Bloomberg Audio Studios, Podcasts, Radio News. Welcome to Maren Talk to Money, the podcast in which people who know the markets explain the markets. I'm Meren sums Thatt Web. This week I am speaking with Ed Cole, head of Multi Strategy Equities within Solutions at Man Group. Complicated titl. Ed, Thanks for joining us today.
Thank you for having me Mere in complicated title, but a simple person.
Okay, and hopefully everything you're going to tell us is also going to be really simple, straightforward and one hundred percent accurate.
I won't make that promise, but let's see where we go.
What we want is correct forecasts on this show to help us get through these difficult times. Listen, what I really want to talk about is equity markets as a whole. We've been writing a lot and talking a lot about whether there is a great rebalancing going on from the US equity market to effectively all of the rest of the world. I don't know whether you would consider what has been happening in the US market of the last year or so well before January this year, whether they're
constituted a bubble or just a very expensive market. But one way or another, possibly it's not that surprising to see American exceptionalism begin to be questioned in the context of the US equity market and for there to begin to be flows into other markets, most obviously Europe at
the moment. But big question for our listeners, particularly as we come up to the end of ice season, is if they're investing now, should they say, Okay, do you know what have made a lot of money in America over the last decade, and maybe it's time to look elsewhere?
And if that is the case, where yeah, extac question a question of course that preoccupies those thinking about their ISA, but also those that are allocating large sovereign pools of
money as well. I'd start with a bit of kind of common sense thinking, which is, whenever you hear terms like exceptional or uninvestable, it pays to think through whether there's another side to that, because typically those things you use the word bubble, but ply those types of words start to reverberate when consensuses are so strong that things
are priced to some degree to perfection. You could take one side of the world today China allegedly uninvestable, where that's priced for uninvestibility, and you take the other side of the world, the US, which is exceptional, and in some parts of that market price for exceptionalism. I mean, I tend to think that it really does pay to think about the other side on that typically because that's
normally a moment of complacency. And indeed, if you were to do something like Google trend search the word US exceptionalism, I suspect it would probably peak sometime after the US election in the fourth quarter last year, which was around the time the market peaked. Big picture, nothing's uninvestable and nothing's exceptional. It really markets and assets have values, and those values have to be connected to reality, and I think we could we should be thinking about things in
those terms. I think that what the sort of extraordinary, if not exceptional, thing about US equities is the level of concentration. And of course you've had times in the
past where equities have been highly concentrated. In nifty to fifty was in the sixties was a period where we saw kind of concentration in a broader basket of stocks them Today, though, and what's extraordinary about today is that if you take the S and P. Five hundred, you have one and a half percent of the constituents by number that account for thirty five percent of the index weight.
And that's the Mega seven.
And that's that that type of group that's problematic because it means you are not really investing in a broad index. You're investing in a kind of group of stocks. I think that we are huge believers in everything that we
do in institutional portfolios at this company in diversification. And where you end up today thinking investing in an SMP tracker is I think you are in something that is pretty undiversified, both in terms of number of stocks, but also, and this is critical, in terms of the commonality of the drivers of those stocks. Call them the mag seven for example, are all broadly in a group technology, long duration cash flows, as in like big growthy type companies,
high quality balance sheets. They've all got a certain type of attribute and those attributes respond to macroeconomic conditions in a very similar way. So if you're clustered into an investment that is overweight one type of style, you have to be prepared for the type to go out in that type of style. That's a long intro to your question, but in my mind, thinking about the medium term, let's say the sort of five year plus time horizon, we
absolutely have to be thinking about diversifying holdings. It seems unlikely to me that at the level of valuation that US equities as a whole are to day and the concentration of that group of stocks is at in particular, that you're going to get super normal returns on a multi year time horizon looking forward.
But does that interrupt you briefly? Is that even the case if these companies were to meet their long term earnings forecasts. So if you look at some of the forecasts for earnings for those huge companies there, I mean, they're extraordinary, expecting earnings to grow twenty twenty five percent five years out, et cetera. Look at that kind of thing, and you say, well, if that was true, maybe these valuations are justified. I wouldn't, by the way, but other people mind.
