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Welcome to Maren Tooks Money, the podcast in which people who know the markets explain the markets.
I am Maren sumrset Web.
This week, I'm speaking with Luca Powerlini, chief strategist at Picta Asset Management. Now, before we start, I have to tell you that we are recording on Wednesday, May thirteenth, late afternoon, British summer time. And I'm being this precise because there is so much going on, so much in flux, that by the time you listen to this, everything could have changed. So if the UK Prime Minister Kirstamer could have resigned, Donald Trump will have been to China, probably
have been to China. The US around standoff may have made progress, may not have made progress, who knows.
So there's a lot.
Of possible changes between right now and publication. That said, I still think there's a lot we can get from Luca today. There's norful that we can talk about that ignores there's changing issues. So Luca, welcome to talk to Money.
Nice to be here again.
Right, as I say, there is quite a lot going on. So let's talk first about the macro environment and how extraordinary it is really how little markets are reacting to these sort of rolling crisis in the Middle East in particular.
Well, I think the main story here really is that when you look also the spin of the last few years, every shock that we're seeing globally, especially the tariffs day and last year, especially as economy been in credibly residient, everybody was expecting a big impact on inflation on the liberal market. The reality is that US growth is about two percent, even Europe is growing in a descent discent rate,
Japanese recovering, Chinese fine. So the global economy has proved to be incredibly residient, a surprise to all of us. But obviously the residience of the global economy also implies that earnings are doing very well, and so looking at the past investors prussing conclusion it doesn't really pay off to be to bet rich too soon, and that's why I think the market continues to be very, very, very strong.
But what do you think you're driving that resilience. I mean, you know, if you watch the news, you hear relentless drive of negativity, for example, and you know, you look at employment numbers and all that kind of thing, you begin to worry that AI is eating into employment, which is going to be a long time problem. There's an inflationary impulse across the globe. Rates are more likely to go up than down. All these things should be negative
for the global economy. But nonetheless, as you said, just it's relentlessly resilient.
Why I think partly because let's not forget the AI boom is not just you know, market prices going up, is a real increase in investment spending that obviously drives all the economic data high, not only in the US. Then there is another element, which I think is important, is an incredible creation of wealth that's been achieved the last few years. That basically implies that people have more money to spend, even if the global economy or some
indicators are not looking good. But I have to tell you that there are some strange indicators in a way. If you look at the consumer confident in the US is an ultimate law. It's even worse than in the seventies and the eighties, lower than twenty twenty. So people
are clearly worried inflation is picking up. But again, when you look at GDP, the normal indicative will look is still very solid, and I think that's what drives market and I think for US, this kind of positive macroathroc is said to continue.
Okay, so even with that resilience of the economy, and we know, of course, by the way I mean historically, that is not necessarily the case that economic growth and market returns are correlated. That's not true. It's all about where valuations begin. But even with that economic growth, looking at stock markets, and let's look particularly at the US, there's definitely a valuation problem.
Now, yes and no. So it is true that when you look at the for example, the price to any ratio of twenty one, well, it's the long time average is seventeen eighteen. But let's not forget that we have a private sector or a corporate sector is incredibly profitable. You have earnest growth of twenty five percent, record margins, buybacks, taxation effectly going down, model up. So the fundamental story is very, very solid. I wouldn't say that US a
market is cheap, but it's not incredibly expensive. And the where I think we see some ara of excessive evaluation, not in the tech sectors, is in stocks in some consumer store the trade well above the market. And I think this is where I think it becomes interesting. Tech
looks expensive. But again, if you assume that this kind of Capex story, the AI story will continue, the evaluation is not that extremely And that's why we think that you know, the valuation element is kind of a negative, but not negative enough to upset you know, all the other positive that we mentioned already.
Okay, and do we assume that this Capex boom can continue, and we can assume the Capex boom will continue become we assume that returns on it will be what everyone expects. And we've done some podcasts with on AI and on the huge buildout and on the limitations of llms and the possibility that the Capex build out may be something of a false start.
I think one, if you look over the next five years, probably I think these numbers cannot be sustained. You know, we're talking about you know, investment in AI in data center clause to one threellion this year in the US. This is cannot go on forever. Can we do expect a significant row down the next six to twelve months when you already had pretty much clear commitment by the top companies that will probably not So I think that the cape story is solid, and I think the question
will be will other sector benefit from there? Some industrials, and our view is that this CAPEX story will get a little bit broader and there will support growth for the next at least for the next year.
Okay, and then earnings across the board. You said earlier, you know, we have these extraordinary earning numbers, extraordinary margins.
