um it's it's the US where you've had the profits growth and then a little bit of rerating. But that combination um of the if you like the structure of the the return for investors in in in 2025 is it's a really interesting juxiposition. My my expectation in in in 2026 is that if if the if things keep keep going um and the show stays on the road, then then that's got to that that distinction has to address. It has to be more about macro fundamentals, profit fundamentals coming in to to make that performance of Asia stock markets, global stock markets sustainable. So we call it role reversal, Alan, in our investment outlook. It's kind of a you always want a jazzy name for the investment outlook. But the story in in China, I think, is consistent with that. I mean, growth trends look resilient in in in 2026. there's still this big focus around policy supports, not maybe um what we saw in the aftermath of the financial crisis, the the the the big bazooka uh approach to industrial policy, very targeted policy stimulus, including fiscal support for consumers, which is a a big I think change to maybe what we've seen in in recent recent years, last decade or or so. It's very clear in Asia that the trade environment remains a challenge. Um we've done some work looking at export share, import share of the Chinese economy and you can see how the trade destinations are are changing in the context of US trade policy, trade fragmentation, much more regional focus around trade now. So that pattern of a more diversified export market, much greater emphasis around regional trade integration and the Chinese industrial policy focused on developing a really competitive advanced manufacturing sector that they're sort of at the heart of it. We've just had the new 5-year plan. So that's kind of interesting because it puts fiscal policy on a pedestal. I mean maybe we've all uh learned this lesson because we we were in the west we were so absorbed with monetary policy as the only tool of macro stabilization for so long. Western policy makers seem to have kind of discovered the bigger focus which is dominant in Asia around industrial policy. But the China 5-year plan really emphasized tech innovation, scientific innovation. It emphasized economic rebalancing. So, a bit more of a focus on the consumer rather than just investment and and and the business. And we've got this funny phrase that you may have seen, anti-involution, which is very popular in in in Asia. Essentially, policies to address the big challenge around overcapacity, which is still a big problem uh for uh China. We're stuck in deflation. It's now the longest stretch of deflation since the Asia financial crisis, if if you believe it. Um, so that's an important element of the story to watch. But yeah, on balance growth looks pretty resilient. I think in in in 2026, we are expecting an exit from deflation gradually to play out as as we go into the early part of of 2026. And and then the the hope in connection to all of that is that fundamentals can do more of the heavy lifting in terms of driving market performance in in 2026 because there there's been a big reliance on on rerating and and currency to to drive the stock market uh this year. I mean, you touched on the markets a little bit, but I mean, bringing it together, it sounds like growth in the US, okay? You know, maybe a little bit of an impulse. China, okay. Um, you know, there's a lot of concern out there about AI, about the markets, but it seems like from an equity perspective, you're not overly concerned about how far things have gone and seems a reasonably positive perspective. I mean, I'm putting words in your mouth, but is is that how you see it? Yeah, I mean look, you're always in my line of work, you're always thinking about what can go wrong, where the risks might be. I mean, one of the biggest risks, of course, is price evaluations. Uh we we've we've had this big phase of of rerating in stock markets, credit spreads moving to um multi-deade multi-deade lows. Um really important to think hard not just about what's going on in the economic environment, but also in in terms of market market valuations there. in my philosophy, they're the sort of two key variables that are helping us understand what prospective returns in 2026, but even beyond there on a on a on a on a multi-year horizon might might look like. So that that sense around are we priced for perfection in in markets is is is is a big thing that that that I worry about. And I mean you mentioned some of the other things to to be to be concerned about if if growth sort of stalls out or if the AI trend really kicks on again and we get another phase of of US exceptionalism. But our central scenario is really looking for this idea that the stock market trends, investment trends can broaden out if growth comes together. There's a little bit more inflation. So we need to be sort of thoughtful about how we maybe diversify our diversifiers a little bit more. But but a case investment case that's quite strong particularly for EE and especially for emerging markets which is our kind of highest conviction view at this point looking looking ahead to 2026. We touched on the 1990s and parallels and obviously differences as well with respect to tariffs, trade environment etc. I mean the other glaring difference is debt and deficits. I mean if you go back to the mid late 1990s in the well in the late 1990s US ran a surplus I think by 2000. So I mean that's a massively different backdrop you know from a debt perspective but obviously we've seen you know some issues wobbles I guess in the UK bond market. We've had a a rerating of yields in in Europe. The US has been up and down around four and a quarter% since what about three and a half years now. So despite the kind of trajectory of debt levels in the US, the markets have been stable. Is this a risk? Is it something that heavily weighs in your mind when you're doing asset allocation or or how do you think about it? >> Yeah, for for sure. I mean, you're you're right. The contrast with with where we were in the '9s is remarkable, isn't it? I mean there were there was a intellectual debate about whether or not the treasury market should be sustained because the public finances were in such good situation. The argument was whether or not the treasury market should be sustained as part of providing global liquidity services to the rest of the world. Crazy when you think about the context of of today. What a what a huge difference. But yeah, look you're you're right Alan. I mean this has a a bearing because I think it it's an important economic mega trend me mega force to understand when we do longer run investment modeling thinking about debt like demographics or globalization these are really important trends to be on on on top of. Um but but in the here and now, you know, we're we're thinking if the growth cycle is going to falter, what could be the drivers of that? And there's the old joke among economists. Um it's it's not the funniest joke. I fear I might have set it up a bit too much now, but there's the joke that that the economic cycle doesn't doesn't die of of old age. It it gets murdered. And normally what economists are thinking is the central bank becoming very hawkish but the bond market can also play a really important part there as well. So I think one of the main areas um in terms of the mechanism where growth might falter and and again investors get very fearful about recession which is not our base case but the mechanism by which that plays out I think could be through the sort of so-called crowding out huge issuance of what's going of um credits by AI and tech and data center investors uh that could create pressure on on credit markets and raise cost of capital challenge financing right across the system. More equally in the context of the government um uh finances, public finances, debt ratios exploding. Do we see uh some challenge around a misbehavior of ultra long long-term government bonds? I mean so far that's been contained to Japan, Europe, and France in particular. quite a lot of discussions with investors in the UK around the budget, what might happen, what might happen there. And I think if we look at the the the part of the yield curve that's been most affected, it does seem to be the ultra bond rather than rather than 10 year. It's it's a 30-year sort of problem in the in the main. But one feature of markets that's been really interesting to me this year has h has been how the long-term bonds at the 10 or 30 year maturity have been either sticky or moving higher despite the fact that we've had rate cuts. I I I found that really interesting. We we've got a few charts on it in our chart pack for the in investment outlook. But it's another one of these stark differences versus the environment of the 2000s or the 2010s because it in that phase you had Greenspan or Bernani complaining that the long bond was just falling and falling and falling even when they were hiking rates and now you could see Powell or the new Fed chair next year um kind of making the opposite through through the looking glass argument. I'm I'm cutting rates. I'm cutting rates boss but the long bond is misbehaving. It keeps going higher. So I mean Greenspan and Bernanki called it the the bond yield conundrum. I've been calling it the reverse conundrum today because everything seems to be the other way round. So al although what's interesting is that the areas of stress in debt markets have been a little bit country specific and it seems to be quite focused on a particular part of the yield curve. I I think the underlying dynamics where we're seeing steeper steeper yield curves, rising term premium in bond markets, that all looks to me that it's quite consistent with the uh with a concern around debt, a concern around fiscal dominance, a concern around fiscal inflation risks. coming back to the four in a in a way that we just were safe to ignore all of that for the last 20 years prior to the kind of COVID pandemic. And I mean you me mentioned the conversations with investors and you know a big talking point in relation to this regime shift has been you know the end of the 6040 or or certainly a question around the role of bonds and portfolios. Obviously from a fixed income perspective, yields are higher than they were in the old regime, which makes them more interesting. But as you say, if we're into a sticky inflation world and if we're into a world where if they cut rates and yields tick higher, then duration doesn't serve its uh same role as in the past. So I mean from a asset allocation perspective, what are you suggesting then in relation to how to use fixed income uh in multiasset portfolios? >> Yes. So you're you're you're right. Dur duration doesn't play maybe the same role that it did all always. I mean maybe investors were a bit spoiled dur during the 2010s 2000s because diversification was was was reliable and cheap uh and and easy to access highly liquid at at the same time. So maybe we have to work a little bit harder for that now. Now, now that's not to say that there's not things to do in bonds. I mean, one of the um markets that we've been actually quite interested in has been the UK guilt market. Not because the public finances or or or the productivity story, but but because the fiscal premium is is looks really outsized, the term premium looks looks really outsized relative to what we normally expect. So there's a sort of sometimes there can be a carry argument or like a valuation anomaly argument for parts of the bond market on like a tactical basis almost even in this environment of tricky fiscal dominance uh tricky macro uh situation and supply shocks. But I think in general uh what I would say Alan is is the idea of diversifying the diversifiers working a little bit harder to try and find risk mitigation or or portfolio resilience is is probably the way that I I would try and approach that. I mean one thing that stands out in our investment outlook is is is the is the case for hedge funds or um sort of uh alternative investment strategies because when you look at the performance of hedge funds in phases like the 80s or the '9s sort of the era of global macro investing um in in in some respects much stronger uh return profile and a really important contribution for overall risk return at the portfolio. level and and then you have this kind of fow period where many hedge fund strategies macro multi strategy found it a lot more difficult when you're in the monetary policy on steroids era low inflation era. So if things are reverting back to the to to a regime similar maybe to the 90s with a little bit of 1960s mixed in as we