I would probably say, you need them to beat those numbers to do well. So the bar's set high. That's one thing. The bar is already set high. And that's back to that point really about when you start getting language like exceptionalism, it tells you that people are bought in.
There's a thematic or a narrative that starts to explain things that you have to be a little bit skeptical of the other side of it, though, quite simply, is not the company earnings, which of course matter enormously for the discrete stock if you buy that stock, but it's also about the macroeconomic environment, and there are enormous cross
currents today in the global economy. I want to get to inflation in a moment, but because it's critically important and I think we're in a world today that's not like one that any of us have really experienced in our professional lifetimes. You could even just start with Europe and what Europe today is intending to do with its plan to rearm itself. Europe has been the big European economies have been moribund for a long time, very stagnant, very much lacking industrial policy in any form at all,
saddled with a lot of debt, low productivity growth. And what you're talking about today, particularly coming out of Germany, which she was an economy with plenty of fiscal room, is something that I think dramatically changes the nominal growth profile of that country, and in doing so, dramatically changes the earnings growth potential of the companies in that country. On a multi year view. Some estimates this is a bigger stimulus for Germany than reunification for those who can
remember it, which was a big deal. So let's without even necessarily having to wonder whether that group of exceptional quote unquote exceptional US are going to beat their earnings, you can start to think about the fact that there are things moving in other parts of the world that are probably not particularly well understood.
The key thing to say is that they are alternatives that until very recently, most equity investors will look around the world and say, well, it's looking a little pricey, But the truth is there isn't any alternative. And they would also have believed, until relatively recently that all the big gains in technology in AI and space and evs, etcetera, etcetera, are all going to come from the US, not from China.
And maybe deepsek with the catalyst to say, do you know what, Actually there's quite a lot going on in AA and China. Maybe it's not uninvestable, maybe it is an alternative. So Germany and China are two sides of this beginning of an idea that there is an alternative.
I think you're so spot on China. I think the markets have this kind of tendency to have a sort of single narrative that they latch onto, and the single narrative on China has been deflationary bust. This is a
deflationary bust economy. And actually what you can see with the emergence of deep sea with the news this week about BYD's ultra fast battery charging for the electric vehicles, is that actually, during this period of attempted containment of the Chinese economy over the last almost decade, that China has really learned to do more with less. This has been an innovative catalyst for China, not a headwind, and
so I think that's an excellent point. But it's also, by the way, just one part of what's going on in China. Conviction has been building for some time that the Chinese authorities, the policymakers there are really starting to understand how to fix their deflationary risk. That there are
several pillars to this. The technology and innovation part is of course a key one, but actually the really important thing here, and we think we're probably likely to see some much more concrete announcements on this later this year. If the US and China do some kind of trade deal. Is that we think we're moving into an environment where the Chinese, as you makers, are going to reform their social security system quite materially, and that's incredibly important because
China has a massive savings rate. In essence, what happens in China is if you're a migrant worker, your social security benefits are payable in the place that you were born, not the place that you live, and that requires you to save, and that means that consumption is repressed by that. And the plan that's taking shape, we think, is one which will allow social security benefits to follow your domicile or your residence and will allow people to save less
and spend more. Which sounds boring, it will be enormous for the Chinese economy, and actually we think we're on That's.
Interesting because there's been talk for years about the Chinese authorities understanding that they need to try and shift to a more consumption based economy but finding it incredibly difficult to do, not being able to find the route through to make people start spending. But obviously this makes sense. If you have a security net wherever you live, you're much more likely to spend the money that you do have.
