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Next guest writes, geopolitical shocks usually fade, but this one matters near term because it's an energy shock.
Boy, that makes a lot of sense to me.
Steve Parker joins US co head of Global Investment Strategy at JP Morgan Private Bank. Steve, what's the conversation you having with your private bank bank clients here these days about how about this black Swan event and what it might mean to their portfolio? I guess short term and maybe longer term.
Yeah, you know, I think clients have done a good job because we've trained them well over the last couple of years to recognize, as you just said, that geopolitics rarely have long lasting impacts. So the first thing that we're seeing is the clients are staying discipline, They're sticking
with their plan, and that's been the right move. I think the bigger question and the thing that matters longer term in the conversations that we're having is recognizing that we're in a world where it's not just this energy shock, but it's this shift towards global fragmentation, which means that inflation is probably a bigger part of the story going forward. The floor on inflation is probably higher, the volatility of
inflation is probably greater. So thinking about the diversification part of your portfolio is not just about bonds, but also thinking about things like infrastructure, real assets, commodities as part of that inflation story.
And also Steve's supply chains I think right are going to be reshaped because of not only COVID, which is I think what sort of raised the flag, but now this war and how does that have you thinking about opportunity.
Yeah, I think you're right. We went through a multi decade period of globalization where it was all about the efficiency and low cost nature of your supply chain. That was great for margins and earnings and inflation. But I think between the pandemic, what's gone on in Ukraine and what's happening now, you know, there's a recognition of this
shift towards as I said, more fragmentation. Countries and companies are going to focus more on the reliability and security of supply chains more so than the cost of supply chains.
One of the interesting opportunities that we've been talking about with clients is this idea of investing in national champions and strategic industries, because I think whether it's you know, infrastructure and power in the US, security and defense in Europe, the technology sector in Asia, you're going to see much more of a focus on developing domestic champions as part of the supply chain story.
Steve, before the war, probably the driving force for these markets and sentiment was AI artificial intelligence, and I guess the market had evolved from simply I'm just throwing money in anything that's remotely close to an AI.
So now I'm trying to discern maybe winners and losers. How are you guys, what's the conversation you're having these days?
Yeah, I think that's right.
And I think that shift really happened towards the end of last year when you saw a shift from these hyper scalers funding a lot of this capital spending from free cash flow to starting to engage credit markets, and I think that caused investors to take a step back and say, you know, we need to decipher not just every spend is good spend, but rather what's going to be effective spent. And I think that that's what we're seeing now, and I think you're going to continue to
see that. The good news is we're continuing to see earnings revisions move higher. Valuations as we've seen a bit of a pause in these stocks have now gotten more attractive. So perhaps heading into this earning season, the bars a little bit lower, even with the rally we've seen in the last week.
But the backdrop to all this, right is possibly higher oil for longer. What is your outlook for oil? I mean in terms of just how we experience it day to day when we go fill up. I mean, now we've got Churasury Secretary best And saying gas should hang around three dollars a gallon for the summer. But yet you got the Energy Secretary saying we might not dip below three dollars a gallon until next year.
Yeah. Yeah.
Our base case is that we do see oil prices continue to gradually move lower, call it eighty dollars a barrel over the next three to six months. I think that's a good environment for growth, inflation, picks up a little bit, but that's something we can manage. We also do a scenario analysis where we ask ourselves what happens if we stay around this one hundred dollars level, what
happens if we see a spy higher? And at the one hundred dollars level, it's a little bit trickier for markets because stocks potentially feel some pressure from a growth slowdown, bonds feel some pressure from higher inflation. That's where you need to look at some of those diverse fires we talked about. Where this becomes more of an economic story is at that one hundred and twenty hundred and forty.
Dollars a barrel for a while.
Then you're looking at a scenario where modest growth year end outlook turns into potentially a modest recession. And that's what we're focused on. But we think that's a low probability outcome.
