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Welcome to Merrin Talks Money.
The podcast so much people who know the markets explain the markets.
I'm Merrin Sum's that web.
This week, I'm joined by Natalia Lippikina, ahead of EMEA's equity strategy and an executive director at JP Morgan Private Bank. We're going to talk about her current outlook on the equity markets as a whole, her take on the Great rotation to the extent there is one, and what she see is happening to the dollar over the next few months, plus of course a little more.
Natalie, Welcome to Merrin Talks Money.
Thank you so much for having me.
Good of you to join us today.
Now, I think if we're going to talk about equity markets at all, we've got to start on the US, the biggest and the boldest of all of them.
What is your outlook there?
And we keep talking on this podcast about the great rotation and about how money is just definitely going to move out of America into other markets. Valuations in the US will come down, valuations elsewhere will go up, but it never seems to quite happen in the volume that we expect.
We are actually quite still constructive on the US market. We like other markets like Europe, but we don't want to abandon the United States of America. And I think it's fascinating to see how quick the recovery has actually been since April lows. ASMP was down close to twenty percent at some point this year, and we're now making all time highs again. And I think the reason is because the markets and participants got more comfortable with AI story. Again.
At the beginning of the year, there were loads of questions around AI, the deep seek and you know, all the money that has been invested into AI if that leads to any side of returns. Now, when you look into the earning season that just happened in the first quarter, we actually got the confirmation that AI trade is still ongoing.
Companies continue to spend money despite the tariff uncertainty. And we're just one or two weeks before the earning season again, and we just think that the tech companies NAI companies will continue to do well. And remember US market is predominantly tach driven, so the outlook on tech is very important.
Okay, so when you look at valuations, maybe I'm too valuation orientated, but When I look at the US, for example, we still have pretty much the most expensive valuations ever seen apart from two thousand, etc. And you look at any valuation method, doesn't matter what you look at, it's still close to historic highs. And every time you see valuations at this kind of level, you see returns in
the following decade pretty week. So if that doesn't happen this time, it will be a bit of a historical anomaly.
Right, I would say that we are quite comfortable with where the valuation can actually stay. Where in the camp that valiation can be between twenty twenty one times next twelve months price to earnings. And the reason for that is when you look into where tech is right now in terms of the waiting, in terms of the net income, it's so much better and so much more important that it has been in the last ten to fifteen years.
The S and P market is predominantly driven by tech, and if you look underneath the sector, you basically have margins that are improving and you have the AI story. Now, I want to emphasize on AI story, because AI doesn't just equal tech. The penetration of AI doubled over the last year or so and what AI actually is. It means that some companies can become more efficient by efficient, meaning that their margin can actually be higher longer term,
that all of that actually deserves a higher valuation. So if you look into the kapex intensity, those tech businesses are just less capex intense, their margins continue to grow, they continue to invest into AI. And this is the reason why. Which is comfortable with the multiple? Or where
is this right now? Again fascinating to see valuation is back to twenty two times as we speak, despite the warriors around tariffs, despite the war, is about where earnings will be this year, and I think the fundamental reason for that is tech.
Another one of the conversations that we have over and over and over is at what point do profit margins in the US revert to some kind of mean, because again, you have historically high profit margins and you might say, well, because of AI, because of that, but nonetheless, historically these things do tend to revert to a bit of a mean.
And when you see things at this level, what happens is maybe there's a different type of competitional maybe there's a new series of regulations, et cetera, et cetera, something usually comes in to reduce margins when they hit this kind of big But you don't think that's going to happen this time.
You see them continueing to.
Well, I think it depends how quickly businesses adopt AI. Right now, you have less than ten percent of companies adopting AI. I think it's quite a low number compared to what benefits AI can actually bring to the business.
Yeah.
Now, if companies do embrace the AI adoption, that should lead to better margins overall. Now, if you're talking about more cyclical downturn, of course it can happen. Cyclical downturn can happen at any point in time, right, it may happen with terriffs. For example, we still don't know what teriffs will bring this year. Right, we're still in the way to see mode. For example, for this year, we are in the wider they expected range. We think that s and peak earnings can be between plus two to
plus nine because tariff uncertainty is still here. But if we're talking about like structurally, we think that AI just can bring more efficiencies out of the companies.
Okay, that's companies across the board. The AI companies themselves e actually the producers. We had someone on the other day who is just discussing AI models and saying, you know, basically, they're kind of all the same, and in the end, these companies are going to be the AI is going to be effectively like airlines. Lots of lots of companies bringing powers of capacs in and producing rather similar products
and seeing their margins. You know, never never quite get where you think they're going to be.
But also remember it's also the companies that adopt AI. I think, of course, the discussion is much much broader than just technology companies. Technology companies are just enablers of that, but I think the adoption will be actually across different sectors.