were joking earlier then then some of those areas in the in the hedge fund space look look look interesting look interesting too. I mean the other idea I'm not sure how you're going to react to to this one is a lot of our work does point to emerging markets really growing up. Um so in the investment outlook um I make the the the joke that it's like dirty Harry. Do do you feel lucky because emerging markets have been lucky in uh 2025 with the with the dollar move but they've also been good. So it's not just luck it's also self-made self-made luck if you like because the macro reforms the financial reforms seem to be really having a big effect. And if we look at bond markets, emerging market bonds, even including the currency, are lower volatility than developed market bonds. Now, we see a similar pattern in equity markets as well. In fact, some of the allegedly most risky equity markets like frontier markets seem to have lower volatility than Msei World or European or the rest of emerging markets. So there's something going on in uh like a diversification on a country bycountry basis within the EM indexes which seems to provide much lower volatility than we might conventionally assume. That's not to say they're necessarily hedging tools, but when we're look when we're a little bit starved of our old reliable workhorse, reliable diversifiers, and we're having to look in different directions, I think it does require a little bit more of an open mind to think about different parts of fixed income, different parts of alternatives, especially something like like hedge funds, maybe private markets, too. and and even emerging markets which stereotypically is the gung-ho beta bet can can maybe play a role as well particularly if the economic cycles are a little bit desynchronized. >> Yeah. And is that as you say index composition kind of sector exposure? Are you getting more financials, more commodities and emerging markets, less tech presumably? Is that the less volatility? Um I mean the great question always used to be will we get emerging markets genuinely decoupling? I mean if we have a a major economic downturn or an equity downturn in the US which generally drags down the rest of the world will I mean immune would be a strong word but can can emerging markets decouple in a scenario like that do you think? Well, the um the spillovers, the sensitivity to the macro cycle does does look like it's it's it's less than than we might stereotypically or historically have seen. Um and that comes through in a lot of the work that we've done. Uh it also comes through in the recent IMF world economic outlook. Um they've been writing and looking at it as well. So the kind of draw downs in GDP, the the the the damage to um uh risk markets does seem to be a little bit less than than than maybe the old approach would suggest. And of course, a lot of that is really connected to maybe more developed and uh improved reformed uh economies, financial sectors, a much deeper domestic investor base as well. So you don't end up with this classic stereotypical emerging market doom loop. The Fed hikes rates, capital rushes away and it tightens financial conditions within emerging markets. They have a little bit more self-determination than I think what we what we saw in the past. The other remarkable thing is that even within the emerging markets complex, you end up seeing quite idiosyncratic things going on uh within the index or across the region. So China versus India is is is the best example maybe quite salient for everybody listening as as well. India has had a a poor year for performance in the stock market in in 2025 after multiple gang buster very strong years and and China is the big winner in 2025. Now historically this idea that India and China can have slightly mirror image performance that that that's that's very strange. If you look back during the 2010s, look back even further, the historic tendency is for those indexes to be highly correlated. And so this goes back maybe to a little bit of what's going on domestically, uh, but also what's going on domestically in terms of the behavior of investors and also how foreigners are accessing emerging markets as as well. If everybody's just buying global emerging market funds or brick funds, uh then then there is a forced correlation with those those markets. If instead there's a there's greater access awareness of country specific themes, greater access to country specific funds, then that can be a source of differentiation and diversification within the EM index which which almost supports this idea of recognizing that you know economic policy, the stage of the cycle, the the structure of the economy in India or in South Asia is very different to what you see in China and and North Asia. um and and and and so some of those differences can really kind of come through in what we're seeing uh in index performance and I think that becomes more and more important actually rather than being just a a short-term blip I think it sustains because a lot of the um uh uh policy in innovation or idiosyncratic measures that that different countries may take in in terms of their economic or foreign policy that seems to be a direct consequence of the geopolitical environment that we found ourselves in. um the multipolar world as as as I call it and others call it that that tends to that seems to create a situation where you can have uh uh greater differences policy experimentation in different parts of the world and that might mean like you say that you end up with a slightly different dynamics depending on where you are in in emerging markets not just reflecting sector composition but also reflecting like a country effect uh as as as well. >> Interesting. Yeah. I mean you touched on the tailwind for EM for the US dollar. I mean the dollar has been an interesting story this year. Obviously start of the year people expected a stronger dollar on tariffs. We got to tariffs then we had a weaker dollar then there was a widespread pessimism about the outlook for the dollar and we've had quite mixed performance since then. I mean if you look at the euro it had a jump up but it's kind of been stuck at 115 116 maybe for what six months now. Dollar yen on the other hand has kind of been moving higher of late in Asia mixed. Yeah, Renimi was a bit stronger, kind of not doing anything too dramatic, but everybody had that chart in their reports at one point showing the, you know, the worst start for the dollar for the year ever, you know, and I haven't seen it for a few weeks now because obviously that story has has quietened down, but it seems like that extreme bearishness has has paused for the moment, but I mean, where where are you on a multi-year basis? Yeah, I I mean like you say the uh cadence of the dollar has been quite different since the summer uh versus what we saw in the in in the first part part of the year. So maybe the first part of year is that very clear um rapid decline in the in the dollar versus everything that that's the the debasement trade or the US exceptionalism reversing a story very clearly and it and it's fizzled out hasn't it in in markets do the dollar depreciation that we that we have seen since the early part of the summer seems to be more about the cycle seems to be more about the Fed and and and then as you mentioned Alan we've we've we've had a bit of a reversal going on more recently. We still find that the dollar is is is quite overvalued versus most currencies. 15 to 20% overvaluation on our equilibrium um currency modeling now. I mean, you know, you have to be a bit careful about valuation analysis when it comes to currencies. You might be okay with bonds and stocks, but with currencies, you have to be a little bit careful. But I do think it works at extremes. Um so the question is whether or not that 15 to 20% uh um misvaluation overvaluation is is is enough to kind of trigger the the valuation elastic into coming coming back together. The the one reason why it it might be is that policy does seem to be focused again on delivering a a weaker dollar. That seems to be the message from Treasury Secretary Besson. That seems to be something that the Fed is wanting to support. It seems to be aligned with that sort of rebalancing adjustment on trade balances and and and maybe supporting some of the the big the big tech export uh um side as as well and and some of the themes that I mentioned around growth coming together. Um if the bad luck that's uh hampered European economic performance in recent years is is is is easing um then European economic recovery, German fiscal support. Chinese growth as we talked about looks like it can be resilient and strong around 5% uh give give or take. then this idea of of maybe some re-equilibiberation of growth around the world that can also support a a weaker a weaker dollar. So I I mean our scenario is to expect it to be a little bit higgled piggledy from here. Um but but to position for a modestly weaker dollar in 2026 that can still then obviously be a help for emerging markets and and ei capital flows downhill some support in terms of financial conditions for rest of the world asset asset classes but it's not quite the sort of dramatic the end of dollar dominance I idea um that was quite popular among um polite discussion circles of economists earlier in the year. The what the one idea that we've had which I I can't quite um be be certain of at this juncture is how the dollar performs under a growth uh uh uh problem scenario because historically we're used to to not just a a um multi-deade dollar bull market but we've also had this kind of risk mitigation property of the dollar. uh some sometimes people call it the dollar smile. So you get a a positive return for the dollar in a in a riskoff a positive return for the dollar in a situation where US growth is outperforming the rest of the world. And it's just that middle bit where uh the dollar is weaker which kind of supports rest of world economic and and market performance. The question in my mind is what's happened to that left hand part of the dollar smile? Has it become more of a of a sort of a smirk? um and and and that could be then uh something to to to watch and and and think about. It brings us back again to this idea of where the true risk mitigators and diversifiers are uh uh today. So, they're the things that we've been thinking about, but yeah, we're in the camp of multi-year dollar weakness. I think you got to be kind of realistic about the the rhythm of that and and the extent it it can play out in. But the the key thing is that policy seems to be lining up behind a valuation signal. And I think I think that's a a reasonable basis then to give some support to some of the investment themes in emerging markets and and in outside of the US markets as well. >> Yeah. I mean you mentioned policy. I mean, um, part of the theme earlier in the year was maybe policy credibility and and obviously we've had, um, attacks on the Fed and and suggestions, you know, that we'll see a less independent Fed and, you know, we're getting into the end of the year, so the time frame on how all of this plays out is getting a bit closer in terms of, you know, likely replacement for for J Pal. So, any thoughts on on that? who you know any who's your personal favorite or who do you think the most likely replacement is and you know there's two schools of thought one is this is going to be highly significant the second one is not going to be that significant as one one person one voice at the table what what do you think in terms of the significance yeah I think I mean I it's exciting isn't it these for central bank watchers these things are always interesting to to follow I'm a bit of a nerd Alan when it comes to tracking central bank speeches. Um a and I think like many economists we have been um in in the market there's been un there's been a significant attention to the presentations of Waller uh alongside the other core FOMC members over the last sort of six months I would say in particular um and those speeches are always very thoughtful and interesting. So, so always interesting to read. Um, the other candidates that have been discussed are little bit more maybe unknown to to to investors or or al orthough all very high profile in in their own in their own rights as as as well. How much of an effect can it have in 2026? I mean, it might be worth one cut if you get a particularly dovish uh uh Fed chair. Our our scenario isn't so far away from where the market is. something like three and a half% Fed funds by the end of 2026 would seem reasonable. So sort of two or three cuts, but I I I find it hard to see that it's