What do you tell your clients to do in the bond market here, I've got a two year treasury, get paid three seventy five for sitting in a two year treasury.
That's not a bad living, but the credit risk above them ban that.
So one we don't see major issues in the credit markets. We still think that there's opportunities focusing on higher quality credit, but opportunistically, where we've been focused, as you said, is on some of the shorter term bonds, whether that's treasuries or investment grade. Long term rates have been rather stable despite the pickup in oil prices. Where we've seen a huge move is on the short end of the curve. The markets went from pricing two or three FED cuts
to a FED on hold. Outside of the US, markets are now pricing Central Bank hikes between now and the end of the year. And so far, our clients who are sitting on a lot of cash using this as an opportunity to extend duration a little bit, pick up and take advantage of some of that move that we've seen is an interesting opportunity.
We were talking to Damian Sasaur earlier about emerging markets and we're seeing a lot of interest also in Africa as we talk about investments in renewable energy. What are your thoughts on EM in this environment, So we.
Think EM is one of the most compelling opportunities out there. Yeah, we think that the story in EM is really one focused on earning's growth and revisions which have moved sharply higher, particularly when you think about Asia, particularly when you think about markets like Korea and Taiwan that are really essential
to this AI capital spending story. And at the same time, even with the outperformance that you've seen in emerging markets over the last twelve to eighteen months, valuations are still
at a pretty substantial discount. And while we don't have a specific view right Africa, I do think that this deglobalization story and this reorientation of supply chains, diversifying resources, natural resources and things, is going to benefit places like Latin America, which is an interesting investable opportunity.
Alternative investments.
I used to think a reasonable allocation to alternative investments would be like five percent, but that's like no way. People are allocating a lot more to alternative investments. How about the sleepy people, JP Morgan Private Bank. I mean, you're there to preserve my capital.
Here, you know.
I think the first thing is really getting an understanding of investment horizon and objectives, right, And the nice thing for a lot of our clients who who are wealthy and they're thinking not just about short term capital needs and liquidity, They're really thinking about long term, multi generational wealth, and that's where alternatives do play a much bigger role when you can give up some of that liquidity in exchange for either you know, potentially enhance returns or diversification
within your portfolio. We did a family office survey recently where we talked to the family offices of our largest clients, and on average, they've got about forty percent of their portfolio and alternatives. Again, that's because they're thinking out over decades and centuries.
You know.
For our other clients, we do think that introducing alternative allocations is important, as I said, both to enhance returns in places like private equity and real estate, but also to give you some diversification in things like infrastructure real.
Quick as an alt investment in your mind crypto.
So crypto is a you know, sort of not a new category, but it's an increasingly focused on category in our client with our in our client conversations, we haven't taken kind of a strategic view on incorporating crypto into our portfolios. You know, it introduces a lot of volatility, and when you're thinking about diversifiers, that's not necessarily where we want to focus our incremental dollar, but it's an area that we're doing a lot of work on and we're continuing to focus on.
Steve, thanks so much, appreciate it. Steve Parker, co head of Global Investment Strategy, JP Morgan Private Bank, Any Progue regiate of the Common School School of Commerce at the University of Virginia.
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Joining us here in studio Isabel mateos Ilago Chief Group Economists B and P. Parrybought offices in Paris are just awesome, by the way, Isabell, thanks so much for joining us here. What are the conversations you're having with your clients today? Is it all about the war? Can they look past the war and try to think about economic fundamentals in the economy? What are the conversations' hearing with your clients these days?
Hi, good morning, Paul. That's an excellent question, and I think by and large the clients are trying to look not through but beyond the war, I think there's a sense that we've been hit by shocks coming out of the US and at some point in the end and then life think, you know, resumes well at some point
they're good or bad. But and so there's an intense desire to not get waylaid by the by the noise and then and the constant Yeah, the shocks that you know, resolve themselves and focus on, you know, what's really happening in the underlying economy and the answer as well, there's a lot of really interesting transformation. There's the AI story, there's the supply chain rewiring story, there's a defense story. So there's thatally, quite a lot of engines of resilience there.