They're all at historical hives.
And I know that we've all been looking at profs in the US for years and going look at that.
They're you know, totally out of wack. This has reverted to mean etc.
And they never do but at some point it feels like that should be a turning point.
Yeah. I think what it's interesting about margin is that there are an all time I everywhere, even in Europe, UK, Switzerland, China, Japan at the lower level in the US better a time high. So there must be something else, And you know, something else could be real prossing powers. A lot of industry are effectively not very competitive. There are just a few major players that actually can effectively dictate prices. I
think they have huge margins. There is a decline I think the in wage costs in a way in real terms, at least there are buybacks as that the help, So it's it's a more fundamental story. I don't think that again, this is unstaindable. At some point, there would be a political backlash, probably because I think people of what will not accept in all these companies to generate a huge amount of profits and when actually a lot of people are struggling. So but it.
Feels like that plitical back that's just kind of under way.
Yes, but you don't see this translating into let's say, anti business kind of policies, right, And I think that's probably what can change. One could be that global growth would get weaker and profit much will or there will be a change in taxation in the distribution of wealth. But so far it seems a very solid trend which is very difficult to expect to stop. And that's why I think the market is well supported.
Yeah, and you believe that there's any examples that we've seen extraordinly aarny numbers we've seen in the US so far, there's yeah that they are sustainable. I mean, because you could argue that that the bubble is not in the p bit of the evaluation.
But in the ebit of the valuation.
Well, I think, look, when you look at the earnings that we're seeing, you know, tech is up almost fifty percent, but all sectors are up, So is it sustainable at this rate? Now? In fact, we think that the expectation for next year and at the twenty percent case is probably too too high. But again, this year has been in a way exceptional. We expect some deceleration in earnings. We steal earnings that are well above the historical norms.
So you need to see more for markets to decline, and probably to see more, you need to see a significant slow down in the global economy.
Okay, let's look out over the next decade. We were talking before we started Voice That podcasts. We were talking about forecasts over the next ten years or so, and you were saying that that doesn't look completely comfortable.
Well, yes, and in the sense that you know, when we got used to see equity returns between ten and twenty percent, historical average between five and ten and historically when you see very low eupremium as it is now, you cannot expect significant returns in the next five or ten years. So unless we are in a new kind of world with low inflation AI pushing roles to three four percent per random level. I think you need to see at some point some deceleration in the in the returns.
What is interesting is that when we look at our indicators in terms of valuation, expected growth, monetary policy, there is a significant convergence across different regions. So we talk a lot about this multipolar and this kind of fragmentation in the geopolitic or the reality is that from a macro point of view, there is actually quite a significant convergence. US is probably gonna get a little bit worse, Europe
a little bit better. Valuation has kind of converged, so evaluation is similar in a way as converged, and the global or the macro economic cycles are converging, you should expect returns to be pretty much converging too, but below historical norms. So it's going to be in a way difficult because return will be lower, but I think will be more kind of spread out than now, which is basically driven by the US. So the time where the US was the only place to be invested is probably over.
And I think that's the key message for investor in the next in the next decade.
Okay, so what does that tell us as ordinary investors? It tells us we should be diversifying away from the US. Does it tell us there are any particular markets we should be heading for.
Yeah, you have to vercify away from the US, not only because not because we expect US talks particularly badly, but because of risk consideration. So if you are passively invested, let's say you're based in the UK, you're passively invested, you end up having seventy percent almost of your asset in a market that is not even denominating your own currency. So there is a risk market risk, currency risk, political risk.
Sectly risk, because so much of that is in the text acutally dominated exactly.
So I don't think it's worth taking this kind of risk. So I think having a more equal weight approach reconsider your location and to a maybe even un biased, I think it would help. And also, let's not forget that when you look at the as an investor, we tend to focus on equities because that's where they tend to
get the best returns. But now if you look at the where bonills are in the UK but also in the US, you know you start thinking that you can probably also maybe take some profit back and put it into fixed income because I think now for the first time I would say in a decade, the expected returns on fixed inco and product actually quite attractive, not only in the UK, also in the US. So I think maybe it's time also to put some money back into the fixeding comes.
You can say, quite brave to get into the UK bob market right now, you.
Know, it's always just a difficult part of our job, right I think when you look dood at the UK, you look at the guilt yields between five and six in real terms, its like India, so the effectively it's the same real yield that you have in India. And if you look at the you know, even the the everybody's talking about, you know, the problem of debt. You know the fiscal situation. And I'm not taking my numbers, take the number of the IMF. The UK is a
much better position, definitely in the US, even Europe. According to the MF, not myself, the UK will have a primary budget surplus in two years time. Maybe it's not going to happen. The point is the fiscal situation the U. In the UK, it is not fantastic, but it's not as bad as everybody think it is. So I think there is some good value guilds the timing.