um going to decisively pivot everything on on a dime. Like you mentioned, it's it's one vote in a um in in a system where dissent and disagreement is is increasingly something that investors expect and look for in in in in the minutes. So, I think it could be worth a little bit of e extra easing at the margin if you get a particularly doubbish um leader um chair at the Fed, but but not sure that it completely decisively change every changes everything in 2026. I mean, central banks we know are an arm of government. this idea that economists had that they were just independent technocrats um like a monetary policy council or a fiscal council as if they can ever be completely fully technocratic and and independent. It it was always something of a non-starter from my perspective. But you still have a situation where there is operational independence which is of course the critical uh um part of the the story to deliver good growth and and inflation outcomes. I mean the other thing I' I'd mention is that the economists don't really know that know too too much about populism and how populism plays out. But the playbook that we have from Latin America um and and and other economies does always point to a idea around some challenges and growth and this idea that institutions are you know under scrutiny. Um and so to a degree what we've seen in in in 2025 isn't really that surprising. It's it's very much a sort of a a classic a classic playbook. Um, I think where it leaves us is reinforcing this idea that 2% on inflation is more of a flaw now than than than a ceiling. It doesn't have to be particularly we don't have to be particularly shrill in the inflation scenario that we we might want to assume. But just to sort of reinforce that idea that stickiness and spikiness are probably good by by words, good adjectives to describe the inflation process now, which is a marked difference relative to what we've become used to and and and the environment that we've grown up in as investors. Yeah, I mean absolutely the the the one asset that maybe has reflected all of these kind of themes this year has been gold. I mean it's an asset that polarizes strategists and economists and asset allocators. Some people love it, some people have zero. I mean in your model portfolios, is there a place for gold and how much? >> Yeah. Um we've been big fans of gold, Alan, so we got that one right. Um and so that that's been an important an an important theme um both in terms of it being in strategic allocations as as as an as an extra uh layer and an element um but also to reflect the fact that you know we we had some concerns around um dollar dynamics and and what might happen and we'd seen in some of our analysis looking at central bank and and sovereign investor uh uh positioning you can you can see that movement more toward uh uh gold and some diversification to to other currencies as well. So across a lot of the um metrics that we've been tracking um across a lot of the discussions that we've been having with investors I've been having with investors around the world it's really come up as a kind of key theme and as you say it's probably the clearest example of of of some of those ideas really coming into markets and play and playing out strongly. The other one I' I' I'd suggest is the stock bond correlation because that stock bond correlation has has really really shifted um materially. Uh obviously depends a little bit how you measure it, what the look back period is, what kind of time horizon you're looking at, but it's another reminder that um you know stock one correlations moving into positive territory. That's telling us something about how many investors are thinking about about inflation. the the co-movement of those asset classes is really reinforcing that dynamic that you've seen behind the gold price action, the debasement trade as it's been as it's been talked about and it's a remarkable um it's a remarkable situation. Of course, all of that's happened at the same time. The stock market's been you bull market all over the place. So quite interesting uh set of um co- movements correlations in in in parts of asset markets. >> We touched on how you you know speak to lots of investors. So that gives you a good you know vantage point around sentiment and where people people's minds are. I mean do you think generally very hard to kind of broadbrush statements but do you see a generally pro- risk positively positioned investor base that you speak to or cash levels a bit higher? Is that going to be a positive or would you say people are overextended or neutral or how would you categorize positioning from from your vantage point? Yeah, I mean I think it depends a little bit sector to sector, investor type to investor type, but there does seem to be a bit of a a nervous equilibrium um a fragile equilibrium maybe to to the outlook because this idea that we we talked about where uh the economists have been thinking about the the K-shaped economy. What happens next? Does the top end of the K move higher still? Does the bottom of the K fall away or could it catch up a little bit? Many questions about how the economic system is going to play out. I think many investors are worried or focused on an idea of of of a sustained big AI bubble dynamic. also fearful at the same time in the same conversation without skipping a beat in the articulation of their thoughts about the slowdown in the labor market data and whether or not the US economy is is hitting some sort of stall speed that then affects what goes on elsewhere. So there's some dissonance uh and um an anxiety in in a in a situation which is pretty radically uncertain really. So a lot of what we see uh with positioning maybe thinking about something that is still modestly pro- risk is tentative is tentative and as you say cash positions and a heightened awareness to news and sensitivity to sort of sticker shock or or market dynamics. I think that's that that's all very much part embedded in the conversation and this is why some of the dynamics that we've been seeing with AI volatility for example tech volatility is really interesting tracking some of the technicals how that's going to play out is is it is it going to um evolve into a much a much bigger story that there's clearly a lot of nervousness uh among the investors that that I talk to but also a recognition that you know while the growth cycle looks okay. Um, you know, investors mostly want to stay invested um and and and look for maybe different sectors, different geographies to to express their view maybe with a little bit less valuation risk. So thinking about Asia tech rather than US tech for example could be could be an interesting looking at neglected equity markets in in in Europe. thinking about the highest quality parts of private credit um uh rather than a generic allocation focus on direct lending looking at new ways to hedge portfolios. We talked about hedge funds that that comes up that comes up a lot with um uh investors who are kind of thinking about that asset class in their investable universe. So certainly a um a an acknowledgment of different scenarios and recognition that a lot can a lot can potentially happen. A and the kind of unique situation that we're in today where you know if macro trends lurch to the downside or to the upside, it would have big effects on portfolios and big effects on markets. And at the same time, it almost because it's part of the conversation and the discussion, it almost wouldn't be that much of a surprise. Quite quite interesting. >> I know I know you publish on capital market assumptions and we've talked a lot about kind of the view this year, next year. I mean, taken more of a kind of a multi-year as you say, we're perspective, we're in a new regime, valuations are high. I mean on a 5 to 10 year view you know I hear I guess you hear from a lot of people expect lower returns in equities or US equities look for opportunities elsewhere. Is that your thinking? I mean you you sound positive on EM. Is that the the the core I suppose high conviction view or anything that you would particularly highlight if you're constructing a kind of a a portfolio from a 5 to 10 year perspective as opposed to the for the here and now? >> Yeah, thank thanks Ellen. I mean this is a really big part of the work that we do is something of a passion project for me as well. I must I must confess we have higher cash rates because of the sticky inflation on a multi-year time frame. So rate cuts in the very near term but a higher sort of resting rate for rate for cash rates. And one of the things that that does is then play out right through the asset spectrum into bonds and credits and equities and elsewhere. Um, importantly, it means that while equity returns still look okay in nominal terms, the the reward, the equity risk premium, the for taking equity risk is is is is a lot more skinny than um maybe we would expect. We we have a equity risk premium in the US starting with a two now, which is unusual. I mean, we got down to a zero in the com mania. So you can see the sort of valuation adjustment is um you know could could could still continue but normally we'd want to see 4% equity risk premium four and a bit percent equity risk premium where we do see high returns very much in the EM space um which is coming from uh asset risk premier being a bit more elevated um cash rates are in some instances um uh u you know decent as as well and then also the currency element which I think is a is a big part. When we think about the long run work, we're often thinking about whether or not the spot currency is going to outperform the forward rather than necessarily making a a bold view. But the currency element does seem to be a big part of the story. Virtually all of the emerging market currencies that we we study in our work are showing u material under valvaluation versus versus the dollar. And on a medium-term view, I think I think those valuation rules of thumb are probably a decent guide. And then there's a number of areas in in the alternative area which which I think look look interesting for like return enhancement. So we might look at something like direct lending still some safer parts of private credit. Private equity has been a bit neglected um but but there seems to be uh an improvement in terms of the um uh private equity market in general. Returns still look okay. It's quite aligned with some of the broadening out um uh uh type of idea in the buyout private equity space and that's how we we we model it as as well thinking about it as a derivative on um different parts different factors in the in the equity market. So that's kind of interesting too. Um and then at the sort of lower lower risk end we see some of the phenomenon that we mentioned at the start. Credit spreads at multi-deade lows. In some instances, we've seen credits trading through government paper. Uh we've got higher risk premium on on bond markets because an expectation that some of those fiscal risks are going to come through. So it it is very much a case of thinking quite hard about how you position that safety part of the portfolio which is why some of these other areas of asset markets thinking about maybe um Asia credits or emerging market credits or hedge funds or infrastructure uh come into that sort of uh safety part of the portfolio very much similar to what what we what we talked about moving or making the argument that uh moving to a or highly uncertain complex macro environment, a multipolar world if you like, kind of means you got to move to a multipolar portfolio as well. Um, and and think about um building portfolio resilience with a number of different asset classes to try and bake in some of that all weather type characteristic which which we want to we want to harness in our multiasset portfolios. >> Very good. Just conscious of time. We're just up to the hour and we do like to ask our guests um for any advice they might have for people who are interested in macro or getting better at macro or things you've read. OB you mentioned Michael Lewis's book which I haven't read so that's I made a note of that one to go and look at but um anything else that you've read that's been highly influential in your career or advice you've got and things you'd pass on to people. >> Yeah, I mean I am a big sucker for books. Um Alan, I read recently just finished um Breakneck by by Dan Wang, which is all about the Chinese economic miracle. Um and and Dan Wang is quite a um well well-known um analyst writer on on on China. That's a that's a terrific book. I'm not really surprised to um hear that it's one of the top nominations for economics book of the