So when we finally get the great productivity revolution we've been waiting for for decades, potentially yes, okay, not potentially yes, just yes, right.
We'll see as we go, depending on how companies are adopting AI.
Okay, So do you still think that in an ordinary person's portfolio, the US should be the kind of waiting that it has been for the last few years. So a lot of portfolios ordinary people are held with wealth managers in the UK or elsewhere, etc. Will have maybe fifty sixty close to seventy percent of their equity allocation in the US.
Is that still appropriate?
Do you think it's still appropriate to have a very high wasting to a S and P. But people should think about how much dollars they actually want to have in their portfolio because we're clearly seeing the move over the last decade or so, a lot of investors built very big overweights to the US market and the US dollar. Now we're in the camp that we think that dollar will continue to depreciate. For example, we have a target of one twenty by mid twenty twenty six on euro dollar.
So that means that people start needs to start thinking, Okay, how do I actually diversify my US dollar portfolio? Now, it doesn't mean that you abandon the US. It just means that marginally you just start looking into our their geographies, for example Europe. And when you look into Europe, I think.
So, can I interrupt you just sorry briefly that when you say marginally, what do you mean? Do you mean that you should take your waiting in the US down to forty percent? And how big a shift are we talking about?
No, I think the shift to forty percent is quite substantial I'm talking about if you know investors have ninety percent exposure to the US, that is pretty substantial. Right If you look into MSCI World, somewhere between sixty to seventy percent makes sense to.
US, okay, So just the what's what's in the index?
Correct?
So anyway, anyone who holds a global ETF is already where you would think they should.
Be exactly because there are there are people out there who have very big exposures to two dollars and to US markets, and they should start rethinking how much they want to have. Sixty seventy percent looks good to.
US, okay.
And one of the one of the numbers that I keep watching is the number of the percentage of corporate equities in the US that are held by foreign investors. And it keeps creeping up and up and up and up and up. And it's now seventeen and a half, nearly eighteen percent. And that's up from more like sort of five six percent towards the end of the nineteen nineties. So you know, there's been a massive shift by non US investors into the US. But you are feel that people should be happy with.
That, well, I think and This is what I mean by marginally reducing the exposures, because if you think about what was the reason for that, it's first of all, a very strong performance of the US equity market, but also very strong dollar. And when you know, US market continues to perform really well, but there are question marks around FX, and when other markets are also performing well.
Back to European domestics story that is happening right now, which wasn't the case, you know, even five years ago. When there is an interesting story here in Europe, you know, investors just start thinking about how much they actually want to have in the US if there are alternative markets to that. This is one of the reasons. The second one is talking you know, in our outlook, one of the big themes was actually portfolio resilience. So traditionally people
have sixty to forty in their portfolio. Maybe adding different asset classes, different sources of risk and return to your portfolio makes sense. Infrastructure, gold, hedge funds, So there is a lot to talk about that rather than just having you know, all exposure in the US equity market.
Okay, well, let's go back to when I interrupted you five minutes ago, for which I apologize you were just starting to talk about European markets and saying that if you're moving a little out of the US, Europe would be one of the top places you would think would be reagionable to go.
Is that right?
That's correct, And it's interesting what is happening in Europe because historically, and would mean five ten years, the way everyone into Europe was around, well, there is a very good stimulus and strong stimulus in China, less by European equities because they're exposed to that market, or the US economy is growing and very strong. Europe has exposure to that market. That is changing. What is happening in Europe right now is you're basically seeing a very strong fiscal
stimulus coming from the German market. And just to put some numbers into that, five hundred billion over the next twelve years, that is pretty substantial on the economy. That is roughly four trillion. You compare that to the COVID package back in the US in twenty twenty one, similar size, but in a much larger economy, so the impact was
smaller and it was quite unprecedented. Not a lot of people were expecting, you know, something from the German economy, who is in general quite fiscally constrained, so that was surprise number one. And secondly, obviously the security spending that is coming out of European countries that is also quite unprecedented. So when you put two things together, you're seeing the growth in the European market that can potentially slightly narrow the gap with the US earnings growth. Now we don't
think it's completely closest. We just think that the gap.
Narrows, okay, And that means that it still makes sense for European markets have lower valuations overall than US markets because that growth differential remains.
And it's not just growth differentiate, it's also the sector composition. When you look into the discounts, Europe in general traits at around twenty to thirty percent discounts to the US. Right now we're thirty percent. And the reason is because one of the reasons is because we just don't simply have enough tech. We have a lot of financials, we have a lot of industrials, whereas US market is all about tech. So naturally your sector composition is quite different,
meaning that the evaluation is different as well. Now in terms of the growth, the growth is also quite different. But the growth is just the matter of the sector composition that you have. Our tech sector is much smaller than in the US, and therefore our growth is smaller as well. But when we look into twenty twenty six and twenty twenty seven, so the next two years, we actually think that the growth can be between mid to
high single digit. Now this year is a bit more uncertain because of the tariffs, but next year, combination of German fiscal stimulus security spending in Europe can actually lead to a bit better than average growth in Europe.