Yes, and it's a different flavor to China. Let's say, the one that people have been used to from the twenty tens onwards has been a sort of luxury obsessed China conspicuous consumption. And let's not forget that g was very, very vocal about common prosperity. And we think that probably the way this takes place is actually mass consumption, that the shape of consumption in China will have changed. All of which is just to say there are really interesting
opportunities outside the US. That the US is a dynamic market, it's a phenomenal economy, It innovates brilliantly. It has a place in everyone's portfolio. But there are opportunities today to think about proper allocations outside the US before, if I may, before we come onto inflation, which is really important. One other thing, just so that I don't end up with
egg on my face. There is I think a real possibility in the near term, call it the next few months, that actually all this fear about the end of US
exceptionalism disappears. I think it's entirely possible. We've had this big wobble in markets recently which has been very much focused on the US, has been centered around unpredictable policy around whether or not the economy will stay out of recession, and it's I think reasonable to assume that actually, as we get more clarity over policy, and it's entirely reasonable for some of that risk premium to come back out again, and we may well find ourselves in three months time
looking back at or near all time highs in US equities, and people will think that's all over. It is not to say that the earlier conversation about there being other opportunities is wrong. It's just that actually these fears dissipate quite quickly as prices change.
I agree with you that could well happen. But I also think that the perlavas over the last few months and the shifts in the other markets relative to the US might mean just a little bit of the spell
is broken. A little bit of the spell is broken, and pretty much any global allocator sitting down now or in three months or in six months is going to have in mind that the US is not the only market in the world, and have in mind that perhaps they were far too concentrated in that market in a fragmenting world.
I don't disagree a soul.
All right, I'm going to let you lose on inflation. I know that's where you really want to go.
I'm a child of the seventies in my blood, even though I didn't know it. Inflation, yes, so inflation is really important to markets. We have all through our professional lives lived through this period that we call the Great Moderation,
which was really from the late eighties onwards. I think the time was only coined in the early two thousands, but it describes this environment that once central bankers in the eighties and supply side reform in the US and the UK and other countries had tamed inflation, we moved to a much less volatile macroeconomic environment, and it was a period in which asset prices obviously have done extraordinarily well,
and the world has grown tremendously through that period. What we see in that time is that central banks explicitly targeted inflation. Inflation has been very well behaved in general. In fact, it's tended that the risks have been to the downside, not the upside. So you would go through a period like the dot Com bust, or the Great Financial Crisis, or the Eurozone debt crisis, and central bankers were always primed to act to defend against deflation, not
worrying about inflation. And we talk in markets about the FED put this idea that the FED is there to protect you. That comes from the fact that the Federal Reserve the most important policy making central bank in the world, even for us here in the UK, that when they don't have to worry about inflation risks on the upside, they can concentrate entirely on growth. So that's what that's
the world we've lived in. And what that's done for markets and for savers is it's created this beautiful environment where bond prices and stock prices are uncorrelated against each other. And I'll explain a little bit what I mean by that.
It would mean that when you're in an environment like the GFS either Great Financial Crisis twenty eight two thousand and nine, as your equity allocation sold off on fears of recession and systemic crisis, your bond portfolio performed extremely well because the world could have conviction that central bankers had your back. Effectively, they would cut rates and stimulate policy sufficiently to rescue the economy, and in cutting rates bonds would appreciate, bond values would go up on that.
So that was a world where to put some numbers on it. In two thousand and eight or two thousand and nine, by the trough of the Great Financial Crisis, equities in the world had lost forty percent, but a sixty to forty portfolio of bonds and equities had lost about ten to twelve percent, really mitigated by having inverse
correlations opposite behavior of these two asset classes. What happened in twenty twenty two when inflation came back is that the conviction that central banks would be able to protect you from disaster inequities dissipated. Suddenly, this policy goal that no one had worried about for thirty five years came back. So what we found was that actually, as equity prices came down, central bankers not only didn't have our back, they were making things worse by hiking interest rates, quote unquote,
making things worse. They were dealing with an inflation problem. And what that did at that point in your portfolio was it meant you lost money in both equities and bonds. And that was a real shock, I think, to the industry, and I guess what we worry about with inflation is that it's a little bit a case that once the genie's out of the bottle, it's quite hard to get it back in again. Inflation expectations get very sticky. We
see this everywhere in the world. Japan, which has been a good equity market story for the last couple of years. In particular, Japan has had some central bank surveys on inflation and they show almost unprecedented expectations of inflation, both by households and businesses. In the UK here last week, I think it was we had wage data private sector
earnings which are growing at about six percent. So you think about the fact that this economy is really not growing very much today at all, but there is an entrenched expectation of wage growth and there isn't very much productivity growth in the UK to support that. That's a problem because that's starting to demonstrate that actually inflation is
becoming systemic to some extent, which is problematic. Now that doesn't mean we believe that you're going to experience inflation going back up to double digits again, as it did in twenty twenty one twenty twenty two, but what it may well mean is that we're in an environment where it's a bit above target for quite a long time, and if we find ourselves in a situation where growth starts to disappoint, central banks will be constrained on how much they can cut.