year. It's certainly the best new economics book that I've read this year. and he goes through some key aspects of China regional development and China macroeconomic development, thinking about technology, thinking about how they've set up some of the manufacturing uh success stories, but also thinking about um some of the other areas of re recent history, the zero COVID policy for example. So that's fascinating if you're interested in China macro. I suppose you know historically it's it's maybe a lot of books that you know things like um market wizards which I always recommend to our graduate cohort. I mean I I love I love that book. On the economics side there's a terrific book by uh Danny Rodrik at Harvard called Economics Rules which looks at how you can apply economic models to thinking about the world. This sort of is like the idea of of the stock market being the market in ideas that that that I mentioned at the start. So Rodri kind of goes through all of the different schools of economic thoughts and shows you how how all of the models are relevant. You've just got to pick the right model at the right time. So I really enjoy enjoy stuff like that and often that's quite a nice book for people who are maybe coming from an economics background to start thinking about how to apply some of those ideas to the real world. But yeah, big sucker for books, big sucker for Substack as well, Alan. So, always following your Substack. >> Good stuff. Good, good to know there's some readers out there. >> Great. Well, listen, Joe, appreciate you coming on today. It's been uh great to get get your thoughts on everything from global markets to global asset allocation. And obviously listeners can follow your work. I'm sure um they can find you pretty active on LinkedIn and social media. and you uh uh kindly also share a lot of your HSBC publications on those uh platforms too. So, so keep an eye out for Joe's work uh because obviously it's a very macro uh driven world we live in today. But from all of us here in Top Traders Unplugged, stay tuned and we'll be back again soon with more content. Thanks for listening to Top Traders Unplugged. If you feel you learned something of value from today's episode, the best way to stay updated is to go on over to iTunes and subscribe to the show so that you'll be sure to get all the new episodes as they're released. We have some amazing guests lined up for you. And to ensure our show continues to grow, please leave us an honest rating and review in iTunes. It only takes a minute and it's the best way to show us you love the podcast. We'll see you next time on Top Traders Unplugged.
AI Booms, Fiscal Strains and the New Macro Regime | Allocator | Ep.32
Summary
Transcript
rates and cutting rates. Boss long bond is Mr. Haven. It keeps going higher. So I mean Greenspan and Bernanki called it the the bond yield conundrum. I've been calling it the reverse conundrum today because everything seems to be the other way round. So I think the underlying dynamics where we're seeing steeper steeper yield curves, rising term premium in bond markets, that all looks to me that it's quite consistent with the uh with a concern around debt, a concern around fiscal dominance, a concern around fiscal inflation risks. coming back to the four in a in a way that we just were safe to ignore all of that for the last 20 years prior to the kind of COVID pandemic. Imagine spending an hour with the world's greatest traders. Imagine learning from their experiences, their successes, and their failures. Imagine no more. Welcome to Top Traders Unplugged, the place where you can learn from the best hedge fund managers in the world, so you can take your manager due diligence or investment career to the next level. Before we begin today's conversation, remember to keep two things in mind. All the discussion we will have about investment performance is about the past and past performance does not guarantee or even infer anything about future performance. Also understand that there's a significant risk of financial loss with all investment strategies and you need to request and understand the specific risks from the investment manager about their product before you make investment decisions. Here's your host, veteran hedge fund manager Neils Krop Len. Welcome or welcome back to another conversation in our series of episodes that focuses on markets and investing from a global macro perspective. This is a series that I not only find incredibly interesting as well as intellectually challenging, but also very important given where we are in the global economy and the geopolitical cycle. We want to dig deep into the minds of some of the most prominent experts to help us better understand what this new global macrodriven world may look like. We want to explore their perspectives on a host of game-changing issues and hopefully dig out nuances in their work through meaningful conversations. Please enjoy today's episode hosted by Alan Dunn. Thanks for that introduction, Neils. Today I'm delighted to be joined by Joe Little. Joe is global chief strategist at HSBC asset management. He leads the firm's macro and multi-asset research, sets the house view on global markets and long-term asset allocation, and is the author of HSB Fleet C's flagship, House View. He's been at the firm for a number of years, and before that was a an economist at JP Morgan and a global macro PM. Joe, how are you? Great to see you. Great to have you on TTU. Thanks a lot, Alan. Great to see you. Thanks a lot for having me. I'm a longtime listener, first time caller to the show. So, it's great to be on. >> Great. No, delighted to have you on and looking forward to hearing everything you have to say about global markets and asset allocation and all you're hearing from your investors as well. I know you speak to a lot of different clients in Asia in particular and do a lot of travel. So, very much will look forward to hearing all of that. We do like to start off by getting a sense on how people got into markets and economics in the first place. So what got you involved uh back in the day? >> Yeah, if some time ago now I I mean I studied economics, Alan, so I guess that was that was where I I sort of started thinking about macro trends, maybe becoming aware of financial markets, but I always thought I'd go into some sort of policy role being a a a SPAD or some sort of special adviser working at the Bank of England or something like this. And it was a bit of a happy accident in the end. I stumbled into a great role at at JP Morgan uh in in London. Um working with some terrific um people in the equity research, equity strategy team, macroeconomic team. Uh and I love that combination of macro and thinking about in investment markets. So I had this um yeah I had this idea that markets were markets in ideas and you could have this laboratory for um testing your theories about the world battle them out in the domain of of investment markets and then like you said I I sort of spent this time as sellside economist then I was a portfolio manager for a little bit these days I'm a buyside strategist but I've always worked in macro um and and asset allocation and today in my my current role at HSBCs and management like you said >> and in that roles you said the house view and you write a lot of um thematic material I guess in terms of how the macro regime is evolving etc. Um I mean day-to-day does that what does that look like? I guess speaking to a lot of different types of investors. Is that it? >> Yes. So we're a global asset manager. We manage uh $850 billion over 20 locations worldwide. My my responsibilities sort of divide into three different zones. Firstly working a lot with the research analysts and portfolio managers um in the UK and then around the world in our in our different manufacturing centers helping them with uh decision support. We often call it investment decision support you know macro perspective on events helping think about um alpha signals or or making them aware of some of those macro risks. Um, and then like you say, a big part of what I do is traveling um to see investors in in different locations, talking to the media, getting to do podcasts. We call it thought leadership, which is quite a grand title, isn't it? I do my best to live up to that label. And and then the third part I do is um helping my boss, the global CIO, uh coordinate and look after the the global investment platform. So sort of variety of management and leadership responsibilities that that go that go with that. So it's pretty varied actually. I get to do a lot of very different things and meet a lot of very interesting people. >> Very good. Um well I mean you we we mentioned kind of your work on kind of thematics and kind of the big picture. So probably the obvious place to start. I mean most people myself included you know reading your work we're all in this view that the the macro regime has shifted somewhat in the last number of years versus the previous decade. So maybe just to give us a sense on you know what do you think are the most important elements of that regime shift and the the the aspects that are most pertinent to to the investment uh culture today? >> Yeah, I mean that that's a great question to to start with. I I think it's helpful to think about where we've come from and then where we are in and maybe moving moving towards because I I draw a big distinction between the environment that we found ourselves in in the post financial crisis world versus where we are to today and it maybe even predates the financial crisis to a certain extent. But the the environment of the 2010s was was very much one of um flexible supply and and demand as the key uh driver of pertabbations volatility in the macro cycle. So we sort of ended up in good growth or bad growth environments depending on how events were playing out. But all of the while it was low inflation, deflation, not inflation as the primary sort of side of of the probability distribution that we were worried about as regards inflation. And the reason that that environment came about is is is because supply was abundant. Geopolitical situation was very stable. We're uh coming to the end of the phase of hyper globalization but still in a very globally connected uh extended supply chain situation. demographics was very favorable in terms of the um uh integration of the uh global economy uh as well. And of course tech big part of the story. And now if we contrast that with with where we're sort of moving to and and maybe heading towards at least three of those following winds which kept inflation low and kept the growth environment strong are are becoming more headwinds. So tailwinds to to headwinds particularly around the tricky situation in in geopolitics and global economic fragmentation particularly around uh what's going on more broadly in globalization as that shifts to regionalization something particularly we're seeing in the Asia uh trade data especially but is also a a phenomenon elsewhere uh and also demographics shifting um as working age populations decline everybody is concerned about Japanification all of a sudden. So that means that there's a heavy burden weighing on tech and to kind of keep this benign growth inflation mixed over the last 20 or 30 years back still on the road. My worry is that we've entered an environment where supply shocks are a much more dominant source of economic fluctuations. And what happens with that Alan is as you know is you get not just growth volatility but also uncertainty uh stickiness and and spikiness in the inflation regime as well. And that has profound consequences for how we want to think about asset allocation. >> Yeah, it's interesting. I mean I definitely um kind of very much hear all of those points and you know when when we came out of co and then the war in Ukraine these were themes you very much he heard from policy makers as well um even central bankers talking about the supply constrained world now against that obviously inflation has come down obviously it's still a little bit above target um when you can you would you say you can see all of these elements in the data now or are these more things that you will will continue to influence the trajectory of inflation o over time. >> Yeah. I mean, cyclally, we've seen some stickiness in in inflation, haven't we? If you look at the data in particular for uh Australia or the UK or or the US, the sort of those Anglo-Saxon economies, if we can call them that, inflation does seem to have got a bit stuck. Um, I mean, if you asked if you asked to guess what the inflation target was for those central banks just by looking at the inflation