September 22, 2025 • 36 mins
Is US exceptionalism over? Pictet Asset Management's Chief Strategist Luca Paolini joins host Merryn Somerset Webb to explain why the world is entering an “age of convergence.” They cover why America’s market dominance may fade, where Europe and China are heading, what AI hype really means and why it might be time to rethink bonds, gold and diversification.
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Speaker 1 (00:02):
Bloomberg Audio Studios, Podcasts, Radio News.
Speaker 2 (00:14):
Welcome to Maren Talks Money, the podcast in which people
who know the markets explain the markets. I'm Maren sumsat Web.
This week i am speaking with Luca Paulini, chief strategist
at Pictaate Asset Management.
Speaker 3 (00:25):
Now.
Speaker 2 (00:25):
We had Luca on the show back in January twenty
twenty three when he made the case of things we're
looking up for the global economy and not quite as
bad as other people thought in terms of both inflation
and recession risk. We wanted to bring him back saf
his outlook has changed, and to talk to him about
the end of American acceptionalism and the beginning of what
he called the age of convergence. Luca, thank you so
(00:48):
much for joining us today. We really appreciate it. It's
nice to have you on again. We haven't had you on,
we think for about two years, maybe more at this point,
so we've got a lot to catch up on.
Speaker 3 (00:57):
Sure.
Speaker 2 (00:58):
When you put out your report at the beginning of
the year about what you expect next, you talked about
the three phases that we've been through and we're about
to go through. The first was the Great Moderation, which
we've talked about a lot on this podcast over the
last few years. So that was the period from nineteen
eighty to two thousand and seven, the end of the
Cold War, the introduction of the Internet to our economies,
disinflation and globalization or as a result of China entering
(01:21):
the global economy that is long behind us now. And
then you put down two thousand and eight post financial
crisis to twenty twenty four as what you call the
age of uncertainty, and that is the period of the
euro crisis, of Brexit, of COVID, of the beginning of
the war in Ukraine, and also of course this long,
(01:42):
long period of US exceptionalism and super low interest rates.
And you now say that we have moved from this
age of uncertainty into what you called the Great convergence.
So can we start by just talking about what you
mean by this, what is taking out from the older
age into when new age.
Speaker 3 (02:02):
Well let me say though, that the age of uncertainty,
or let's really uncertainty, is still with us. We're not
saying that the Great Conversion will imply, you know, a
return to a golden age for financial markets and societies
and the economy. What we are saying, is that the
phase of exceptionalism where US outperform financially but also politically,
(02:24):
is pretty much over. Europe may not see a boom,
and it's difficult to imagine that, but Europe is i
think going slowly as always in the right direction, and
China is kind of stabilizing in a way. So you
see the US from our point of view, we lose
some of the kind of this kind of big performance
(02:44):
that the US had in the past. China we stabilized.
Europe will get better and this kind of environment is
still very uncertain, right, very uncertain, but will not be
kind of dominated by the US only. So it's a
much more you know, with the convergence, talk about convention,
it's more about the economics, economic growth, monetary policy, but
(03:05):
also financial returns. It's not kind of we are well
aware of the fact that when you look at political
joe politically, you're going to see even more fragmentation. So
in a way it's not a convergence there, but from
a purely economic and financial point of view. Again, the
era of this US our performance coming to an end.
Europe is recovering Chinese stabiliaity, which is very different from obviously,
(03:28):
let's say in the past five to ten years.
Speaker 2 (03:31):
But if we look at it like that, this is
not about the US performing less well, it's about other
areas performing better.
Speaker 3 (03:43):
Well. Yes and no, because you know it's interesting, you
know that when you look at the performance of the
past five, ten years or seven years, right, the initial
of the starting point is critical. A lot of investors
very surprised when I tell them the UK the UK
equities eies are beaten US equities since the end of
twenty twenties. It really depends when when you start your charge.
(04:06):
In a way, right, what we are saying here is
that again is financial returns on equitism bonds will be
much lower than the low terme average. Effectively, everything will
be kind of will be lower. And this, in a way,
that's the conversion we are talking about. It's not that
Europe would be the new US. It's more than most
(04:26):
countries we go to a period of let's say we
growth and relatively moderate returns. And so in that sense,
that's what the conversions that were in mind now Europe
and China becoming let's see the new US internal performance
rather a convergence to a very low, relatively low level
of economic growth, but also of financial returns.
Speaker 2 (04:48):
Okay, so we divide it up into two and look
first at the economic growth bet and then move on
to talking about the market reaction to that economic growth.
So DUS is still growing faster than most of Europe,
and we would still expect that to continue. Right hard
to see the UK and much of Europe hitting growth
rates above a couple of percent.
Speaker 3 (05:08):
Yes, but you know, I think what we are missing
here is that we look the last five years atriast
on our analysis, roughly forty percent of US growth has
come from an exceptionally loose physical monetary policy. You may say, well,
in Europe has been the same, Not really, because in Europe,
if you look at dept to GDP ratio, it's pretty
(05:28):
much the same of five years ago. In the US
is much much higher. So the US had a combination
of factors and on the AI is also an incredibly
loose and expansion in physical policy that is not, in
our view, sustainable in the very long term. So if
you remove let's say the policy aspect of that, you
know the gap between Europe and US. It's significant, but
(05:49):
not extremely so. So this is I think the starting point.
The second is that Europe, with all the problems, I
think it's fair to say that what's going on in Germany,
especially the end of the day break, this is really
like a kind of a game changer. Now we know,
as always things in Europe will move very very slowly,
(06:09):
but I think Germany embracing physical activism is something new
and we have obviously consequences and split over also for
other countries. Now we may say that this is not
what Europe need. We need obviously in Europe a big
boost to productive they may not come from physical activism,
but you see there's a big change. So Europe in
(06:31):
a way will reflate, while the US will face constraints
politically economic in terms of the amount of stimulus that
can provide. And this is actually the main difference. So
when you look at the next five years, we expect
Europe and the US to growth pretty much at the
same level across to one point five. The difference though
that at least in Europe we will have inflation back
(06:52):
to normal, but in the US will remain higher. And
I think the ratio between growth and inflation, the mix
is will really matter for an markets would become much
less favorable for the US and better for Europe. That's
one of the things that we are saying about these
conversion that we'll see in the next few years.
Speaker 2 (07:11):
Okay, So to agree that the US will be held
back by its very high levels of debt and deficit
and unable to push forward fiscally in the same way
as Europe. But then when you look at and we
talk about Germany and the end of the debt break,
et cetera, but Germany has its own massive problem with
it with debt and deficits, et cetera. And I saw
something in the paper this morning and I hadn't realized
(07:32):
it was quite so high. That German welfare payments including
pensions are about thirty percent of GDP and that clearly unsustainable.
And you look at a similar situation in the UK
and France and do you think, well, the fiscal position
of these countries is basically unsustainable even and you know,
we might say previously we used to say unsustainable in
the long term, Now we're going there kind of unsustainable
(07:52):
in the short term. So these have got to be
massive drags on growth and the ability of any of
these countries to move forward unless they see massive gains
in productivity.