Earning season is kicking into high gear this week. We got about twenty percent of the S and P five hundred company is going to report, including some big names Tesla, Bowing, Intel Ge. The list goes on, Isabelle, how much are earnings driving the the performance for equities at the moment?
A lot? I think, you know.
I was in Washington, DC last week for the IMF meetings, and a lot of the conversation was around the apparent disconnect between how you know, well markets, stock markets have performed. I mean, we're above where we were at the start of the We're in the in US markets today versus this really enormous uncertainty about the war and the impact it's going to have on the economy. And I think the reason for that is exactly earnings, which so far
have been very strong. Earnings expectations have been revised up, not down, and and I think this is again an indication that people think the damage from the war is going to be contained, including companies, if they're realising including companies. The problem with that is that it's not a certainty, it's just a bed that people have obviously confidence in. And that was also the mood you know, last week
in Washington. But what I would say is that people from the region were the ones sounding a note of quotient of saying, look, this is going to be complicated. Even if a peace deal is signed today, it's going to take a while for things to normalize. And so you know, maybe hold your horses. All of you out there are who are bullish, but for now, this bullishness I think dominates as well.
When this war started, I think the economic concerns given the shock that we've seen to the energy space would be perhaps slower economic growth, higher inflation. Have you adjusted your numbers at all to reflect that or what are you seeing out there?
So we're waiting for the ceasefire to publish. It's been a bit of a moving target, but yes, the direction of try, I think it's hard to argue with this growth revised lower, inflation revis higher. The quantum is what we're still waiting to see. But you know, by and large we're very aligned with the IMF numbers and others, which is, you know, we were starting from a position of strength with a fairly good growth momentum everywhere, and
that growth momentum is going to be slower. But you know, we're not looking at at a recession again unless things re escalate in the in the Gulf and the inflation shock is going to be meaningful, but you know, not something that would require central banks to you know, high interest rates by as much as they did in twenty twenty two.
I want to ask about the disconnect between Europe and US traders because I'm looking at the WI screen here on the terminal showing me year to date percentages for the major indexes S and P five hundred and four percent year to date, the DACKS in Germany down about a third of a percent. So are European investors seeing this war and its implications differently than the way US and are.
So I think it's just a reality of the components of the respective stock markets. You know, the U S stock market is take heavy and the US economy in general is less exposed to this energy shock, just because you know, US is in that energy exporter. Germany, out of all the European economy, is the most industrial and the most you know, carbon energy intensive, So yes, it is going to be hit disproportionately, and that's what you see in the performance of the DACKS that you just mentioned.
But everything considered being down, what did you say, a quarter of represent is a bit of a shrug, frankly compared to what could be the scale of your shock. So I think it's telling you that even in Europe, and that's definitely true in Germany, there is a lot of resilience and there are a lot of other drivers of growth, notably the infrastructure and defense public investment effort that is underway in Germany that is going to continue to power growth through this shock.
That's kind of where I wanted to go as about the positive economic development starting last year from the tariffs of on the part of Germany and maybe even some other European countries, in defense, in just infrastructure. Now that's got that offset a little bit, which is buoy the higher energy costs here. So what's the economic outlet broadly defined for Europe right now?
So, look, we were expecting Europe to grow at around one and a half percent before the war. We're going to revise that down by exactly how much, I can't tell you, but we'll still be, you know, roughly around one percent. And that's because there are these other drivers of growth. Investment in the energy transition was already there. I would expect this will accelerate. And then there's also
a lot of investment into tech modernization. Some of it is AI, some of it is more plain vanilla automation. But you know, all of that has to continue. This is what we're hearing from our clients in the real economy, and that's going to be a factor of resilience.