dates, you'd guess 3%. You you wouldn't guess guess two. And and I guess the environment that I'm envisaging is is is not something that's particularly dramatic in terms of really decisively changing the inflation trend. It's more of a nuance. So what I would say is that the 2% inflation which had been a bit of a a peak during the 2010s, central bankers were struggling to get to 2% inflation, serial undershooters of the inflation target. That becomes more of a flaw in the way that I would think about it now. It it means it's a bit subtle. It's it's it's a it's a nuance rather than, you know, something more dramatic suggesting that it's going back to the ' 70s. That would not be the way that I would want to characterize the the situation. And I think you are seeing elements of of that playing out in in the data. Um we have had a little bit of a puzzle I think for many economists this year about why the tariffs in the US are not playing out more obviously in the in in the key CPI readings. I wonder if actually what's going on there is a little bit of a delayed effect that could come through in 2026. Um some of the economic research that that we've been quite persuaded by suggests that most of the tariffs about 2/3 have been affecting uh profit margins and about onethird has been passed through into the inflation data. Now as policy uncertainty slips away tariff uncertainty falls away. All of these economic policy uncertainty measures are are dropping quite quickly now. Firms might regain a little bit more confidence, bit more pricing power and suddenly we see a bit of a delayed kickon in terms of how tariffs are playing out. So, I I think it can be a a a near-term theme, a 2026 theme, particularly with policy impulse positive in 2026. I I like the way that you phrased it at the start because it is as much as anything the way that we want to try and understand the economic regime as being one of sticky and spiky inflation. And and that's quite different to what we've experienced in the past. And I guess we're going to talk about it, but it has big effects in terms of thinking about bonds and currencies and stocks and all the asset allocation decisions as well. >> Sure. Well, as it is kind of we are recording at the end of November. It'll be out in early December. It is the time of year where everybody every strategist on the street has their 2026 outlook. Um now you did talk about positive policy impulse. So that maybe suggests that you do see some positivity coming where um you know we we've had from the data we've seen obviously the the data is very patchy at the moment the general sense is labor market weakening in the US and some downside risks to growth but looking ahead it sounds like you're a little bit more upbeat on the outlook is that fair to say >> yeah we we're still taking a moderately pro- risk allocation in in how we're building uh portfolios and a lot of that is connected to a a sense that the most likely outcome is is a bit of a muddle through um policy impulse is is positive next year. We've got Fed cuts, not lots, and I think they're going to be uh constrained a little bit by this sticky in inflation backdrop, but but still a a cutting environment. Tariff policy uncertainty is falling. The fiscal story and what's going on in the industrial policy side, a really big boost to growth. So I think a lot of people have looked at the AI boom, what's going on there, but it's all the derivative sectors as well where you're seeing a big investment boom and all of that is important. I I guess what's different versus maybe what we've become used to is how a faster cadence of growth might begin to generate inflation pressures a little bit faster than many analysts are are expecting. So we um that's how we're we're sort of thinking about it in in the in the central scenario. Um what I would expect alongside that is that growth comes together a bit more globally. So the US exceptionalism idea has been this story that US growth has been the big relative winner. Markets of course going with that too. But as we look at the GDP um scenarios for 2026 and also think about consensus around around profit expectations as well there there is a sense that those expectations seem to be a little bit more globally aligned Europe, China picking up um uh much more US relative advantage slipping away a a little bit and that's quite important because it speaks to something that we've been positioned for and thinking about in investment portfolios which is this broadening out of stock market behavior. So yeah, reasonably constructive in terms of our core scenario. I mean, we run a few different scenarios. Of course, we can talk about the risks, but the core scenario is one where we think that policy impulse is important. Little bit of a an inflation challenge, cyclical inflation challenge that comes along alongside that. But but this idea of a broadening out of market performance can mean that there's still quite a lot for investors to look at and think about in 2026. And obviously, you know, from a markets perspective, but it's not, you know, it's not um totally removed from from the economy. It's been an important driver of the economy as well has been AI and AI spend. Um and more recently we've had some I guess uh reassessment of the merit of that the the amount of spending and and the return that ultimately will be acred and and um you know the you know also from a I guess from an earnings perspective future um questions on on I suppose the durability of those uh revenues. Well, yeah, you know, from an economic perspective, how do you see this? Um, and also from a market perspective, some people draw the parallels with the mid 90s that that that that was a different era that was in the old regime. Do you see that that kind of parallel or is that um from at least from an economic valuation or an equity valuation perspective? >> Yeah, it's a it's a great question. I I was asked the other day which um year the current uh um situation is is is most like. I thought it was a really fun interesting game to play because there's so many parallels with the '9s. I was rereading the old book of Michael Lewis, the new new thing. I don't know if you've read that one, but he he chronicles the the dot story in in typical Michael Lewis fashion. It's it's it's a great read and and going through that now, you can sort of see the similarities between between that era. um the economists writing about indogenous growth, productivity story, all of the investment excitement around the the dotcom mania as well. So there's a lot of parallels with the uh late late '9s. I mean I think the big difference is around market valuation. Maybe the difference also around what we see uh in in terms of the the broad global growth environment, the economic the trade environment and and this notion that I mentioned at the start where the way that I would characterize the system is with a little bit more volatility, uncertainty, uh uh shock behavior coming from the supply side of of of the macro system as well. So in in in a way you've got this slightly strange blend where some parts of the economy are looking a bit like the '9s, other parts maybe bit more like the 60s. Um and economists have talked a little bit about the K-shaped economy all year where you have this lopsided nature to growth. Some sectors really doing very well and winning, other sectors struggling a a lot more. So I I think that's a kind of a nice way to to think about it. In the very near term, I' I'd certainly see the AI theme as as as a big investment boom. We can see that very clearly in the economic data. The excitement around data centers, the spend on data centers is overtaking more conventional forms of of investment. First half of the year, the US economy, all of the growth pretty much is explained by uh data center, software, IT, tech in investment. So there's very clear sort of uh um shovels in the ground investment going on. Then the sort of economic question is how long does it take before the supply side starts to react to all of that in a more positive way? Where's the productivity story? Is is that is that coming through in the data yet? A little bit, but maybe not quite in the really big way that that the tech optimists expect. And that's when you get the more disinflationary force. So 2026 still feels as if we're putting heat into the economy. It's going to create a little bit of cyclical inflation, but the question later is whether or not the AI theme is really a big positive supply shock. And of course, a lot of that is going to come back to the idea of how much labor it displaces as as as well. So there's an awful lot to think about. And and then in markets too, there's many dimensions around index concentration, relative performance in different countries to to to reflect on also. And I mean obviously we're talking very much from a US perspective in terms of the you know the impact of AI on on GDP and the the kind of the fiscal imple impulse. Um outside the US obviously Europe we've had the the loosening of the debt break in Germany and a bit more optimism on on on growth. I I I I was at an event. I saw um Isabelle Schnabble speaking last week or the week before saying she thought things look pretty stable in Europe and if anything upside risks to inflation and then obviously in China and Asia where you spend a lot of your time a different growth dynamic. know I mean maybe taking the Asian perspective China has been muddling through I guess uh do use your expression um how do you see China's growth trajectory and in the context of the overall emerging markets and Europe as well you know taking the kind of global perspective on growth and not just the US >> yeah I mean it's really interesting to to reflect on what's being go going on in in in Asia I mean in in the in the markets we've seen super strong performance in Asia and China in particular, but so much of that is coming from the rerating of the stock market and then the currency effect. Actually, not that much is coming from profits growth. Um it's it's the US where you've had the profits growth and then a little bit of rerating. But that combination um of the if you like the structure of the the return for investors in in in 2025 is it's a really interesting juxiposition. My my expectation in in in 2026 is that if if the if things keep keep going um and the show stays on the road, then then that's got to that that distinction has to address. It has to be more about macro fundamentals, profit fundamentals coming in to to make that performance of Asia stock markets, global stock markets sustainable. So we call it role reversal, Alan, in our investment outlook. It's kind of a you always want a jazzy name for the investment outlook. But the story in in China, I think, is consistent with that. I mean, growth trends look resilient in in in 2026. there's still this big focus around policy supports, not maybe um what we saw in the aftermath of the financial crisis, the the the the big bazooka uh approach to industrial policy, very targeted policy stimulus, including fiscal support for consumers, which is a a big I think change to maybe what we've seen in in recent recent years, last decade or or so. It's very clear in Asia that the trade environment remains a challenge. Um we've done some work looking at export share, import share of the Chinese economy and you can see how the trade destinations are are changing in the context of US trade policy, trade fragmentation, much more regional focus around trade now. So that pattern of a more diversified export market, much greater emphasis around regional trade integration and the Chinese industrial policy focused on developing a really competitive advanced manufacturing sector that they're sort of at the heart of it. We've just had the new 5-year plan. So that's kind of interesting because it puts fiscal policy on a pedestal. I mean maybe we've all uh learned this lesson because we we were in the west we were so absorbed with monetary policy as the only tool of macro stabilization for so long. Western policy makers seem to have kind of discovered the bigger focus which is dominant in Asia around industrial policy. But the China 5-year plan really emphasized tech innovation, scientific innovation. It emphasized economic rebalancing. So, a bit more of a focus on the consumer rather than just investment and and and the business. And we've got this funny phrase that you may have seen, anti-involution, which is very popular in in in Asia. Essentially, policies to address the big challenge around overcapacity, which is still a big problem uh for uh China. We're stuck in deflation. It's now the longest stretch