Speaker 3 (08:01):
But I think I think one thing that is very
important Twilight is demographics. We still have the idea that
demographics in the US is great and in Europe is bad.
When you look at the employment rate in euro US
is pretty much the same. Population growth in the US
is pretty much growing in line with Europe, mainly because
again a decline in immigration. So again it's not that
(08:22):
we're not saying that Europe will boom. What we are
saying is that this gap that we have seen in
the past we shrink. And again you're totally right in Europe,
it's not. You know, what Europe need is first of all,
a change in the mindset was resk taking and this
requires also a change in the mindset exactly of European
economic agents and an investor. It's not just you know,
(08:46):
a few points of fiscal definity that can make a difference.
But you know, the trend I think is in place.
I think Europe is aware of the weaknesses. I think
is moving very slowly. The US, i'm afraid, is going
the opposite direction. And and I think again the crackdown
on immigration is one I think and the fact that
you know, we are even talking about the independence for
(09:07):
this example of the fact, well the US is not
in a way in such a solid place it was
just a few years ago, and that's the difference. I
think that that is for US very relevant.
Speaker 2 (09:21):
Is there evidence yet that the crackdown on immigration is
affecting growth.
Speaker 3 (09:26):
We have seen a significant weakening on deliberate market in
the US, but it's very difficult to say this it
is down to immigration, is probably down to the impact
of tariffs, and also the fact that the US economy
has been very strong for five years, so a phase
of weakness is inevitable. No, I don't think that it's
too early to say there is an impact on that.
(09:46):
But you know, the US, this access the ES was
based on human capital and in few immigration faults and
universities are not let's say US free to operate as
before for a number of reasons. Well, you know, it's
just an impact on on productive and impact on growth.
Speaker 2 (10:04):
But I guess you could still afire. We're still looking
for a way to explain the future for the US
and say well, exceptionalism is still there. They're very much
ahead of US and of Europe in terms of AI
for example, and in terms of the cheap energy required
to drive the AI revolution, So that is something that
still remains specific to the US.
Speaker 3 (10:24):
There is no question that the US is economically more competitive
than Europe. You mentioned the cost of energy is totally right,
but bear in mind that we are going into a
phase where a lot of energy we come from basically
solar panels, and that would be renewables, which obviously makes
Europe less dependent on energy import and make the US
(10:46):
in a way less exceptional because if all the energy
is produced locally solar panel for example, then obviously the
energy dominus the US become less less relevant. On tech,
you're totally right. The question though on tech is that,
especially what's going on AAAI, there is a clear advantage
of the US in terms of spending. We see that
(11:06):
on a daily basis. The question though, is that is
this kind of all this investment pay off or not
is the US and all US overspending on AI. This
is really an open question. I don't have an answer
for that, but there is no question that if there
is one element that makes the US still an economy
which is much more kind of than am the Europe.
(11:28):
So the right is tech, but it's not you know,
it's not just tech. When you look also the US market,
right or the global market, tech is only only twenty
seven percent of the market. It's not one hundred percent.
There are other elements if you have to take into consideration.
But yeah, we don't expect the tech gap between US
and Europe to close, but maybe again would be less dramatic,
(11:50):
less visible than it is now.
Speaker 2 (11:54):
So you say, the question, the real question is whether
all this investment in AI pays off or not? What
is what is your view there there's a great AI
bubble that's going to collapse and leave a lot of
people like it' slightly red faced or something else.
Speaker 3 (12:05):
Well, you know, there is some elements of a bubble.
First of all, bubbles also need a macrocroonomy outlook the
allow bubble to happen, typically abundant liquidity, financial deregulation, and
a strong kind of narrative. I think probably all three
are there. I don't think the evaluation is so extreme
for AI stocks to say, well, that's a bubble. But
(12:28):
it's almost inevitable when you have such a big increase
in spending, some of this money will be wasted. It's
inevitable that happened all the time. I don't know when
this will materialize. There could be a second wave. It
was with the internet. You know, you have a bubble,
then you have a period of in a thousand, then
there was the real kind of boom also for the
economy later on. No, look, I am a strong believer
(12:51):
in A. I my worry here is that what happened,
for example, with deep sick, the risk is that I
will be commody time is sooner rather than later. And
so all this advantage the US has as a first
mover will at the end not this disappear, but may
be actually reduced. And this again, this is really what
(13:11):
matters for financial returns, right, is the rate of change,
not the level. And I think in this sense, I
think I see that again this advantage of the US,
even in tech, may not last forever, at least not
in the same extent.
Speaker 2 (13:27):
Okay, so does that suggest to you that a large
part of the US market is very overvalued?
Speaker 3 (13:32):
You know, we always think about tech talks, and you know,
I think, what is I think not well known that Walmart,
which is you know, it was actually an early adopter
of A but Walmart is the biggest return in the world.
Is not a tech company's trading and a higher multiple
than Amazon costco is trading and a multiple or peer
ratio of fifty start US more than thirty. So it's
(13:54):
not just tech. Actually tech, when you look at the
growth rates, I think it's almost fairly valued. Is part
of the US market is I think, much more expensive,
and nobody's talking about it. Again. It made down to
a you know, too much liquidity in the system, too
much optimism. Also the fact that, let's be very honest,
some of these companies are incredibly good, incredibly efficient, and
(14:16):
so maybe they deserve this kind of multiple when I
see kind of retailers start trading a fifty time for earnings.
But I start to feel that it is a little bit stretched.
So it's not just tech, it's the overall mark in
the US, which I think is quite expensive. Considering the
gross is not five it's two five percent. If you're
not in the nineties right when gross was five percent,
(14:38):
inflation was one percent, is a very different environment which
I think will require multiples and need to be lower
than the current levels.
Speaker 2 (14:48):
It's interesting, isn't At first? I love that. I love
the phrase a little bit stretched, which is a great
financial markets usemism for screamingly expensive, getat while you still can.
So there are there will be an over lot of
people and invested in the US. You think that because
they have a track of fund of some kind, they're diversified,
so they feel that they're holding lots of different companies
and therefore they're diversified across the board. But of course
(15:10):
they kind of not because they're still very overexposed to
the expensive end of the US. So it's one of
those occasions when the idea that you're diversified is untrue
because you're effectively exposed to the same type of companies
across the board.
Speaker 3 (15:24):
Yeah, and I think Marian, it's what is also important
is that let's say you are European investors that invest passively,
but you have almost seventy percent of your wealth in
the US. You're taking on the evaluation risk but also
the currency risk, and you know you know what I mean,
as we have seen it recently. So again we're not
saying that the US talks are terrible. Not. What we
(15:45):
are saying is that, especially if you're not in US
investor holding so much in a market which is heavily concentrated,
it's expensively expensive currency with all the political risks, I
think is a risk that is not worth taking. And
so yeah, that we have is to reduce these explosions
on term in the US and adding to either domestic stocks,
(16:05):
but even the bond market. Obviously very few people want
to invest in, and I think it's almost time to
reconsider that.
Speaker 2 (16:29):
So if you're moving money out of the US, and
you're moving it, where where do you move into? I mean,
is it still oky to by German stocks, by Spanish dogs?