Yeah. Well, there was an interesting survey that we talked about at the time. You may have seen when inflation was worth very high in the UK feedback that once inflation goes over eight percent, it's really hard to get it back to target. You know, it takes I think it was an average of fourteen years from that sebect. It doesn't mean that you get hyper inflation, doesn't mean it goes fifteen percent. Just means that once you go
over eighty eight percent, people really notice. There's a new generational understanding that this can happen to prices, and people fight it. So it's hard to get it back down to two. Maybe you can get it to four, and maybe you can get it to three, two point eight, two point nine. Man to get it back down to two very hard.
I think that's absolutely right. I think that's absolutely right. I think it just tying it back to your very first question, which is about US equity markets. The other thing in all of this is that the companies today that are the biggest, most successful, best performing companies in US equities over the last five to ten years are actually the ones that are most sensitive to inflation. We have this concept that we think about, which is a
bit technical, but the duration of cash flows. And what we mean by that is if you're a really growthy company, if you're an AI company that's got a runway of growth for the next twenty years, the market will award you a really high multiple. Your valuation will be high on the expectation of that incredibly long runway for growth.
In contrast, if you're a company that has a bunch of factories that make ball bearings, and you know exactly how many ball bearings are coming out every year and what the price of those ball bearings will be, you've got what we think of its short duration cash flows. The latter is not very sensitive to interest rates because it's very predictable and short in nature, so when you discount it, the impact is not very much the former.
When you put interest rates up into your model on how you value that incredibly long stream of earnings and cash flows, it has a much much bigger impact and so guess what, no surprise. In twenty twenty two, when this inflation thing really bit, one of the worst performing equity markets was the US relative terms of the UK, which is a value market, did really well.
Right.
So there's two big implications for this. I think one is your first question, which is we've got to think about, if inflation is sticky, how we allocate in the world. And the other is in thinking about multi asset portfolios, which is a really sensible way to save, particularly depending on where you are in your time of life, but that multi asset portfolios may well not give you the protection today that they have done for such a long period of time in the past.
Let's be the first bit of that. First, in a global inflationary environment, in an equity sense, which markets look the most attractive.
Cheap ones?
Yeah, cheap one one for the UK.
Yeah, Look, there's certainly a case for it. I think we have a lot of high quality assets in the
UK that trade it discounts. And I think there's also this extraordinary thing that we've seen both of the UK and continental Europe, which is what we think of as the postcode phenomenon, which is you can have a business that's domiciled in Europe or the UK, that trades at a material discount to a US peer, even if it has a large proportion of its assets or earnings coming from the US, And that just speaks to the way that capital is allocated, that it's been moving perhaps passively or.
Yeah, I was going to say, it's a function of passive investment. Right, People invest with an allocation into the US and a very small allocation to the UK. So the automatic result is that American companies will be more highly valued than UK companies, regardless of what it is that they do. A should be a great opportunity for the stock pick or the individual investor, just hasn't worked out that way recently.
If you have a long enough time horizon, or even a medium term time horizon, I think there is now There are now tailwinds for that valuation gap to close that there probably haven't been before.