of deflation since the Asia financial crisis, if if you believe it. Um, so that's an important element of the story to watch. But yeah, on balance growth looks pretty resilient. I think in in in 2026, we are expecting an exit from deflation gradually to play out as as we go into the early part of of 2026. And and then the the hope in connection to all of that is that fundamentals can do more of the heavy lifting in terms of driving market performance in in 2026 because there there's been a big reliance on on rerating and and currency to to drive the stock market uh this year. I mean, you touched on the markets a little bit, but I mean, bringing it together, it sounds like growth in the US, okay? You know, maybe a little bit of an impulse. China, okay. Um, you know, there's a lot of concern out there about AI, about the markets, but it seems like from an equity perspective, you're not overly concerned about how far things have gone and seems a reasonably positive perspective. I mean, I'm putting words in your mouth, but is is that how you see it? Yeah, I mean look, you're always in my line of work, you're always thinking about what can go wrong, where the risks might be. I mean, one of the biggest risks, of course, is price evaluations. Uh we we've we've had this big phase of of rerating in stock markets, credit spreads moving to um multi-deade multi-deade lows. Um really important to think hard not just about what's going on in the economic environment, but also in in terms of market market valuations there. in my philosophy, they're the sort of two key variables that are helping us understand what prospective returns in 2026, but even beyond there on a on a on a on a multi-year horizon might might look like. So that that sense around are we priced for perfection in in markets is is is is a big thing that that that I worry about. And I mean you mentioned some of the other things to to be to be concerned about if if growth sort of stalls out or if the AI trend really kicks on again and we get another phase of of US exceptionalism. But our central scenario is really looking for this idea that the stock market trends, investment trends can broaden out if growth comes together. There's a little bit more inflation. So we need to be sort of thoughtful about how we maybe diversify our diversifiers a little bit more. But but a case investment case that's quite strong particularly for EE and especially for emerging markets which is our kind of highest conviction view at this point looking looking ahead to 2026. We touched on the 1990s and parallels and obviously differences as well with respect to tariffs, trade environment etc. I mean the other glaring difference is debt and deficits. I mean if you go back to the mid late 1990s in the well in the late 1990s US ran a surplus I think by 2000. So I mean that's a massively different backdrop you know from a debt perspective but obviously we've seen you know some issues wobbles I guess in the UK bond market. We've had a a rerating of yields in in Europe. The US has been up and down around four and a quarter% since what about three and a half years now. So despite the kind of trajectory of debt levels in the US, the markets have been stable. Is this a risk? Is it something that heavily weighs in your mind when you're doing asset allocation or or how do you think about it? >> Yeah, for for sure. I mean, you're you're right. The contrast with with where we were in the '9s is remarkable, isn't it? I mean there were there was a intellectual debate about whether or not the treasury market should be sustained because the public finances were in such good situation. The argument was whether or not the treasury market should be sustained as part of providing global liquidity services to the rest of the world. Crazy when you think about the context of of today. What a what a huge difference. But yeah, look you're you're right Alan. I mean this has a a bearing because I think it it's an important economic mega trend me mega force to understand when we do longer run investment modeling thinking about debt like demographics or globalization these are really important trends to be on on on top of. Um but but in the here and now, you know, we're we're thinking if the growth cycle is going to falter, what could be the drivers of that? And there's the old joke among economists. Um it's it's not the funniest joke. I fear I might have set it up a bit too much now, but there's the joke that that the economic cycle doesn't doesn't die of of old age. It it gets murdered. And normally what economists are thinking is the central bank becoming very hawkish but the bond market can also play a really important part there as well. So I think one of the main areas um in terms of the mechanism where growth might falter and and again investors get very fearful about recession which is not our base case but the mechanism by which that plays out I think could be through the sort of so-called crowding out huge issuance of what's going of um credits by AI and tech and data center investors uh that could create pressure on on credit markets and raise cost of capital challenge financing right across the system. More equally in the context of the government um uh finances, public finances, debt ratios exploding. Do we see uh some challenge around a misbehavior of ultra long long-term government bonds? I mean so far that's been contained to Japan, Europe, and France in particular. quite a lot of discussions with investors in the UK around the budget, what might happen, what might happen there. And I think if we look at the the the part of the yield curve that's been most affected, it does seem to be the ultra bond rather than rather than 10 year. It's it's a 30-year sort of problem in the in the main. But one feature of markets that's been really interesting to me this year has h has been how the long-term bonds at the 10 or 30 year maturity have been either sticky or moving higher despite the fact that we've had rate cuts. I I I found that really interesting. We we've got a few charts on it in our chart pack for the in investment outlook. But it's another one of these stark differences versus the environment of the 2000s or the 2010s because it in that phase you had Greenspan or Bernani complaining that the long bond was just falling and falling and falling even when they were hiking rates and now you could see Powell or the new Fed chair next year um kind of making the opposite through through the looking glass argument. I'm I'm cutting rates. I'm cutting rates boss but the long bond is misbehaving. It keeps going higher. So I mean Greenspan and Bernanki called it the the bond yield conundrum. I've been calling it the reverse conundrum today because everything seems to be the other way round. So al although what's interesting is that the areas of stress in debt markets have been a little bit country specific and it seems to be quite focused on a particular part of the yield curve. I I think the underlying dynamics where we're seeing steeper steeper yield curves, rising term premium in bond markets, that all looks to me that it's quite consistent with the uh with a concern around debt, a concern around fiscal dominance, a concern around fiscal inflation risks. coming back to the four in a in a way that we just were safe to ignore all of that for the last 20 years prior to the kind of COVID pandemic. And I mean you me mentioned the conversations with investors and you know a big talking point in relation to this regime shift has been you know the end of the 6040 or or certainly a question around the role of bonds and portfolios. Obviously from a fixed income perspective, yields are higher than they were in the old regime, which makes them more interesting. But as you say, if we're into a sticky inflation world and if we're into a world where if they cut rates and yields tick higher, then duration doesn't serve its uh same role as in the past. So I mean from a asset allocation perspective, what are you suggesting then in relation to how to use fixed income uh in multiasset portfolios? >> Yes. So you're you're you're right. Dur duration doesn't play maybe the same role that it did all always. I mean maybe investors were a bit spoiled dur during the 2010s 2000s because diversification was was was reliable and cheap uh and and easy to access highly liquid at at the same time. So maybe we have to work a little bit harder for that now. Now, now that's not to say that there's not things to do in bonds. I mean, one of the um markets that we've been actually quite interested in has been the UK guilt market. Not because the public finances or or or the productivity story, but but because the fiscal premium is is looks really outsized, the term premium looks looks really outsized relative to what we normally expect. So there's a sort of sometimes there can be a carry argument or like a valuation anomaly argument for parts of the bond market on like a tactical basis almost even in this environment of tricky fiscal dominance uh tricky macro uh situation and supply shocks. But I think in general uh what I would say Alan is is the idea of diversifying the diversifiers working a little bit harder to try and find risk mitigation or or portfolio resilience is is probably the way that I I would try and approach that. I mean one thing that stands out in our investment outlook is is is the is the case for hedge funds or um sort of uh alternative investment strategies because when you look at the performance of hedge funds in phases like the 80s or the '9s sort of the era of global macro investing um in in in some respects much stronger uh return profile and a really important contribution for overall risk return at the portfolio. level and and then you have this kind of fow period where many hedge fund strategies macro multi strategy found it a lot more difficult when you're in the monetary policy on steroids era low inflation era. So if things are reverting back to the to to a regime similar maybe to the 90s with a little bit of 1960s mixed in as we were joking earlier then then some of those areas in the in the hedge fund space look look look interesting look interesting too. I mean the other idea I'm not sure how you're going to react to to this one is a lot of our work does point to emerging markets really growing up. Um so in the investment outlook um I make the the the joke that it's like dirty Harry. Do do you feel lucky because emerging markets have been lucky in uh 2025 with the with the dollar move but they've also been good. So it's not just luck it's also self-made self-made luck if you like because the macro reforms the financial reforms seem to be really having a big effect. And if we look at bond markets, emerging market bonds, even including the currency, are lower volatility than developed market bonds. Now, we see a similar pattern in equity markets as well. In fact, some of the allegedly most risky equity markets like frontier markets seem to have lower volatility than Msei World or European or the rest of emerging markets. So there's something going on in uh like a diversification on a country bycountry basis within the EM indexes which seems to provide much lower volatility than we might conventionally assume. That's not to say they're necessarily hedging tools, but when we're look when we're a little bit starved of our old reliable workhorse, reliable diversifiers, and we're having to look in different directions, I think it does require a little bit more of an open mind to think about different parts of fixed income, different parts of alternatives, especially something like like hedge funds, maybe private markets, too. and and even emerging markets which stereotypically is the gung-ho beta bet can can maybe play a role as well particularly if the economic cycles are a little bit desynchronized. >> Yeah. And is that as you say index composition kind of sector exposure? Are you getting more financials, more commodities and emerging markets, less tech presumably? Is that the less volatility? Um I mean the great question always used to be will we get emerging markets genuinely decoupling? I mean if we have a a major economic downturn or an equity downturn in the US which generally drags down the rest of the world will I mean immune would be a strong word but can can emerging markets decouple in a scenario like that do you think? Well, the um the spillovers, the sensitivity to the macro cycle does does look like it's it's it's less than than we might stereotypically or historically have seen. Um and that comes through in a lot of the work that we've done. Uh it also comes through in the recent IMF world economic outlook. Um they've