They've gone up so much over the last year, the
UK slightly less, but nonetheless we've performed reasonably well. Where
where is the safest equity market to move into?
Speaker 3 (16:50):
Well, safest is a tricky one because we know that
when things go wrong, the correlation goes to one right,
and this is this is one actually one of the
reasons why investors still like the SMP We have stocked
because we say, well, everything goes down, maybe I lose
less in the US than in Europe. No, our view
is that again it depends where you First of all,
(17:11):
where you are, So let's say if you are in
the UK, I think the choice for us pretty straightforward.
You should invest and know that we discussed this before.
You should invest a little bit more in UK stocks,
so in domestic stock similar for Europe, right, But also
I think what our approach is is try to think
more inequal weighted terms. So let's say instead of having
(17:34):
seventy percent in the US and thirty percent elsewhere, I
think fifty percent, say in the US and fifty percent
no US. It makes sense. It really depends where you are.
If you are in the UK Switzerland, for example, you
should have probably more in the domestic stocks. You should
also add to emerging market where they're doing very well,
not because there is anything dramatic happening, just because the
(17:57):
dollar is getting weaker and the dollar will continue to
get weak, emerging market will rate. So again it's a
little bit of everything, but really depends on where you're from.
For UK investors, I think that's I think a good
time to invest in UK stocks. But we also have
the view that you should have a second look at
mid caps, small caps that have been a little bit
(18:17):
lagging even in the UK, and so they have I
think good valuation, the kind of I think a recent
outlook for earnings. So I think again diversification not for
the because the usual thing you have to diversify, know,
is the evaluation element. The market economy out look point
to a more diversified but let's see equally weighted kind
(18:40):
of approach.
Speaker 2 (18:41):
Yeah, so diversify and part across the valuations and the UK.
You said, put a little bit more into the UK.
But the UK is really very cheap relative to most
other markets still, so it would seem a perfectly reasonab place.
Speaker 3 (18:53):
I mean, evaluation is not everything, right, well, it's quite
a lot everything, but you know it's the UK market
trade at the same level of emerging markets right in
term before earn. Now you can say there is less
growth and you can emerging market, that's true, but the
risk still is still less. So I do think that
again investors should focus a little bit more on their
domestic market and also move away from just simply investing
(19:17):
in large caps. Look at me caps. There are some
great stocks there, even small caps. So that's that's the
strategy that we have.
Speaker 2 (19:24):
Okay, let's go back then to the bond market. You're say,
no one really feels most like investing in bones at
the moment, which is fair. They kind of don't. So
what's the reasoning.
Speaker 3 (19:34):
There, Well, you know, a few years ago, I remember
you remember that the assumption was there is nothing safer
than German bones, you remember, right, Yeah, Well, you know,
in real terms you would have lost almost seventy percent
in a couple of years. So now if you are investors,
and you know and and you lose so much on
(19:56):
an asset class that's supposed to be safe, well I
can understand they're quite investor reluctant to be invested in it.
But again, it's not just valuation. But let's look at valuation, right,
what is the anchor? What is the right value for
you know, a domestic government bonds? I mean historically but
also in theory, the yield that you get from let's
(20:18):
say guilds or bones or treasure should be more or
less in live with trend growth. This is the valuation
anchor for bonds. And you know a few years ago
when boones was negative, very close to zero, close to zero,
clearly there was an evaluation program. And now we're in
a situation where roughly speaking, roughly speaking, bone yields, government
(20:39):
bond yields are more or less in line with the
trend growth rate of their respective economy. So you ask
close to four percent. You know in the UK is
all higher because of inflation. So we are in a
position where you know, bonds are not particularly cheap, but
they're not as expensive and ecreites are not as good.
To say, well adjust in that inequities forget about bonds.
(21:02):
You have to be selective, though. I think there is
I think value guilds very good value, and I think
especially in inflation protected bonds because if you're wrong on
inflation and inflation goes through the roof, at least we
have the inflation protection if you go into a recession,
which is possible globally, well, inflation protected bones are bones,
so they will all perform. So we like inflation protective bonds.
(21:23):
We also like credit because you know, we have spreads
are very very close to historical law, but the balance
sheet of the private sector or company is incredibly strong,
and so we do believe that, you know, there is
still value in credit, especially in Europe and emerging markets.
You know, emerging markets this year done fifteen percent emerging
market debt. Why because again they tend to benefit from
(21:48):
from the dollar. Inflation is folding great cuts and good valuation.
You know, Brazilian bonds will give you a real, kind
of real close to ten percent. So I think that
investors should forget the past. In a way. The reason
why bond of so much was a combination of what
incredibly expensive saluation because of QE. If you want an
(22:10):
inflation shocked then nobody expected. Now inflation may remain sticky,
but I don't think we're going to see what was
twententy twenty two in terms of inflation spike. And you
know we're getting older, all of us. And when again,
you need income when you invest in US equities, you
know you may get the upside from capital gains, but
you don't get any income. So I think there is
(22:30):
an underlying demand for bonds of fixing and coming from aging,
which I think I'm afraid we cannot change. And this
is this is I think one of the factors which
I think we support bond markets going forward.
Speaker 2 (22:42):
And what's the risk to that view? What would make
inflation suddenly go much higher than you might expect?
Speaker 3 (22:49):
Well, I think you know what is amazing of what
we have seen in the past few years is that
we were all shocked by this increase in inflation, right
we were, Even if looking back you may say, well,
it was obvious, right, big increase in demand loss apply
a lot of money, but it's very easy to say,
you know, looking back, what hasn't changed is that inflation expectations,
(23:10):
the long term inflation expectations hasn't changed. So if you look,
we look at seven eight measured inflation expectations in the US,
and apart from the consumer expectations, they tend to be,
by the way, the one that tend to be more
less reliable in the long term. All the market based
measure of expecting infliction in the US are all between
(23:30):
two point one and two point five, so they haven't moved.
And I think what can change completely the picture is
that if there is a second wave of inflation, potentially
because the FED loser is independence, then you start to
see a significant inflation premium being priced in the bond market.
For now, you don't really see it. You don't see
it because central banks they have maintained their inflation credibility,
(23:56):
but this can go. I think what is going on
in the US. I think it's particularly dangerous in a way.
Right now the FED is cutting rates, that's fine, but
the idea that potentially the White House can dictate the
monetary policy at some point. Well, that obviously is very
dangerous for the bone mark. That's to me is the
(24:16):
risk that the anchoring of inflation expectation in the US
is the risk number one for bond markets globally.
Speaker 2 (24:24):
Is that. Do you think the reason why the goal
price is so high? Is it that concern of the
risk of high inflation or is it simply to do
with central bank buying.
Speaker 3 (24:36):
No, it's not just the central bank buying. I think
the critical factory here is, Yes, investors still want to
have an edge against the risk over inflation. There is
still demand for real assets, and gold offer pretty much
all of them, even bit coin in a way that's
going to happen party for the same reason. So I
(24:56):
think there is demand for real acids and because they really,
let's be very honest, your political risk has sitting incredibly high,
and so you look around and you know gold is
probably one of the few options that you have, and
you know, we are overweight gold, They've been overweight gold. Yes,
the price is very elevated in nominal and real terms,
(25:17):
but as long as the as the fundamental study hasn't changed,
I think that the trend is still higher and I
think that's what we have been saying in our in
our second outrook this year.