Okay.
And when you look at Europe, which sectors are interesting and obviously there's a huge amount of money is going to be going into defense. And one of the things that we've talked about again quite a lot here, both in the US and across Europe, is this changing nature of what defense means. And we know when we talk in the UK about spending five percent of our GDP on defense, and no one knows where that money is going to come from, obviously, but let's say we somehow
find that money. We know it's not actually going to go in to you know, tanks and guns. A lot of it is going to go into energy, security and infrastructure, etc. So that's that's that's a changing dynamic. Is that a sector that you find interesting in Europe?
Well, like industrial sector, So industrial sector is exposed to a lot of different themes and structurally it is interesting. One of the big themes that industrials is actually exposed to is AI. So AI is a big topic. And it's not just tech companies that expose to do I, it's also the industrial companies. The second thing is you have the fiscal spending in Germany, so naturally the companies that are the most exposed to that will actually be industrials.
And we think that the impact is likely to come I would say from next year rather than this year. Again, this year is more teriff specific, and then yes, defense spending is also increase in Europe. But overall, I would say when you look into the European story, the most interesting angle is actually the domestic companies because in the last decades or so, I would say, the focus has been on the multinational companies that have exposure to the US,
have exposure to Asia, but less exposure to Europe. And now it's changing. People want to have domestically oriented companies are the industrial sector, financial sector, construction utilities, because again the story is evolved here in the region rather than
everyone else. And on top of that, you basically have if you're looking into the domestic oriented companies, you have more exposure domestically, but also less effects risk, which is quite important because you know, when euro dollar continues to rise, that is not great for some of the exporters. And secondly, you have less terrif risk.
What about the consumer orientated companies or even the luxury good companies.
I think I think the expectations for those companies are quite weak as we speak. I think they need to deliver better than expected results in the coming couple of quarters and especially show that the US market continues to be strong. And then there is a bit of a relief in the Chinese market, which hasn't been the case for the last couple of years. I think the valuation is attractive for those markets, but there is a very kind of a big divergence between the losers and the winners in
the space. But overall, right now, the market has a bit of a downturn and needs better growth to kind of to show investors that this sector remains to be interesting long term.
Do you look at the UK at full Natalie, are you very focused on Europe?
I do. It's a cheap market, but it has been cheaped for a very long time. The challenge with the UK is it just doesn't have the same fiscal stimulus as German economy, for example, has and as a result, you just don't have the same earnings growth as the European markets currently is experiencing. So there are interesting pockets in the markets in different sectors, like real estates, some in oil and gas sector, but overall we just can't find the driver for the UK markets to rerate.
Talked about physical stimulus quite a lot, and obviously the main reason that UK can't have fysical stimulusms because it's horrific levels of debt and deficit, so you know, we're not really in a position to spend, and the UK has is particularly bad, but across Europe there's still an ongoing debt problem. There any any markets that concern you particularly.
Not really, I would say this is just in general the theme as you highlighted the theme going into this year, were highlighted this particular each you to investors and look, I think the reason why for example, Germany was able to do the fiscal stimulus was because they were very prudent for the last you know, decades or so when we look into the other countries, is just much much
more difficult to have a very similar fiscal spending. And frankly, this is one of the reasons why when we talk to investors we highlight the power of you know, diversifying beyond your sixty to forty portfolio, adding other asset classes that can do well if inflation picks up, for example, alternatives for example, infrastructure, hatch funds, gold, so really diversifying given the potential different scenarios that can unfold.
So when you say infrastructure, what do you mean From a retail ordinary investors point of view?
It can be just as boring infrastructure as airports and roads, or it can be digital infrastructure that is growing much faster, for example data centers. But I would say this is probably more a theme in the private markets rather than public markets.
Okay, and gold in back at the late seventies early eighties, it was considered perfectly normal, in fact even compulsory to have at least five, six, seven, eight, nine, ten percent of your portfolio in gold, and then suddenly over the eighties nineties, as inflation disappeared as a risk, so did the gold allocation. And now we're at a point where almost no ordinary investors hold any gold at all. And you what would you say, What would you say to them?
And why?
I would say that investors should definitely have exposure to gold. Gold continues to be one of our highest conviction despite the big rally. It's a different asset class. It provides you with the diversification benefits, and it's also one of the asset classes to look giving the dollar weakness. So absolutely investors should look into dollar and investor.
And it's also I mean, it's your insurance against geopolitics, isn't it correct?