It's just perceived as bad because no one quite believes that that fiscal surplus will exist based on current policy.
Because of political instability. You don't know it's going to be in charge. Obviously, that's you pay the price for that. But the point is that when you look over the next ten years, there are a lot of political cycles. I think there is still good value in UK, in UK bonds okay.
And in equities. Is there anny market that stands out.
To you well? When we look at now, I think the US is still the best bet. Again, you have a good economy, you have probably potentially some rat cuts, earnest growth at twenty five percent. I think everything seems to be going well for the US. Emergy is true, and this is not just Korean Taiwan. I think we see a decent improvement in emerging market smer market already
cutting rates, good valuation chip currencies. So I think it's it's EM and US and now the place to be if you extend your analysis over the next five to ten years. There is also a case for Europe. You know, Europe is kind of especially Germany, it's going to spend more, you know, cheap valuation. I think we also feel more
optimistic than others on the integration story reforms. It's difficult to invest in Europe, we know, but I think if you're standing your analysis, I think everything seems to be going very is learning Europe in the right direction, and I think the market is not the kind of priceful for that improvement.
We're all just the branch about Europe and the UK.
Yeah, because actually the history tells you that it's not worth investing in Europe. But you know, at some point things will change. And in fact, when you look at the performance of euro versus the US, but if the UK locally, the past five years a big difference. So I think it's important to highlight that, you know, not everything is better in Europe. But obviously, you know there is a reason why Europe and the UK trade a
significant discount to the US. We just think that this kind of discount is a little bit too wide.
And thinks should change for the best.
What about commodities, I mean, obviously the energy marketers have great interest to everybody at the moment, but across the board there's renewed interest in the commodity sector and talk of a new super cycle and commodities, et cetera. A lot of our listeners are particularly interested in gold.
I don't believe in a commodity supercycle. If you look, the last one was riven by a huge increase in investment in China, especially in the real estate, which is very commodity intensive. The current capex cycle is this less kind of commodity intensive. You still need, especially industrial metals, not by a chance industry metal strad and all time high, so you have to be differentiated. I think the gold
price is set to increase, not at the same pace. Know, the dollars already appreciated a lot, there is limited downside and rates if the geopolitical situation improved. I think gold still has the potential to do well, but not at the same pace of the last few the last few years, the old pride thing is trending down unless something goes wrong.
Obviously in the Middle East, where I think the most interesting bit on the commodity side is industry metals, because I think you can claim that industry metals are critical in the green transition, there is limited supply, a strong momentum. That's probably the air of the market, which I think is more interesting. But betting on a commodity supercycle when grossy is okay man not booming, I find it difficult.
But at the same time, with all our kind that a position in commodities is required, special in gold because if there is a spiking inflation, you still want.
A to it.
Yeah, yeah, I mean, it's it's it's something that you know sometimes when you look at your perform you don't want to just pick the asset class they will do necessarily be the best, but the one that can give you some protection something goes wrong, and I think commodities I think fit this kind of description.
Yeah. I So when we were talking earlier about Europe and the UK and reasons people don't feel particularly comfortable investing, and one of the reasons that people often give them part is because of the extremely expensive energy prices in European in the UK, and that makes it very difficult to think, well, these are places that are going to grow incredibly fast in the future of economic activity.
Is energy transformed, etc. Is germanly really the place to be?
Is UK really place to be because it's hard to see great growth on the back of that kind of price.
Well, I mean, Europe roughly imports three percent of GDP, so that's the cost of the import bill in terms of in terms of energy, so three percent GDP is significant. The US is an ect exporter one. There is one positive element to all this. First of all is that we expect first of all oil prices to decline, but also the fact that renewables are a much bigger role. That means that Europe slowly, with time, potentially by two thousand and forty will be energy independent.
Assuming battery technology everyone.
I mean it's two thousand and twenty six. Two thousand and four is a long time, but I think Europe is going in the right direction. My worried about Europe is that this process of there are also on real reforms. Another example, you look at the periphery today looks even more solid than the core. So we tend to forget that Europe has a lot in the last decade, but
it's still too slow. There is that I see for Europe Party in the UK that you need another existential crisis for the actual reform to be implemented and Awfully, it's not going to happen. But that's my worry that we are still too comfortable in Europe and the UK to make the decision that we have to make again. I hope that you're going the right direction without a crisis, but I feel that we need maybe more.