Speaker 2 (25:28):
Yeah, look, what do you mean by overweight gold? Overweight
relative to what?
Speaker 3 (25:33):
Yeah? I think I think you know, it's a good
question because you know, when you ask the portfolio, there's
a lot of surveys and what what is your weight
in gold in your portfolios? You always get numbers between
four and five percent, sometimes three. This is kind of
let's say, the average weight of gold in in institutional
funds if you want, But also what in general if
(25:55):
you look at the market as well, this is kind of, uh,
the implied weight of gold in the total in the
global if you want the market, right, we have actually
close to ten percent in our fund, So in that sense,
we have much more than the average portfolio manager has.
Again based on the fact that we expect the dollar
to depreciate, to really interest rate to be weaken and
(26:16):
these geobilitical risks will not go away. So I think
I still believe the goal that's abside from here.
Speaker 2 (26:22):
Okay, and you say that that coin fulfilled the same role,
does that have a place in a retail investors portfolio?
Speaker 3 (26:28):
Do you think, well, that's a tricky question. Mary. You
know that I'm not a big fan of bitcoin.
Speaker 2 (26:32):
Oh I didn't know that.
Speaker 3 (26:33):
I respect the market. I respect the market. I still
don't see an obvious economic logic beyond b coin, but
the coin has proved to be incredibly resident with higher
inflation fed acting rates and all these kind of things. Well,
we know that. You know, in the US, roughly twenty
five percent of investors on the Rector Director is some
(26:54):
kind of cryptocurrency. So crypto has become more accepted. And
what I'm saying is that we don't really invest in
bigcoin right now. We prefer gold. But obviously, especially if
you're much younger than me, I can understand that you know,
bigcoin could be an alternative, but I can see the
logic of those that are willing to have a very
small share of their wealth in bitcoin.
Speaker 2 (27:17):
Very small. Okay. One of the things that you have
on your list is sticking with it roughly in this topic.
One of the things on your list of things that
we will see happen in the Great Convergence to twenty
twenty five onwards is asset tokenization. Will you just explain
to us what does you mean by that and how
that will affect us.
Speaker 3 (27:33):
You know, when we look at the out over the
next five years or ten, it's not just you know,
equitis bond, but it's also important to understand what's going
on in the industry. Right, we had you know, the ETFs,
we had bigcoin, and so we're trying to see who
would be the next thing. So I think asset organization
is going to be probably the big thing for the
(27:54):
next five years. It's already happening now is early stages,
but I can see this hell helping especially kind of
investor to take positions in asset classes that are less liquid.
So I can see the positive side of that. There
is obviously a risk again of bubbles and things, but
again we have to embrace innovation be scared about it.
(28:16):
And I think this is probably the next big thing
after basically ETFs, and if one blockchain and cryptocurrency, that's
for us. What will be the big thing for the
next five to ten years.
Speaker 2 (28:28):
When you say it, love us get exposed to less
liquid assets or help ordinary investors get exposure to less
liquid acids. Are you thinking about private markets?
Speaker 3 (28:35):
Yeah, exactly, be private marketing. It's not only that, right,
I mean, because now as the organization will affect pretty
much everything. What I can see that this is probably
the air which is most interesting, could be private market
are everything, a lot of asset classes that for a
number of reasons are very difficult to get exposed to.
And this week again we increase significantly the investor base
(28:58):
if you want, of a lot of these things make
also transaction much faster. As you know, again early stages,
but things can go very quickly, and I'm pretty sure
in five years time we will be here again Mary
in talking about and what has the implication? Again early stages,
but we are very confident this is the next big.
Speaker 2 (29:16):
Thing interesting And would it make you would it make
you uncomfortable to feel that ordinary private investors were ending
up via somethings such as as a organization or all
the other ways that are being discussed at the moment,
long term, at the funds, et cetera, that ordinary investors
were ending up with quite high levels of exposure to
unlisted companies.
Speaker 3 (29:35):
We have to strike a balance between the regulation and
protection of the investor. Is very difficult because technology is
going very fast, regulation is always falling behind. I think
there is a risk, there is no question about it.
As there is a risk for cryptocurrencies, and I also
feel that there would be at some point some financial
accident that will make us question. You know, all this,
(29:58):
but that's the so story of financial markets, you know,
it's and I think it's very important also to alight Merin.
Then if you're right to expect very low returns in
the next five to ten years, all these kind of
financial innovations will help potentially to increase the rate of
return of what we can achieve in our savings. But
(30:21):
that's really important. So every small thing matters in this sense.
Speaker 2 (30:24):
Yeah, Although interestingly, if you can use tokenization trading tokens
that represent parts of companies or assets or whatever, if
you can use tokenization to make the ill liquid liquid,
it might help us significantly with price discovery. For example,
in private equity, where price discovery because of the very
long term holdings and the illiquidity, can be quite difficult.
If you suddenly you can trade your your private equity
(30:46):
stake with tokens, we may find that the returns to
private equity are slightly different, possibly lower, then we might
have felt previously.
Speaker 3 (30:54):
Don't forget that. Yeah, we talked about this. Actually I
mentioned myself but I think the ac organization is happening
also on mutual funds, on bond so it's not just
for the liquid acid. They say, one area where I
think I can see the biggest potential, And yeah, we
do believe that investors are probably still, at least individual
investors under invested in private assets, especially private debt. But
(31:17):
again we have to be very careful because I think
this is an asset, an area where you need the expertise,
and I think investing, you know, even passively in a
way doesn't make a lot of sense for us. So
I think it's an area where we have to look
at all.
Speaker 2 (31:31):
Right, anything we've missed, do you think, Luca, anything that
we must tell people that we haven't told them.
Speaker 3 (31:37):
Yeah, something, it's interesting, right, we didn't talk about China,
and this is something that when I need our clients,
I'm always surprised by the fact China was for a
long time. Maybe not the first question, but the second question,
what's going on in China? A cheap And I'm wondering
if this lack of interest in Chinese because investors, given
(31:58):
what's going on, especially on the refront, they effectively treat
China as pretty speculative, potentially and investable because simply they
don't see a lot of potential there. And it's a
tricky one because if you look at the performance of
Chinese tech companies this year has been fantastic. China is
(32:20):
not booming. In fact, the latest data has been very,
very weak. But I think after a few years off
I think of political and policy mistakes, I think China
is slowly going into the right directions try to recreate
a more business friendly climate. I think in some areas
China as well out of the US in a lot
(32:40):
of areas. So I started to think, and China trades
thirteen times forward earnings, right, So I'm just wondering if
this lack of interest is because of the uncertainty around
targets or it's something more secular. And I do believe
and that we believe that China being the second biggest
economy in the world, you cannot just stay out of China,
(33:03):
you know, obviously, and you can invest in possibly you
need to look at which sectors get the support from
the government. You have to be more tactical in nature,
you have to be there on the ground. But I
do believe that emerging markets in China may have they
may kind of become popular again, and hopefully this will happen,
(33:23):
not because the US is doing very badly, but because
they're doing the reforms, the things that I think they
should do. So I think it's there's something that to me,
it's again surprising, this lack of interest, apparent lack of
interest in China overall, not only in Chinese as but
also in the Chinese economy. It seems like now with
tarists is a completely different world. It doesn't really affect us,
(33:46):
and it's wrong because it's such a big part of
the global economy that you have to look at China
as well.