Do your clients see the US dollar as still sort of the gold standard of safety safe haven assets?
Well, I think you know the answer in the way you asked the question. So it's you know, it's not been the gold standard ever since nineteen seventy three, was it?
But no, I think it's fair to say that looking at the behavior of both the dollar and US treasuries in these recent market wobbles, it's very clear that while they retain a lot of reasons to feature in portfolios, they're not the old weather risk hedge that they once were, and so people are looking to diversify from the dollar as a safe haven and to find other ways to
introduce safety in their portfolios. And interestingly, and that's something again I heard a lot around Washington last week, is this is creating appetite for European assets and for certain emerging market assets.
Isabelle, thank you so much for joining us. Really appreciate it.
Isabel Mateo's Ilago Group, chief economists for B and p PR I bought based in Paris, but we appreciate getting her in our studio here today in New York City.
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You know, doing the volatility so far this year, particularly around the rat and Iran war, it felt like trading in the equity markets, in the bond markets was wasn't panicked.
It seemed like it was pretty reasonable.
It did, and kind of reflecting what's going on out there in the marketplace. But now we've got stocks hitting new time all time highs. Here, we've got the bond markets sitting right where was seemingly before tenure treasury four zero point two six percent, that four to four and a half percent range. Here's somebody who does this stuff for it living, actually makes a living off of.
The fixed income market.
Matt Rezneesky, head of Fixed in Client portfolio Management at Vanguard. Matt, your market has been rock steady, it seems like. Talk to us about what you're seeing in your fixed income up market over the last six, seven, eight weeks.
Well, thanks for having me today and good morning on this early Monday morning. Look at the bond market in some way and think about credit markets in general. Maybe have been sitting like an elephant in a little bit. There's a lot of resilience under the hood. And when you start to look at the returns in the bond market so far this year, you're up close to a percent, close to a percent in a number of areas of
the market, which is quite interesting. A lot of that's coming because of the income that you're getting in the bond market, So yield is kind of driving the story for the bond market.
Yeah, I'm looking the benchmark ten year treasury yield up fourteen percent since the start of the war. What could change this? I mean, are you looking at the Fed meeting really being the next cattle us? Because things just seem so I just keep coming back to that word chaotic this morning with regards to the war.
Chaotic.
I have two little boys, so I think about bedtime here, right, you.
Know, you know all about Kaoa.
It's whether you know, I need more water, I need this, I need that. We're going we're going back and forth. But I think when you kind of you know, peel peel the onion back and you look at look at the market right now, it is all about the price of oil right now, and it's all about the geopolitical headlines that we're getting right now. We got some you know, kind of a shift in tone over the weekend, the
shifting total weekend after an exuberant Friday. But again we're still in this environment where the bond market hasn't really moved all that much. Credit spreads and the investment Great Index are you know, seventy nine basis points high yield or inside of three hundred basis points or so, you're clipping around five percent, And that's something that we think is really compelling for investors.
So in the credit space, how much credit risk do you want to take these days? Because I can sit there and to your treasure and get three point seven percent, and there's something.
How much credit risk are you in your clients taking these is? Look, it's important to have just the right amount of credit risk. There's a key thing I'd say here is it's better to do something than do nothing. But what we really like a lot of is is higher quality investment grade corporates. There's a lot of value in say financials. We've gone through, you know, this amazing stretch of bank earnings and what did the banks tell us?
It's that the consumers in a pretty good spot. But beyond that, looking at lending, we're seeing you loan books on banks continue to expand. So overall, when we think about clipping a coupon getting around five percent or so, that's something that we think is quite compelling in this environment in a way to kind of power through some of the noise that you're getting in the market.
I'm so glad you brought up banks because I was looking at smaller the regional banks. They're actually outperforming the major banks. You know, we heard from them last week in terms of earnings. But the KBW Nasdaq Regional Bank Index, so this tracks about fifty regional banks. It's up ten percent so far this year. Does that tell you that, I mean, I guess their business is driven by investor loans more than retail investor loans.