My life, existential crisis and physical crisis, presumably of some kind of the UK.
I don't know, because again the UK, of course, it's all about the political the political environment, because the UK we are very dependent on foreign capital, something that Europe is not, for example. But at the same time, I feel that the real risk for scal risk is more in the US when you have people tend to forget that. In the especially in the euro area, the debt to GDP ratio is the same as ten years ago in
the US is twenty percent higher. The US is where you see an exponential increase in public debt, not in Europe. In Europe the promise that we don't spend well what we have in the US there is an exponential trend that there is no sign of this being changed. So I think of the US, because you have the dollar, there is a currency, there's still a lot of capital inputs into the US. But this is where I think the risk are more in the US than in Europe from a fiscal.
Polity anything that. I mean, you and i've had this conversation before. We've been worrying about this in the US for decades, decades, and it just keeps going. It's fine, So why would.
We were now?
Because the US is less. You can't trust the US in the sent where you trust the US a few years ago, and when you're very dependent on foreign coup that's throws over the UK. You cannot treat foreign investors in the wrong way. And that's the percept, the percept the US is not the safest place. It's still the safest, the best place, but not as good as it was before.
And so I think if you just again we talk about the diversification, even if a small portion of foreign investors are diversify away from the US, this is a huge implication in terms of one yields evaluation of equities.
We don't expect anything crazy, but we think that the we already seen the peak of exceptionalism and the US will I think already lose some the dominant position in a lot of areas, right and so I think that that's what can trigger potentially and we don't expect the US ITS investors getting worried about a dollar depreciation, the federal or the fat tools independence. This could be a
significant trigger for potentially a physical crime. We don't see this happening, but you know, that's one of the risks that we have for our in our second outomes.
Okay, I was going to ask you what you thought the biggest risk was out there, and I suspect that that's the one.
Yes, yeah, sorry, yeah.
So leaving that, what what is the thing that you think might happen that might make everything absolutely fine, justify valuations across the board. Maybe these physical problems go away. I mean, we often hear from people, but we don't worry about anything anymore. Because the arrival of AI and robotics are going to bump up productivity so much all the problems that you thought we had are going to vanish.
Well, I mean, there will always be problems, right I think. I think to me as an investor, the word that I have there is always something happening that we can we can predict. These are the real problems, the one that we're not prepared. We are kind of prepared for US packing inflation. We are prepared for some kind of physical criss We are prepared for a scally in the middle list. We are not prepared for COVID for example.
This is the kind of things where when honestly, when I look at the fundamental is one risk that I see for for global market is that we are in a way too dependent in terms of well creation of what the stock market is doing. So it's for whatever reason, and we see actually life with the eye, there is a disruptive force that can potentially create a big shock in the market that will have a huge implication also for growth. So in a way, the correlation has changed.
Is the way around? Now that's to me, and this.
Can happen on a daily basis, and we kind of predict that That's what I'm really worried about, some more market shock affecting the global economy. That the way around.
Okay, all right, generally speaking, you're relatively optimistic that everything will hold together, but we'll see just lower lower returns over the next ten years that we have over the.
Previous Yeah, we had basically ten or twenty years of superior returns. I think this is not going to happen again, and you go if you have you know, seven percent return on equities and inflation is three. It's not bad, it's just that it's not We shouldn't get used to twenty percent because that's not sustainable. If it happens, you know, what happens is the inequality rise and the risk of
economic populism would grow. So I don't think it's actually good for us as society to have a long period of superior kind of return from acty because these would generate political political tensions.
Yeah, we want better GDP growth put ahead and maybe less growth in the stock market. Yeah, look, I thank you. Can I ask you just before we go? I previously I used to always ask people whether if they were given a choice between gold or bitcoin, they would which one they would take. But I'm slightly given up on that one now because everyone always chooses gold. But I just want to check, would you choose gold?
Would still I still believe that bitcoin is a lottery ticket you can win a lot three, but I think coneverage you don't. But I can't blame any one if they want to put some of their kind of safety in bitcoin. But I still think that gold is the winner here.
Thank you very much.
Thank you.
Thanks for listening to this week's Marin Jogs Money.
If you like our show, rate review and subscribe wherever you listen to podcasts, and keep sending questions or comments to Merrorn 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. This episode was hosted by Me Marren Sumset webs produced by some Aersaidi and Moses and with help from Jessica Beck. Sound designed by Blake Naples and Aaroncasper. Special thanks to Luca Perlini.