Speaker 2 (33:53):
It's interesting, is a conversation that comes up quite a
lot on the podcast. But it's so you know, and
I think such a binary conversation. For half the people
it's as well, that's an investable there we won't be
doing with that. And for the other half as well,
it's very cheap, so you know, you're compensated, but it's
not quite so cheap anymore after the performance of the
tech sector of the last year, isn't.
Speaker 3 (34:12):
Yeah, And to be honest with you, you know, when
you look at the tarist thing, it's incredibly difficult, right,
we don't know if the tar will be ten percent
or one hundred percent. It's incredibly difficult. But again that's
normally where the good money has been made. If you
always wait to know everything, well, then obviously we'll be
already in the price. The fact that the Chinese assets
(34:34):
are doing very well, to me, is already a sign
that probably the worst of the tarist is behind us.
The market is feeling that the Trump administration will kind
of find a compromise that actually is not that I'm
bad for China, and I think the market is already
reacting to that.
Speaker 2 (34:53):
So there is one last thing I want to ask you.
What are you reading that's interesting you might recommend to
our reader.
Speaker 3 (34:57):
I'm reading a book on the Story of Ideas, which explore,
you know, the philosophical aspect of equality, justice and democracy.
And I think for me, you know, after a long
day at work, you want to have something different. I
struggled to read books on economics on the tube after
you know, ten hours of work.
Speaker 2 (35:18):
Yeah, no, fair enough. Can you remember the author of
your book, History of Ideas?
Speaker 3 (35:23):
Yes, someone called David ran Siman, and it's called the
History of Ideas. So it's a very good book, very good.
Speaker 2 (35:33):
Book, excellent. We'll all read that. Look.
Speaker 3 (35:36):
Thank you, very muche, Thank you, thanks for.
Speaker 2 (35:43):
Listening to this week's Marin Talok's Money. If you like
our show, rate review, and subscribe wherever you listen to podcasts,
I keep telling your questions or comments The Merrin Money
at Bloomberg dot net. You can also follow me and
John on Twitter or x. I'm at Marinus w and
John is John Underscore Step. This episode is hosted by
Me Maren Sumset Web. It was produced by Samasadi and
Moses and sound designed by Blake Naples and Kelly Gary.
(36:06):
Special thanks to Luca Paulini.
Bloomberg Audio Studios, Podcasts, Radio News.
Speaker 2 (00:14):
Welcome to Maren Talks Money, the podcast in which people
who know the markets explain the markets. I'm Maren sumsat Web.
This week i am speaking with Luca Paulini, chief strategist
at Pictaate Asset Management.
Speaker 3 (00:25):
Now.
Speaker 2 (00:25):
We had Luca on the show back in January twenty
twenty three when he made the case of things we're
looking up for the global economy and not quite as
bad as other people thought in terms of both inflation
and recession risk. We wanted to bring him back saf
his outlook has changed, and to talk to him about
the end of American acceptionalism and the beginning of what
he called the age of convergence. Luca, thank you so
(00:48):
much for joining us today. We really appreciate it. It's
nice to have you on again. We haven't had you on,
we think for about two years, maybe more at this point,
so we've got a lot to catch up on.
Speaker 3 (00:57):
Sure.
Speaker 2 (00:58):
When you put out your report at the beginning of
the year about what you expect next, you talked about
the three phases that we've been through and we're about
to go through. The first was the Great Moderation, which
we've talked about a lot on this podcast over the
last few years. So that was the period from nineteen
eighty to two thousand and seven, the end of the
Cold War, the introduction of the Internet to our economies,
disinflation and globalization or as a result of China entering
(01:21):
the global economy that is long behind us now. And
then you put down two thousand and eight post financial
crisis to twenty twenty four as what you call the
age of uncertainty, and that is the period of the
euro crisis, of Brexit, of COVID, of the beginning of
the war in Ukraine, and also of course this long,
(01:42):
long period of US exceptionalism and super low interest rates.
And you now say that we have moved from this
age of uncertainty into what you called the Great convergence.
So can we start by just talking about what you
mean by this, what is taking out from the older
age into when new age.
Speaker 3 (02:02):
Well let me say though, that the age of uncertainty,
or let's really uncertainty, is still with us. We're not
saying that the Great Conversion will imply, you know, a
return to a golden age for financial markets and societies
and the economy. What we are saying, is that the
phase of exceptionalism where US outperform financially but also politically,
(02:24):
is pretty much over. Europe may not see a boom,
and it's difficult to imagine that, but Europe is i
think going slowly as always in the right direction, and
China is kind of stabilizing in a way. So you
see the US from our point of view, we lose
some of the kind of this kind of big performance
(02:44):
that the US had in the past. China we stabilized.
Europe will get better and this kind of environment is
still very uncertain, right, very uncertain, but will not be
kind of dominated by the US only. So it's a
much more you know, with the convergence, talk about convention,
it's more about the economics, economic growth, monetary policy, but
(03:05):
also financial returns. It's not kind of we are well
aware of the fact that when you look at political
joe politically, you're going to see even more fragmentation. So
in a way it's not a convergence there, but from
a purely economic and financial point of view. Again, the
era of this US our performance coming to an end.
Europe is recovering Chinese stabiliaity, which is very different from obviously,
(03:28):
let's say in the past five to ten years.
Speaker 2 (03:31):
But if we look at it like that, this is
not about the US performing less well, it's about other
areas performing better.
Speaker 3 (03:43):
Well. Yes and no, because you know it's interesting, you
know that when you look at the performance of the
past five, ten years or seven years, right, the initial
of the starting point is critical. A lot of investors
very surprised when I tell them the UK the UK
equities eies are beaten US equities since the end of
twenty twenties. It really depends when when you start your charge.
(04:06):
In a way, right, what we are saying here is
that again is financial returns on equitism bonds will be
much lower than the low terme average. Effectively, everything will
be kind of will be lower. And this, in a way,
that's the conversion we are talking about. It's not that
Europe would be the new US. It's more than most
(04:26):
countries we go to a period of let's say we
growth and relatively moderate returns. And so in that sense,
that's what the conversions that were in mind now Europe
and China becoming let's see the new US internal performance
rather a convergence to a very low, relatively low level
of economic growth, but also of financial returns.
Speaker 2 (04:48):
Okay, so we divide it up into two and look
first at the economic growth bet and then move on
to talking about the market reaction to that economic growth.
So DUS is still growing faster than most of Europe,
and we would still expect that to continue. Right hard
to see the UK and much of Europe hitting growth
rates above a couple of percent.