Yeah, I mean, this is this is coming back to a story as a bond investment standpoint. Selection is what really really is important. You're you're bringing up, so what's going on the equity market. You know, one of the things that we've been talking about a lot is that this is a bond pickers market. We've moved from this beta trade in fixed income. The beginning of the conflict started this catalyst.
With all of these.
Issues we're going on, whether it's AI concerns, geopolitics, whether it's you know, worries about private credit, all of this has kind of created this environment where there's a lot of the spursion. You look under the hood, the spread moves in investment grade corporates have been interesting, but also be beneath that, the moves between energy and financials are something really worth watching. So again, selection is what you want.
You want to work with a very well resourced active manager in this particular juncture to find good resilient income in this enduring environment for fixed income.
We've seen technology companies who typically aren't big issues in the credit market. Boy, they've become big issues in the credit market. How does your market view them? How do you view those issues? They seem like if I ear an investment, I'd be like, keep it coming, you know, I would say, the new kids on the block into some way. There's a lot of new issuance in the market. All the big names, whether it's Meta, it's it's Alphabet's oracle.
You know, we're thinking about how these can play within portfolios. But but again, under the hood, you look at the performance so far, they've actually lagged a little bit, you know, from us from a spread perspective, you look at returns, you know that the best performers have actually been energy so far, with within within, within, the corporate credit and thing so far. So again, it's a selection story. It's something you want to have a position in. But it's
all about sizing. That's that's the real that's the real key right now, how you're thinking about.
Things, all right, Matt Raznesky Rasneski, Yes, all right, Head of fixed income over at Vanguard, Matt, what are your expectations for next week's FED meeting.
We're very focused on, you know, a couple of key things that read on how they're responding to the data and the data in particular as we get more understanding and closer through this this geopolitical risk that we're going through. Again, the inflation numbers, the headline inflation numbers were really really focused on, because that's whe're starting to see some of the the pickup of some of the energy worries and some of the risks there. But ultimately it's all about
data at this point. How much duration risk are you taking?
How far out do you want to go on the curve here these days.
Look, we think a neutral position is quite important. And when we think about client portfolios and we have a chance to within our advisor business looking at hundreds and hundreds of investor portfolios, a couple things that are kind of interesting that The first thing I'd say is, on average, four to five portfolios that we look at have a duration shorter than the AG and about half of portfolios have a duration that's at least one year shorter than the AG. And the point here is this is an
enduring environment for bonds. People have been putting money in cash looking at you know flows so far this year, ultra short has been something that's gained a lot of TRISTM investors are looking to park some money on the sidelines. We're really focused on getting investors at the right part of the curve. We say the smart part of the curve. Today it's really the belly of the curve. You have a lot of resilient income. You also have some potential price appreciation if we get a bit of a rally
in the market. But this is the sweet spot for us overall today.
What has demand been like or money flows into muni bonds at the moment.
Muni bonds one of my favorite things to talk about. Look sweety too. Yeah really really, I had a nickname one point called Muni Matt. But look, the muni market has been kind of sopping up demand from investors here. Obviously we've gone through the March period as the market is notoriously known for some volatility around taxis and but what's interesting about munis is this is a steep yield curve. The muni market continues to have an even steeper yield
curve than the treasury market. So what does that mean is you could pick up attractive income and roll down the curve kind of profit over the passage of time. We look at the any bond market, this is something that we say the media curve is steep and cheap relative to treasury. So if you're looking at income, you want to get some really attractive coupon that's tax advantaged. This is a really great opportunity for investors that have taxes on the mind.
As I raised my hand there, Resid, thanks so much for joining us.
Mattisonski head a fixed income client portfolio management at van Guardan.
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Joint Sellow Economics.
In our relationship, what do you think is going on so great? Because we do in fact have a hot warn I ran.