been writing and looking at it as well. So the kind of draw downs in GDP, the the the the damage to um uh risk markets does seem to be a little bit less than than than maybe the old approach would suggest. And of course, a lot of that is really connected to maybe more developed and uh improved reformed uh economies, financial sectors, a much deeper domestic investor base as well. So you don't end up with this classic stereotypical emerging market doom loop. The Fed hikes rates, capital rushes away and it tightens financial conditions within emerging markets. They have a little bit more self-determination than I think what we what we saw in the past. The other remarkable thing is that even within the emerging markets complex, you end up seeing quite idiosyncratic things going on uh within the index or across the region. So China versus India is is is the best example maybe quite salient for everybody listening as as well. India has had a a poor year for performance in the stock market in in 2025 after multiple gang buster very strong years and and China is the big winner in 2025. Now historically this idea that India and China can have slightly mirror image performance that that that's that's very strange. If you look back during the 2010s, look back even further, the historic tendency is for those indexes to be highly correlated. And so this goes back maybe to a little bit of what's going on domestically, uh, but also what's going on domestically in terms of the behavior of investors and also how foreigners are accessing emerging markets as as well. If everybody's just buying global emerging market funds or brick funds, uh then then there is a forced correlation with those those markets. If instead there's a there's greater access awareness of country specific themes, greater access to country specific funds, then that can be a source of differentiation and diversification within the EM index which which almost supports this idea of recognizing that you know economic policy, the stage of the cycle, the the structure of the economy in India or in South Asia is very different to what you see in China and and North Asia. um and and and and so some of those differences can really kind of come through in what we're seeing uh in index performance and I think that becomes more and more important actually rather than being just a a short-term blip I think it sustains because a lot of the um uh uh policy in innovation or idiosyncratic measures that that different countries may take in in terms of their economic or foreign policy that seems to be a direct consequence of the geopolitical environment that we found ourselves in. um the multipolar world as as as I call it and others call it that that tends to that seems to create a situation where you can have uh uh greater differences policy experimentation in different parts of the world and that might mean like you say that you end up with a slightly different dynamics depending on where you are in in emerging markets not just reflecting sector composition but also reflecting like a country effect uh as as as well. >> Interesting. Yeah. I mean you touched on the tailwind for EM for the US dollar. I mean the dollar has been an interesting story this year. Obviously start of the year people expected a stronger dollar on tariffs. We got to tariffs then we had a weaker dollar then there was a widespread pessimism about the outlook for the dollar and we've had quite mixed performance since then. I mean if you look at the euro it had a jump up but it's kind of been stuck at 115 116 maybe for what six months now. Dollar yen on the other hand has kind of been moving higher of late in Asia mixed. Yeah, Renimi was a bit stronger, kind of not doing anything too dramatic, but everybody had that chart in their reports at one point showing the, you know, the worst start for the dollar for the year ever, you know, and I haven't seen it for a few weeks now because obviously that story has has quietened down, but it seems like that extreme bearishness has has paused for the moment, but I mean, where where are you on a multi-year basis? Yeah, I I mean like you say the uh cadence of the dollar has been quite different since the summer uh versus what we saw in the in in the first part part of the year. So maybe the first part of year is that very clear um rapid decline in the in the dollar versus everything that that's the the debasement trade or the US exceptionalism reversing a story very clearly and it and it's fizzled out hasn't it in in markets do the dollar depreciation that we that we have seen since the early part of the summer seems to be more about the cycle seems to be more about the Fed and and and then as you mentioned Alan we've we've we've had a bit of a reversal going on more recently. We still find that the dollar is is is quite overvalued versus most currencies. 15 to 20% overvaluation on our equilibrium um currency modeling now. I mean, you know, you have to be a bit careful about valuation analysis when it comes to currencies. You might be okay with bonds and stocks, but with currencies, you have to be a little bit careful. But I do think it works at extremes. Um so the question is whether or not that 15 to 20% uh um misvaluation overvaluation is is is enough to kind of trigger the the valuation elastic into coming coming back together. The the one reason why it it might be is that policy does seem to be focused again on delivering a a weaker dollar. That seems to be the message from Treasury Secretary Besson. That seems to be something that the Fed is wanting to support. It seems to be aligned with that sort of rebalancing adjustment on trade balances and and and maybe supporting some of the the big the big tech export uh um side as as well and and some of the themes that I mentioned around growth coming together. Um if the bad luck that's uh hampered European economic performance in recent years is is is is easing um then European economic recovery, German fiscal support. Chinese growth as we talked about looks like it can be resilient and strong around 5% uh give give or take. then this idea of of maybe some re-equilibiberation of growth around the world that can also support a a weaker a weaker dollar. So I I mean our scenario is to expect it to be a little bit higgled piggledy from here. Um but but to position for a modestly weaker dollar in 2026 that can still then obviously be a help for emerging markets and and ei capital flows downhill some support in terms of financial conditions for rest of the world asset asset classes but it's not quite the sort of dramatic the end of dollar dominance I idea um that was quite popular among um polite discussion circles of economists earlier in the year. The what the one idea that we've had which I I can't quite um be be certain of at this juncture is how the dollar performs under a growth uh uh uh problem scenario because historically we're used to to not just a a um multi-deade dollar bull market but we've also had this kind of risk mitigation property of the dollar. uh some sometimes people call it the dollar smile. So you get a a positive return for the dollar in a in a riskoff a positive return for the dollar in a situation where US growth is outperforming the rest of the world. And it's just that middle bit where uh the dollar is weaker which kind of supports rest of world economic and and market performance. The question in my mind is what's happened to that left hand part of the dollar smile? Has it become more of a of a sort of a smirk? um and and and that could be then uh something to to to watch and and and think about. It brings us back again to this idea of where the true risk mitigators and diversifiers are uh uh today. So, they're the things that we've been thinking about, but yeah, we're in the camp of multi-year dollar weakness. I think you got to be kind of realistic about the the rhythm of that and and the extent it it can play out in. But the the key thing is that policy seems to be lining up behind a valuation signal. And I think I think that's a a reasonable basis then to give some support to some of the investment themes in emerging markets and and in outside of the US markets as well. >> Yeah. I mean you mentioned policy. I mean, um, part of the theme earlier in the year was maybe policy credibility and and obviously we've had, um, attacks on the Fed and and suggestions, you know, that we'll see a less independent Fed and, you know, we're getting into the end of the year, so the time frame on how all of this plays out is getting a bit closer in terms of, you know, likely replacement for for J Pal. So, any thoughts on on that? who you know any who's your personal favorite or who do you think the most likely replacement is and you know there's two schools of thought one is this is going to be highly significant the second one is not going to be that significant as one one person one voice at the table what what do you think in terms of the significance yeah I think I mean I it's exciting isn't it these for central bank watchers these things are always interesting to to follow I'm a bit of a nerd Alan when it comes to tracking central bank speeches. Um a and I think like many economists we have been um in in the market there's been un there's been a significant attention to the presentations of Waller uh alongside the other core FOMC members over the last sort of six months I would say in particular um and those speeches are always very thoughtful and interesting. So, so always interesting to read. Um, the other candidates that have been discussed are little bit more maybe unknown to to to investors or or al orthough all very high profile in in their own in their own rights as as as well. How much of an effect can it have in 2026? I mean, it might be worth one cut if you get a particularly dovish uh uh Fed chair. Our our scenario isn't so far away from where the market is. something like three and a half% Fed funds by the end of 2026 would seem reasonable. So sort of two or three cuts, but I I I find it hard to see that it's um going to decisively pivot everything on on a dime. Like you mentioned, it's it's one vote in a um in in a system where dissent and disagreement is is increasingly something that investors expect and look for in in in in the minutes. So, I think it could be worth a little bit of e extra easing at the margin if you get a particularly doubbish um leader um chair at the Fed, but but not sure that it completely decisively change every changes everything in 2026. I mean, central banks we know are an arm of government. this idea that economists had that they were just independent technocrats um like a monetary policy council or a fiscal council as if they can ever be completely fully technocratic and and independent. It it was always something of a non-starter from my perspective. But you still have a situation where there is operational independence which is of course the critical uh um part of the the story to deliver good growth and and inflation outcomes. I mean the other thing I' I'd mention is that the economists don't really know that know too too much about populism and how populism plays out. But the playbook that we have from Latin America um and and and other economies does always point to a idea around some challenges and growth and this idea that institutions are you know under scrutiny. Um and so to a degree what we've seen in in in 2025 isn't really that surprising. It's it's very much a sort of a a classic a classic playbook. Um, I think where it leaves us is reinforcing this idea that 2% on inflation is more of a flaw now than than than a ceiling. It doesn't have to be particularly we don't have to be particularly shrill in the inflation scenario that we we might want to assume. But just to sort of reinforce that idea that stickiness and spikiness are probably good by by words, good adjectives to describe the inflation process now, which is a marked difference relative to what we've become used to and and and the environment that we've grown up in as investors. Yeah, I mean absolutely the the the one asset that maybe has reflected all of these kind of themes this year has been gold. I mean it's an asset that polarizes strategists and economists and asset allocators. Some people love it, some people have zero. I mean in your model portfolios, is there a place for gold and how much? >> Yeah. Um we've been big fans of gold, Alan, so we got that one right. Um and so that that's been an important an an important theme um both in terms of it being in strategic allocations as as as an as an extra uh layer and an element um but also to reflect the fact that you know we we had some concerns around