Speaker 3 (05:08):
Yes, but you know, I think what we are missing
here is that we look the last five years atriast
on our analysis, roughly forty percent of US growth has
come from an exceptionally loose physical monetary policy. You may say, well,
in Europe has been the same, Not really, because in Europe,
if you look at dept to GDP ratio, it's pretty
(05:28):
much the same of five years ago. In the US
is much much higher. So the US had a combination
of factors and on the AI is also an incredibly
loose and expansion in physical policy that is not, in
our view, sustainable in the very long term. So if
you remove let's say the policy aspect of that, you
know the gap between Europe and US. It's significant, but
(05:49):
not extremely so. So this is I think the starting point.
The second is that Europe, with all the problems, I
think it's fair to say that what's going on in Germany,
especially the end of the day break, this is really
like a kind of a game changer. Now we know,
as always things in Europe will move very very slowly,
(06:09):
but I think Germany embracing physical activism is something new
and we have obviously consequences and split over also for
other countries. Now we may say that this is not
what Europe need. We need obviously in Europe a big
boost to productive they may not come from physical activism,
but you see there's a big change. So Europe in
(06:31):
a way will reflate, while the US will face constraints
politically economic in terms of the amount of stimulus that
can provide. And this is actually the main difference. So
when you look at the next five years, we expect
Europe and the US to growth pretty much at the
same level across to one point five. The difference though
that at least in Europe we will have inflation back
(06:52):
to normal, but in the US will remain higher. And
I think the ratio between growth and inflation, the mix
is will really matter for an markets would become much
less favorable for the US and better for Europe. That's
one of the things that we are saying about these
conversion that we'll see in the next few years.
Speaker 2 (07:11):
Okay, So to agree that the US will be held
back by its very high levels of debt and deficit
and unable to push forward fiscally in the same way
as Europe. But then when you look at and we
talk about Germany and the end of the debt break,
et cetera, but Germany has its own massive problem with
it with debt and deficits, et cetera. And I saw
something in the paper this morning and I hadn't realized
(07:32):
it was quite so high. That German welfare payments including
pensions are about thirty percent of GDP and that clearly unsustainable.
And you look at a similar situation in the UK
and France and do you think, well, the fiscal position
of these countries is basically unsustainable even and you know,
we might say previously we used to say unsustainable in
the long term, Now we're going there kind of unsustainable
(07:52):
in the short term. So these have got to be
massive drags on growth and the ability of any of
these countries to move forward unless they see massive gains
in productivity.
Speaker 3 (08:01):
But I think I think one thing that is very
important Twilight is demographics. We still have the idea that
demographics in the US is great and in Europe is bad.
When you look at the employment rate in euro US
is pretty much the same. Population growth in the US
is pretty much growing in line with Europe, mainly because
again a decline in immigration. So again it's not that
(08:22):
we're not saying that Europe will boom. What we are
saying is that this gap that we have seen in
the past we shrink. And again you're totally right in Europe,
it's not. You know, what Europe need is first of all,
a change in the mindset was resk taking and this
requires also a change in the mindset exactly of European
economic agents and an investor. It's not just you know,
(08:46):
a few points of fiscal definity that can make a difference.
But you know, the trend I think is in place.
I think Europe is aware of the weaknesses. I think
is moving very slowly. The US, i'm afraid, is going
the opposite direction. And and I think again the crackdown
on immigration is one I think and the fact that
you know, we are even talking about the independence for
(09:07):
this example of the fact, well the US is not
in a way in such a solid place it was
just a few years ago, and that's the difference. I
think that that is for US very relevant.
Speaker 2 (09:21):
Is there evidence yet that the crackdown on immigration is
affecting growth.
Speaker 3 (09:26):
We have seen a significant weakening on deliberate market in
the US, but it's very difficult to say this it
is down to immigration, is probably down to the impact
of tariffs, and also the fact that the US economy
has been very strong for five years, so a phase
of weakness is inevitable. No, I don't think that it's
too early to say there is an impact on that.
(09:46):
But you know, the US, this access the ES was
based on human capital and in few immigration faults and
universities are not let's say US free to operate as
before for a number of reasons. Well, you know, it's
just an impact on on productive and impact on growth.
Speaker 2 (10:04):
But I guess you could still afire. We're still looking
for a way to explain the future for the US
and say well, exceptionalism is still there. They're very much
ahead of US and of Europe in terms of AI
for example, and in terms of the cheap energy required
to drive the AI revolution, So that is something that
still remains specific to the US.
Speaker 3 (10:24):
There is no question that the US is economically more competitive
than Europe. You mentioned the cost of energy is totally right,
but bear in mind that we are going into a
phase where a lot of energy we come from basically
solar panels, and that would be renewables, which obviously makes
Europe less dependent on energy import and make the US
(10:46):
in a way less exceptional because if all the energy
is produced locally solar panel for example, then obviously the
energy dominus the US become less less relevant. On tech,
you're totally right. The question though on tech is that,
especially what's going on AAAI, there is a clear advantage
of the US in terms of spending. We see that
(11:06):
on a daily basis. The question though, is that is
this kind of all this investment pay off or not
is the US and all US overspending on AI. This
is really an open question. I don't have an answer
for that, but there is no question that if there
is one element that makes the US still an economy
which is much more kind of than am the Europe.
(11:28):
So the right is tech, but it's not you know,
it's not just tech. When you look also the US market,
right or the global market, tech is only only twenty
seven percent of the market. It's not one hundred percent.
There are other elements if you have to take into consideration.
But yeah, we don't expect the tech gap between US
and Europe to close, but maybe again would be less dramatic,
(11:50):
less visible than it is now.
Speaker 2 (11:54):
So you say, the question, the real question is whether
all this investment in AI pays off or not? What
is what is your view there there's a great AI
bubble that's going to collapse and leave a lot of
people like it' slightly red faced or something else.
Speaker 3 (12:05):
Well, you know, there is some elements of a bubble.
First of all, bubbles also need a macrocroonomy outlook the
allow bubble to happen, typically abundant liquidity, financial deregulation, and
a strong kind of narrative. I think probably all three
are there. I don't think the evaluation is so extreme
for AI stocks to say, well, that's a bubble. But
(12:28):
it's almost inevitable when you have such a big increase
in spending, some of this money will be wasted. It's
inevitable that happened all the time. I don't know when
this will materialize. There could be a second wave. It
was with the internet. You know, you have a bubble,
then you have a period of in a thousand, then
there was the real kind of boom also for the
economy later on. No, look, I am a strong believer
(12:51):
in A. I my worry here is that what happened,
for example, with deep sick, the risk is that I
will be commody time is sooner rather than later. And
so all this advantage the US has as a first
mover will at the end not this disappear, but may
be actually reduced. And this again, this is really what
(13:11):
matters for financial returns, right, is the rate of change,
not the level. And I think in this sense, I
think I see that again this advantage of the US,
even in tech, may not last forever, at least not
in the same extent.
Speaker 2 (13:27):
Okay, so does that suggest to you that a large
part of the US market is very overvalued?
Speaker 3 (13:32):
You know, we always think about tech talks, and you know,
I think, what is I think not well known that Walmart,
which is you know, it was actually an early adopter
of A but Walmart is the biggest return in the world.