Yeah, I think, I mean, I I am of the policy community that is that is not so bullish. But you know, I also I speak with and watching Marcus closely, and so I think it was really it was the question that every conversation started with. And part of it, I think is exactly what you you just reported on, which is that earnings are coming in looking extremely positive.
You have this this overarching understanding that AI is going to revolutionize the way we do business and and that will mean up, you know, an increase in productivity.
But I mean, traders are also.
Trading on on some on misleading tweets. So you have statements from Trump, you have you know, statements from from Iran, and a lot of them are just are trading tweet to tweet and expecting a short duration of the conflict.
But the actual fallout will.
Dominate world politics for months and possibly years and will weigh pretty heavily on the global economy. So you have Europe and Asia and Africa preparing right now for sustained energy shocks feeding.
Into all of their different industries.
And you know, in particular, you look at Europe with jet fuel shortages, Asia the same thing. It's going to
impact travel and tourism, food, food scarcity, and inflecture. So I think we're looking at an absolute disconnect when you look at the golf people and in the in the at the World Bank meetings last week, we're really we're talking about the Golf needing to reevaluate its its business model, so it's not just having to claim force majure on exports and commitments, but beyond commodities, you know, the Golf was really building it up itself up as a safe haven,
as an airline hub, as a data center hub. And then you have the hit to maritime navigation and what the Asian powerhouses are looking at Japan, Australian Philippines gearing up for potential disruptions and and enclosures of maritime navigation in the Indo Pacific. So there's not a lot of optimism out there for a swift resolution to the crisis, and yet you have markets, uh buoyant and reaching all time highs.
And yet Heidi, speaking of Save Haven's, you have investors globally sort of questioning the dominance of the US dollar. And you say, at this meeting it was the first time real questions about dollar centrality were actually discussed by what you call serious people. What are the implications there?
H So, I mean, the the it's been an enduring question the dollar as as the world's reserve currency, and you know, from from time to time there have been, you know, questions about how how durable that that that dollar dominance is. But there were some more serious people talking about the dollar centrality in the system.
And I don't personally predict any.
Kind of end imminent end to the to the to dollar dominance, but it's it's clear that countries are increasingly seeking alternative issuance options payment mechanisms beyond dollar and euro to ensure some redundancy. And what's happening in with with the choke hold on the Strait of Hormuz is really really forcing countries and companies to look to other currencies
to be able to transact in. I mean, you look at it at a dollar, you know, the dollar as a reserve currency, it's a store of value, it's a medium of exchange and transaction, and it's also a unit of account. So it's not just it's not just the money, it's actually it's the infrastructure that's that's built in and underpins global trade. But this is really this is a time when we're watching capital flows pretty closely out of the US dollar and dollar assets.
Uh.
And then the counter to that is, really there's no other deep, liquid, safe market and with the potential for growth that we are anticipating in the United States.
Heidi, I'll be interested to hear about kind of the folks you talk to, what are they saying about China here, because obviously all eyes are on what's happening with Iran. But the US and China are still set to meet i think May fourteenth and fifteenth, President g and President Trump, assuming that's still on. What's the expectation there for the US China relations going forward.
Well, that meeting was always going to be a precarious balancing act of what was originally on the I think the president's President Trump and President She's agenda, which was trade and critical minerals and rare earths and basically a maintenance of stability and what what deliverables could be could could be on both sides. Right now, we're talking about choking off China's purchases of oil coming out of the Gulf.
They buy eighty percent of Iranian oil, and this office with the management of the oil shipments coming out of the Strait of horror moves and the blockade that the US has put on. The Iranian blockade really directly impacts China and its oil purchases. So I think that's going to be an interesting all.
Right, Hidi, thank you so much, really appreciate it. Hei to Creeboat Rehticker. She's a senior fellow.
For Geoeconomics on the Council for Foreign Relationship.
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