um dollar dynamics and and what might happen and we'd seen in some of our analysis looking at central bank and and sovereign investor uh uh positioning you can you can see that movement more toward uh uh gold and some diversification to to other currencies as well. So across a lot of the um metrics that we've been tracking um across a lot of the discussions that we've been having with investors I've been having with investors around the world it's really come up as a kind of key theme and as you say it's probably the clearest example of of of some of those ideas really coming into markets and play and playing out strongly. The other one I' I' I'd suggest is the stock bond correlation because that stock bond correlation has has really really shifted um materially. Uh obviously depends a little bit how you measure it, what the look back period is, what kind of time horizon you're looking at, but it's another reminder that um you know stock one correlations moving into positive territory. That's telling us something about how many investors are thinking about about inflation. the the co-movement of those asset classes is really reinforcing that dynamic that you've seen behind the gold price action, the debasement trade as it's been as it's been talked about and it's a remarkable um it's a remarkable situation. Of course, all of that's happened at the same time. The stock market's been you bull market all over the place. So quite interesting uh set of um co- movements correlations in in in parts of asset markets. >> We touched on how you you know speak to lots of investors. So that gives you a good you know vantage point around sentiment and where people people's minds are. I mean do you think generally very hard to kind of broadbrush statements but do you see a generally pro- risk positively positioned investor base that you speak to or cash levels a bit higher? Is that going to be a positive or would you say people are overextended or neutral or how would you categorize positioning from from your vantage point? Yeah, I mean I think it depends a little bit sector to sector, investor type to investor type, but there does seem to be a bit of a a nervous equilibrium um a fragile equilibrium maybe to to the outlook because this idea that we we talked about where uh the economists have been thinking about the the K-shaped economy. What happens next? Does the top end of the K move higher still? Does the bottom of the K fall away or could it catch up a little bit? Many questions about how the economic system is going to play out. I think many investors are worried or focused on an idea of of of a sustained big AI bubble dynamic. also fearful at the same time in the same conversation without skipping a beat in the articulation of their thoughts about the slowdown in the labor market data and whether or not the US economy is is hitting some sort of stall speed that then affects what goes on elsewhere. So there's some dissonance uh and um an anxiety in in a in a situation which is pretty radically uncertain really. So a lot of what we see uh with positioning maybe thinking about something that is still modestly pro- risk is tentative is tentative and as you say cash positions and a heightened awareness to news and sensitivity to sort of sticker shock or or market dynamics. I think that's that that's all very much part embedded in the conversation and this is why some of the dynamics that we've been seeing with AI volatility for example tech volatility is really interesting tracking some of the technicals how that's going to play out is is it is it going to um evolve into a much a much bigger story that there's clearly a lot of nervousness uh among the investors that that I talk to but also a recognition that you know while the growth cycle looks okay. Um, you know, investors mostly want to stay invested um and and and look for maybe different sectors, different geographies to to express their view maybe with a little bit less valuation risk. So thinking about Asia tech rather than US tech for example could be could be an interesting looking at neglected equity markets in in in Europe. thinking about the highest quality parts of private credit um uh rather than a generic allocation focus on direct lending looking at new ways to hedge portfolios. We talked about hedge funds that that comes up that comes up a lot with um uh investors who are kind of thinking about that asset class in their investable universe. So certainly a um a an acknowledgment of different scenarios and recognition that a lot can a lot can potentially happen. A and the kind of unique situation that we're in today where you know if macro trends lurch to the downside or to the upside, it would have big effects on portfolios and big effects on markets. And at the same time, it almost because it's part of the conversation and the discussion, it almost wouldn't be that much of a surprise. Quite quite interesting. >> I know I know you publish on capital market assumptions and we've talked a lot about kind of the view this year, next year. I mean, taken more of a kind of a multi-year as you say, we're perspective, we're in a new regime, valuations are high. I mean on a 5 to 10 year view you know I hear I guess you hear from a lot of people expect lower returns in equities or US equities look for opportunities elsewhere. Is that your thinking? I mean you you sound positive on EM. Is that the the the core I suppose high conviction view or anything that you would particularly highlight if you're constructing a kind of a a portfolio from a 5 to 10 year perspective as opposed to the for the here and now? >> Yeah, thank thanks Ellen. I mean this is a really big part of the work that we do is something of a passion project for me as well. I must I must confess we have higher cash rates because of the sticky inflation on a multi-year time frame. So rate cuts in the very near term but a higher sort of resting rate for rate for cash rates. And one of the things that that does is then play out right through the asset spectrum into bonds and credits and equities and elsewhere. Um, importantly, it means that while equity returns still look okay in nominal terms, the the reward, the equity risk premium, the for taking equity risk is is is is a lot more skinny than um maybe we would expect. We we have a equity risk premium in the US starting with a two now, which is unusual. I mean, we got down to a zero in the com mania. So you can see the sort of valuation adjustment is um you know could could could still continue but normally we'd want to see 4% equity risk premium four and a bit percent equity risk premium where we do see high returns very much in the EM space um which is coming from uh asset risk premier being a bit more elevated um cash rates are in some instances um uh u you know decent as as well and then also the currency element which I think is a is a big part. When we think about the long run work, we're often thinking about whether or not the spot currency is going to outperform the forward rather than necessarily making a a bold view. But the currency element does seem to be a big part of the story. Virtually all of the emerging market currencies that we we study in our work are showing u material under valvaluation versus versus the dollar. And on a medium-term view, I think I think those valuation rules of thumb are probably a decent guide. And then there's a number of areas in in the alternative area which which I think look look interesting for like return enhancement. So we might look at something like direct lending still some safer parts of private credit. Private equity has been a bit neglected um but but there seems to be uh an improvement in terms of the um uh private equity market in general. Returns still look okay. It's quite aligned with some of the broadening out um uh uh type of idea in the buyout private equity space and that's how we we we model it as as well thinking about it as a derivative on um different parts different factors in the in the equity market. So that's kind of interesting too. Um and then at the sort of lower lower risk end we see some of the phenomenon that we mentioned at the start. Credit spreads at multi-deade lows. In some instances, we've seen credits trading through government paper. Uh we've got higher risk premium on on bond markets because an expectation that some of those fiscal risks are going to come through. So it it is very much a case of thinking quite hard about how you position that safety part of the portfolio which is why some of these other areas of asset markets thinking about maybe um Asia credits or emerging market credits or hedge funds or infrastructure uh come into that sort of uh safety part of the portfolio very much similar to what what we what we talked about moving or making the argument that uh moving to a or highly uncertain complex macro environment, a multipolar world if you like, kind of means you got to move to a multipolar portfolio as well. Um, and and think about um building portfolio resilience with a number of different asset classes to try and bake in some of that all weather type characteristic which which we want to we want to harness in our multiasset portfolios. >> Very good. Just conscious of time. We're just up to the hour and we do like to ask our guests um for any advice they might have for people who are interested in macro or getting better at macro or things you've read. OB you mentioned Michael Lewis's book which I haven't read so that's I made a note of that one to go and look at but um anything else that you've read that's been highly influential in your career or advice you've got and things you'd pass on to people. >> Yeah, I mean I am a big sucker for books. Um Alan, I read recently just finished um Breakneck by by Dan Wang, which is all about the Chinese economic miracle. Um and and Dan Wang is quite a um well well-known um analyst writer on on on China. That's a that's a terrific book. I'm not really surprised to um hear that it's one of the top nominations for economics book of the year. It's certainly the best new economics book that I've read this year. and he goes through some key aspects of China regional development and China macroeconomic development, thinking about technology, thinking about how they've set up some of the manufacturing uh success stories, but also thinking about um some of the other areas of re recent history, the zero COVID policy for example. So that's fascinating if you're interested in China macro. I suppose you know historically it's it's maybe a lot of books that you know things like um market wizards which I always recommend to our graduate cohort. I mean I I love I love that book. On the economics side there's a terrific book by uh Danny Rodrik at Harvard called Economics Rules which looks at how you can apply economic models to thinking about the world. This sort of is like the idea of of the stock market being the market in ideas that that that I mentioned at the start. So Rodri kind of goes through all of the different schools of economic thoughts and shows you how how all of the models are relevant. You've just got to pick the right model at the right time. So I really enjoy enjoy stuff like that and often that's quite a nice book for people who are maybe coming from an economics background to start thinking about how to apply some of those ideas to the real world. But yeah, big sucker for books, big sucker for Substack as well, Alan. So, always following your Substack. >> Good stuff. Good, good to know there's some readers out there. >> Great. Well, listen, Joe, appreciate you coming on today. It's been uh great to get get your thoughts on everything from global markets to global asset allocation. And obviously listeners can follow your work. I'm sure um they can find you pretty active on LinkedIn and social media. and you uh uh kindly also share a lot of your HSBC publications on those uh platforms too. So, so keep an eye out for Joe's work uh because obviously it's a very macro uh driven world we live in today. But from all of us here in Top Traders Unplugged, stay tuned and we'll be back again soon with more content. Thanks for listening to Top Traders Unplugged. If you feel you learned something of value from today's episode, the best way to stay updated is to go on over to iTunes and subscribe to the show so that you'll be sure to get all the new episodes as they're released. We have some amazing guests lined up for you. And to ensure our show continues to grow, please leave us an honest rating and review in iTunes. It only takes a minute and it's the best way to show us you love the podcast. We'll see you next time on Top Traders Unplugged.