Is not a tech company's trading and a higher multiple
than Amazon costco is trading and a multiple or peer
ratio of fifty start US more than thirty. So it's
(13:54):
not just tech. Actually tech, when you look at the
growth rates, I think it's almost fairly valued. Is part
of the US market is I think, much more expensive,
and nobody's talking about it. Again. It made down to
a you know, too much liquidity in the system, too
much optimism. Also the fact that, let's be very honest,
some of these companies are incredibly good, incredibly efficient, and
(14:16):
so maybe they deserve this kind of multiple when I
see kind of retailers start trading a fifty time for earnings.
But I start to feel that it is a little bit stretched.
So it's not just tech, it's the overall mark in
the US, which I think is quite expensive. Considering the
gross is not five it's two five percent. If you're
not in the nineties right when gross was five percent,
(14:38):
inflation was one percent, is a very different environment which
I think will require multiples and need to be lower
than the current levels.
Speaker 2 (14:48):
It's interesting, isn't At first? I love that. I love
the phrase a little bit stretched, which is a great
financial markets usemism for screamingly expensive, getat while you still can.
So there are there will be an over lot of
people and invested in the US. You think that because
they have a track of fund of some kind, they're diversified,
so they feel that they're holding lots of different companies
and therefore they're diversified across the board. But of course
(15:10):
they kind of not because they're still very overexposed to
the expensive end of the US. So it's one of
those occasions when the idea that you're diversified is untrue
because you're effectively exposed to the same type of companies
across the board.
Speaker 3 (15:24):
Yeah, and I think Marian, it's what is also important
is that let's say you are European investors that invest passively,
but you have almost seventy percent of your wealth in
the US. You're taking on the evaluation risk but also
the currency risk, and you know you know what I mean,
as we have seen it recently. So again we're not
saying that the US talks are terrible. Not. What we
(15:45):
are saying is that, especially if you're not in US
investor holding so much in a market which is heavily concentrated,
it's expensively expensive currency with all the political risks, I
think is a risk that is not worth taking. And
so yeah, that we have is to reduce these explosions
on term in the US and adding to either domestic stocks,
(16:05):
but even the bond market. Obviously very few people want
to invest in, and I think it's almost time to
reconsider that.
Speaker 2 (16:29):
So if you're moving money out of the US, and
you're moving it, where where do you move into? I mean,
is it still oky to by German stocks, by Spanish dogs?
They've gone up so much over the last year, the
UK slightly less, but nonetheless we've performed reasonably well. Where
where is the safest equity market to move into?
Speaker 3 (16:50):
Well, safest is a tricky one because we know that
when things go wrong, the correlation goes to one right,
and this is this is one actually one of the
reasons why investors still like the SMP We have stocked
because we say, well, everything goes down, maybe I lose
less in the US than in Europe. No, our view
is that again it depends where you First of all,
(17:11):
where you are, So let's say if you are in
the UK, I think the choice for us pretty straightforward.
You should invest and know that we discussed this before.
You should invest a little bit more in UK stocks,
so in domestic stock similar for Europe, right, But also
I think what our approach is is try to think
more inequal weighted terms. So let's say instead of having
(17:34):
seventy percent in the US and thirty percent elsewhere, I
think fifty percent, say in the US and fifty percent
no US. It makes sense. It really depends where you are.
If you are in the UK Switzerland, for example, you
should have probably more in the domestic stocks. You should
also add to emerging market where they're doing very well,
not because there is anything dramatic happening, just because the
(17:57):
dollar is getting weaker and the dollar will continue to
get weak, emerging market will rate. So again it's a
little bit of everything, but really depends on where you're from.
For UK investors, I think that's I think a good
time to invest in UK stocks. But we also have
the view that you should have a second look at
mid caps, small caps that have been a little bit
(18:17):
lagging even in the UK, and so they have I
think good valuation, the kind of I think a recent
outlook for earnings. So I think again diversification not for
the because the usual thing you have to diversify, know,
is the evaluation element. The market economy out look point
to a more diversified but let's see equally weighted kind
(18:40):
of approach.
Speaker 2 (18:41):
Yeah, so diversify and part across the valuations and the UK.
You said, put a little bit more into the UK.
But the UK is really very cheap relative to most
other markets still, so it would seem a perfectly reasonab place.
Speaker 3 (18:53):
I mean, evaluation is not everything, right, well, it's quite
a lot everything, but you know it's the UK market
trade at the same level of emerging markets right in
term before earn. Now you can say there is less
growth and you can emerging market, that's true, but the
risk still is still less. So I do think that
again investors should focus a little bit more on their
domestic market and also move away from just simply investing
(19:17):
in large caps. Look at me caps. There are some
great stocks there, even small caps. So that's that's the
strategy that we have.
Speaker 2 (19:24):
Okay, let's go back then to the bond market. You're say,
no one really feels most like investing in bones at
the moment, which is fair. They kind of don't. So
what's the reasoning.
Speaker 3 (19:34):
There, Well, you know, a few years ago, I remember
you remember that the assumption was there is nothing safer
than German bones, you remember, right, Yeah, Well, you know,
in real terms you would have lost almost seventy percent
in a couple of years. So now if you are investors,
and you know and and you lose so much on
(19:56):
an asset class that's supposed to be safe, well I
can understand they're quite investor reluctant to be invested in it.
But again, it's not just valuation. But let's look at valuation, right,
what is the anchor? What is the right value for
you know, a domestic government bonds? I mean historically but
also in theory, the yield that you get from let's
(20:18):
say guilds or bones or treasure should be more or
less in live with trend growth. This is the valuation
anchor for bonds. And you know a few years ago
when boones was negative, very close to zero, close to zero,
clearly there was an evaluation program. And now we're in
a situation where roughly speaking, roughly speaking, bone yields, government
(20:39):
bond yields are more or less in line with the
trend growth rate of their respective economy. So you ask
close to four percent. You know in the UK is
all higher because of inflation. So we are in a
position where you know, bonds are not particularly cheap, but
they're not as expensive and ecreites are not as good.
To say, well adjust in that inequities forget about bonds.
(21:02):
You have to be selective, though. I think there is
I think value guilds very good value, and I think
especially in inflation protected bonds because if you're wrong on
inflation and inflation goes through the roof, at least we
have the inflation protection if you go into a recession,
which is possible globally, well, inflation protected bones are bones,
so they will all perform. So we like inflation protective bonds.
(21:23):
We also like credit because you know, we have spreads
are very very close to historical law, but the balance
sheet of the private sector or company is incredibly strong,
and so we do believe that, you know, there is
still value in credit, especially in Europe and emerging markets.
You know, emerging markets this year done fifteen percent emerging
market debt. Why because again they tend to benefit from
(21:48):
from the dollar. Inflation is folding great cuts and good valuation.
You know, Brazilian bonds will give you a real, kind
of real close to ten percent. So I think that
investors should forget the past. In a way. The reason
why bond of so much was a combination of what
incredibly expensive saluation because of QE. If you want an
(22:10):
inflation shocked then nobody expected. Now inflation may remain sticky,
but I don't think we're going to see what was
twententy twenty two in terms of inflation spike. And you
know we're getting older, all of us. And when again,
you need income when you invest in US equities, you
know you may get the upside from capital gains, but
you don't get any income. So I think there is
(22:30):
an underlying demand for bonds of fixing and coming from aging,
which I think I'm afraid we cannot change. And this
is this is I think one of the factors which
I think we support bond markets going forward.