You say, cheap we said the UK, China, Japan, certain emerging markets.
Yeah, all of those.
Basically everywhere except for America.
And within the US, there are plenty of good companies that also by virtue of size or style or sector, are overlooked. So I think there is I think it's a world in which active management probably guess what the active manager says, as a world in which active management couldn't work well. But actually there's a world.
I think how many active managers we have who tell us that the age of actor is back?
It would be a shame if we didn't. But I do think there is a lot of value to identify in markets today, and there are a lot of different macroeconomic impulses that are making those catalysts become a bit more real versus where they were ten years ago.
Perhaps the politics of America will probably mean because another layer of inflation, doesn't it that there are new tariffs and produced globally. Trade wars are expensive.
It's such an interesting question. Actually, we've done an awful lot of discussion of this. I work with it. For those of your listeners who'd like to read, I work with an extremely talented macroanalyst called Henry Neville, who writes prodigiously and publishes on our website and anyone can read it,
and he writes on very interesting macro topics. But he and I spent a great deal of time trying to discussing the impact of tariffs on inflation because it is it seems to be the case that all analysis we see of it focuses on the mechanical impact of a price increase for the consumer, which is, of course, in
the moment that it happens, inflationary. But actually, if you look back over history, if you look at the nineteen thirties, which had some obvious specific context of its own in terms of the Great Depression that had preceded it, but actually tariffs during that period were actually very disinflationary or deflationary.
And you can also think about a tariff in some way like a sales tax, and we have a more recent experience in the last decade of Japan implementing sales taxes where when you look at the experience of inflation, you have a bump that reflects the imposition of the sales tax, and then as that comes out of the year on year comparison, things just normalize again. So it isn't obvious to me after tariffs what the inflationary consequences
of tariffs are. I think, what is I mean? It is obvious that you will have a step change in inflation to reflect tariffs. It's also the case that probably a less globalized world with more fragmented supply chains is something that will have a tendency to be more inflation.
Okay, let's go to your second part. Then, how in environment like this, if you can't use your old sixty to forty portfolio to protect you anymore, what do you
put in your multi asset portfolio? And we've had various suggestions on the podcast over the last few months, and it mostly end up coming down on global equities with a lot more balanced than you have at the moment, for sixty percent cash for forty percent, gold for forty percent gold, or bitcoin for the other forty percent, etc. And then we had the abliity as well, a big part of private equity, which we wouldn't necessarily feel would be the answer. What's your answer?
I would frame it in a couple of ways. I think that the multi asset portfolio has definitely still got a real use. I think it's a really good way for individual investors to get a diversified portfolio. But I think if you're cognizant of the risk that I've mentioned, that perhaps the bomb part of it doesn't protect you when you need it. Now you need to think about implementations of multi asset portfolios that then think about managing
risk a bit more dynamically. One way to think about that is portfolios that can identify where correlations between different asset classes are changing and dynamically shift the allocation or
reduce the allocation to one of those asset classes. So that's something that we can do systematically, but it's a way of ensuring that you can stay in a really efficient multi asset portfolio but avoid some of the kind of some of the extremes of equity volatility, particularly if you don't believe you're going to get rescued by the
bomb market. The other thing that we think makes a great deal of sense, and the conversations that we have with big allocators, I think reflect this is the introduction of liquid alternatives into your portfolio. And that's just a bit of terminology that really requires some explanation.
It does because when we think about alternatives, probably most of our listeners, when they think about alternatives, they're mainly thinking about things which are very I liquid, right, So they're thinking, they're thinking about private equity, they're thinking about property, they're thinking about forestry. Maybe they're thinking about a physical portfolio of metals, etc. They're not thinking about anything that is particularly liquid. So this is new for us.