I would say in general the geopolitics for US, geopolitics tend to have a very short lived impact on market. What matters to us usually is earnings. Earnings is the most important factor when investing into markets, and as I mentioned before this year, we may have a bit of uncertainty given the tariff risk, but overall we're seeing a very strong corporate backdrop at this point.
Okay, so you are only interested in geopolitics to the extent that you can see exactly how it is that they will affect earnings. It's not so much a sentiment thing.
View correct sentiment can be actually a short lift. It was interesting to see the oil price move a couple of weeks ago when oil was trading above eighty, but now it's going back to sub seventy and it just shows you that even though the sentiment was rising, but overall we're not seeing a very big impact on geopolitics right now.
But it's still from what you said earlier about the UK market, I picked up that you feel people should maybe still have some allocation to oil and gas.
It depends when you look into the equity markets. And if you're buying the broader exposure, you will have the exposure to oil and gas because it's part of the intex it's just your exposure will be much smaller than the rest of the sectors. Overall, this is not the sector that we currently recommend.
Okay, and outside Europe and the US, any markets that you look at that you find interesting, we.
Think that in emergent markets, India looks quite interesting.
In expensive, though expensive.
Expensive but justified when you look into the valuation. It trades above its five year average on the PE multiple, but we think it's justified because you have the economy that is growing mid to high single digit. That translates actually into the earnings. Earnings are growing nicely double digit. Now it's very hard to find the economies and the markets that are growing so much. And then you also have a very interesting angle in my view, that is
supply chain diversification. You know, when everyone is talking about tariffs and how tariffs can impact different companies, India actually stands out as the beneficiary from all those discussions and diversification of the supply chain and as well can be a market for those who are thinking to diversify it beyond the United States.
Okay, any other markets like that.
I mean, for example, we often talk about Vietnam, for example, as being a similar kind of economy one will benefit from this diversification of supply chain, etc.
We've been talking about Japan positively, but we recently closed our positive call. We're still like it long term. We still think that there are interesting reforms happening in the market, but tactically we think we can rotate to the markets like Europe or the United States. The valuation and what changed there is that valuation based predominantly. Yes, it has
done well. Valuation is a bit higher than what we would be comfortable with, so we've been recommending it for solid time, and we just think that taking some profits never hurts anyone and rotating somewhere else. But this was mainly yes, the valuation call overalls. Structurally, we think it's quite interesting what is happening there with regards to the reforms, and you know the increase in the shareholder returns that the Japanese companies are currently going through.
Okay, interesting, thank you. Now, when you talked about different asset classes making up the forty in a portfolio and moving away from this whole sixteen to forty equity bond mix, and would you include cryptocurrencies and in particular Bitcoin in that as one of the assets that maybe should make up the insurance element of your portfolio side gold.
We don't cover it, so we can't talk about it.
At all.
Nope, Okay, I totally understand all your arguments about the US, etc. But nonetheless, if people start investing now and that they use the allegation that you suggested as we've been talking, they will effectively be investing at all time highs and very high valuations.
Is there an argument for saying maybe said this that in cash for a while.
I think it's always very uncomfortable to look into the market and just say it's at all time high, I'd better stay in cash. The reality is staying in cash is not great for your long term goals, because equity market is the one that is giving you a very high return over the long term. But it always comes
to us volatility. And I would just say that when we do look into our analysis and we compare them investing at all time highs versus not all time highs, there is actually not a lot of the diference, which is maybe a bit illogical. But the reality is when the market makes all time highs, the new all time highs usually follow because there is such a strong momentum
in the market. So investing all time house can be quite difficult psychologically, but statistically looking into the numbers, there are turns that you get actually painting your very similar picture if you invest it in not all time has.
Except for the occasional all time high.
Every now and then there'll be an all time high that isn't followed by another all time hi.
It's not long to have fullbacks in the market.
Yeah, but you just don't know when that's gonna be, right, Natalia, one final question, if you could, I always ask everyone at the end of the podcast what they are reading at the moment.
Are you reading anything interesting at the moment?
Yes? Good, Well, I would say, Actually, I'm a big reader of Bloomberg, so I'm not sure if I am your typical guest. I just absolutely love reading what is happening on Bloomberg day to day. This is my goal to source.
Oh, thank you, we appreciate that. But no novel, no interesting non fiction.
No only finance related.
I'm going to send you some summer reading tips nat earlier.
It makes me nervous. Thank you so much for joining us, so we huguely appreciate it. That was absolutely fascinating.
Thank you so much.
Thanks for listening to this week's Marin Talks Money. If you like us, share, rate, review, and subscribe wherever you listen to podcasts, and keep sending questions or comments to Merror Money at Bloomberg dot net. You can also follow me and John on Twitter or x. I'm at marinas w and John is John Underscore Stepic.
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Course to Natalia