That way merin b dragons, we think, because the liquid part's really critical if you think about what I've described about the relationship between So let's say you have your core exposure, your core portfolio that gives you some exposure to bonds, which is a pretty good thing today. They yield something nice. You get an income out of bonds that you haven't had for many years. So you want some bonds and you want some equities because they're a
good long term growth asset. If you have a year like twenty twenty two and both of them draw down at the same period of time, and you're not able to tap your alternatives, which are by definition designed to diversify, then in our mind, they've failed to do their job. The problem that I think, the thing we worry about with private equity is twofold. The first is that what you're actually investing in is a portfolio of smaller companies that are subject to the same macroeconomic and micro forces
that public equities are. So they are companies that have to earn cash flows and deliver earnings and pay dividends and pay off debt and do all the things that public companies have to do, but you're doing it in a liquid form. So the first question is it actually an alternative? Is it a diversifier? People think it's a diversifier because it doesn't price very regularly, but actually is the inherent volatility and cash flow profile of that investment
different from what you have in public equities. So that's question number one. But then question number two is even if it is that, the value of a liquid diversifying alternative is that you can tap it when you need it, and if you can't tap it for seven or eight years, then the question is it actually diversifying for you? And does it have a function that allows you to opportunistically add exposure when you need it. I'll give you an example, a really recent example in the UK, which is twenty
twenty two September the LDI crisis. So that was a period where the UK sixty forty portfolio lost about eight percent in two weeks, which is a lot, right. This is a balanced portfolio that many pension schemes are exposed to,
and it lost eight percent in two weeks. Over the same period, a diversified portfolio of what we call liquid alternatives, so things that perhaps incorporate equity market neutral, non directional equities trend following multi asset investing, but in an alternative form over a similar period, it made about four percent
now the liquidity of that portfolio. If you've got something that's moving in the opposite direction to your core portfolio and it's highly liquid, you can liquidate it and you can buy more of the traditional assets that are at that moment in time dislocated. And that's got a real value. It's got a real value to institutional scale asset allocators, and it's got a real value to retail investors as well.
Okay, I'm going to put links in the show notes to your very interesting sounding economist, was it Henry Neville?
Henry Neville?
Henry Neville, And I'm going to put a link if you don't mind. The report that you wrote on this type of diversification. Very good, so that we just going to look at it more carefully because is super interesting. Can I ask you one or two other quick questions?
Please?
China up a lot this year so far. I'm still happy with that.
For the rest of the year, yeah, I think it will take a pause I think we've gone from uninvestable to investable. So where I started, which is beware of narratives and how they change in consensuses. Let me put it this way, I wouldn't be surprised. I think I said at the beginning of this year that a reasonable bingo kard would be China for the best performing market in the US to give you pretty much nothing, and I still think that's probably recent.
Okay, what are you reading at the moment?
That's an excellent question. I'm reading a book of ts Eliot's poetry, because I'm woefully poorly read when it comes to T. S. Eliot. I have to say, actually that if your readers are looking for advice on finance books, I'm the wrong person because I'm trying to spend my time learning more about the human condition and less about financial markets.
Some people would say those were the same things. Final question bitcoin on gold, gold.
I would It's not to say that I don't think there's a regulatory tailwind that supports crypto, but I think gold has an established use as a store of value over millennia. We know that we've done some really interesting work. We did a paper, an academic paper called the best strategies for the worst times, in which we look at different ways to protect wealth in the worst part of equity drawdowns, and actually generally in bad times, gold gives
you a positive excess return or positive real returns. I tend to think that for the long term, you want to be in something that has a proven store of value.
That's why we like it too. Thanks Ed, it's been really good having you on Great pleasure, Maren.
Thank you very much.
Thanks for listening to this week's Maren Talk to Your Money. If you like us, share rate, review, and subscribe wherever you listen to the 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 Meren sw and John is John Underscore stepek Eddie on Twitter. I am not I had a feeling you were going to say that, but you know, if you're interested in the human condition, it's all out there.
I was once and then I found that it was possibly a facet of the human condition I didn't like too much.
Fair enough, fair Enough. This episode was hosted by me Maren zamzet Web. It was produced by Someersadi production and support by Moses and especial thanks of course to ed Cole