Speaker 2 (22:42):
And what's the risk to that view? What would make
inflation suddenly go much higher than you might expect?
Speaker 3 (22:49):
Well, I think you know what is amazing of what
we have seen in the past few years is that
we were all shocked by this increase in inflation, right
we were, Even if looking back you may say, well,
it was obvious, right, big increase in demand loss apply
a lot of money, but it's very easy to say,
you know, looking back, what hasn't changed is that inflation expectations,
(23:10):
the long term inflation expectations hasn't changed. So if you look,
we look at seven eight measured inflation expectations in the US,
and apart from the consumer expectations, they tend to be,
by the way, the one that tend to be more
less reliable in the long term. All the market based
measure of expecting infliction in the US are all between
(23:30):
two point one and two point five, so they haven't moved.
And I think what can change completely the picture is
that if there is a second wave of inflation, potentially
because the FED loser is independence, then you start to
see a significant inflation premium being priced in the bond market.
For now, you don't really see it. You don't see
it because central banks they have maintained their inflation credibility,
(23:56):
but this can go. I think what is going on
in the US. I think it's particularly dangerous in a way.
Right now the FED is cutting rates, that's fine, but
the idea that potentially the White House can dictate the
monetary policy at some point. Well, that obviously is very
dangerous for the bone mark. That's to me is the
(24:16):
risk that the anchoring of inflation expectation in the US
is the risk number one for bond markets globally.
Speaker 2 (24:24):
Is that. Do you think the reason why the goal
price is so high? Is it that concern of the
risk of high inflation or is it simply to do
with central bank buying.
Speaker 3 (24:36):
No, it's not just the central bank buying. I think
the critical factory here is, Yes, investors still want to
have an edge against the risk over inflation. There is
still demand for real assets, and gold offer pretty much
all of them, even bit coin in a way that's
going to happen party for the same reason. So I
(24:56):
think there is demand for real acids and because they really,
let's be very honest, your political risk has sitting incredibly high,
and so you look around and you know gold is
probably one of the few options that you have, and
you know, we are overweight gold, They've been overweight gold. Yes,
the price is very elevated in nominal and real terms,
(25:17):
but as long as the as the fundamental study hasn't changed,
I think that the trend is still higher and I
think that's what we have been saying in our in
our second outrook this year.
Speaker 2 (25:28):
Yeah, look, what do you mean by overweight gold? Overweight
relative to what?
Speaker 3 (25:33):
Yeah? I think I think you know, it's a good
question because you know, when you ask the portfolio, there's
a lot of surveys and what what is your weight
in gold in your portfolios? You always get numbers between
four and five percent, sometimes three. This is kind of
let's say, the average weight of gold in in institutional
funds if you want, But also what in general if
(25:55):
you look at the market as well, this is kind of, uh,
the implied weight of gold in the total in the
global if you want the market, right, we have actually
close to ten percent in our fund, So in that sense,
we have much more than the average portfolio manager has.
Again based on the fact that we expect the dollar
to depreciate, to really interest rate to be weaken and
(26:16):
these geobilitical risks will not go away. So I think
I still believe the goal that's abside from here.
Speaker 2 (26:22):
Okay, and you say that that coin fulfilled the same role,
does that have a place in a retail investors portfolio?
Speaker 3 (26:28):
Do you think, well, that's a tricky question. Mary. You
know that I'm not a big fan of bitcoin.
Speaker 2 (26:32):
Oh I didn't know that.
Speaker 3 (26:33):
I respect the market. I respect the market. I still
don't see an obvious economic logic beyond b coin, but
the coin has proved to be incredibly resident with higher
inflation fed acting rates and all these kind of things. Well,
we know that. You know, in the US, roughly twenty
five percent of investors on the Rector Director is some
(26:54):
kind of cryptocurrency. So crypto has become more accepted. And
what I'm saying is that we don't really invest in
bigcoin right now. We prefer gold. But obviously, especially if
you're much younger than me, I can understand that you know,
bigcoin could be an alternative, but I can see the
logic of those that are willing to have a very
small share of their wealth in bitcoin.
Speaker 2 (27:17):
Very small. Okay. One of the things that you have
on your list is sticking with it roughly in this topic.
One of the things on your list of things that
we will see happen in the Great Convergence to twenty
twenty five onwards is asset tokenization. Will you just explain
to us what does you mean by that and how
that will affect us.
Speaker 3 (27:33):
You know, when we look at the out over the
next five years or ten, it's not just you know,
equitis bond, but it's also important to understand what's going
on in the industry. Right, we had you know, the ETFs,
we had bigcoin, and so we're trying to see who
would be the next thing. So I think asset organization
is going to be probably the big thing for the
(27:54):
next five years. It's already happening now is early stages,
but I can see this hell helping especially kind of
investor to take positions in asset classes that are less liquid.
So I can see the positive side of that. There
is obviously a risk again of bubbles and things, but
again we have to embrace innovation be scared about it.
(28:16):
And I think this is probably the next big thing
after basically ETFs, and if one blockchain and cryptocurrency, that's
for us. What will be the big thing for the
next five to ten years.
Speaker 2 (28:28):
When you say it, love us get exposed to less
liquid assets or help ordinary investors get exposure to less
liquid acids. Are you thinking about private markets?
Speaker 3 (28:35):
Yeah, exactly, be private marketing. It's not only that, right,
I mean, because now as the organization will affect pretty
much everything. What I can see that this is probably
the air which is most interesting, could be private market
are everything, a lot of asset classes that for a
number of reasons are very difficult to get exposed to.
And this week again we increase significantly the investor base
(28:58):
if you want, of a lot of these things make
also transaction much faster. As you know, again early stages,
but things can go very quickly, and I'm pretty sure
in five years time we will be here again Mary
in talking about and what has the implication? Again early stages,
but we are very confident this is the next big.
Speaker 2 (29:16):
Thing interesting And would it make you would it make
you uncomfortable to feel that ordinary private investors were ending
up via somethings such as as a organization or all
the other ways that are being discussed at the moment,
long term, at the funds, et cetera, that ordinary investors
were ending up with quite high levels of exposure to
unlisted companies.
Speaker 3 (29:35):
We have to strike a balance between the regulation and
protection of the investor. Is very difficult because technology is
going very fast, regulation is always falling behind. I think
there is a risk, there is no question about it.
As there is a risk for cryptocurrencies, and I also
feel that there would be at some point some financial
accident that will make us question. You know, all this,
(29:58):
but that's the so story of financial markets, you know,
it's and I think it's very important also to alight Merin.
Then if you're right to expect very low returns in
the next five to ten years, all these kind of
financial innovations will help potentially to increase the rate of
return of what we can achieve in our savings. But
(30:21):
that's really important. So every small thing matters in this sense.
Speaker 2 (30:24):
Yeah, Although interestingly, if you can use tokenization trading tokens
that represent parts of companies or assets or whatever, if
you can use tokenization to make the ill liquid liquid,
it might help us significantly with price discovery. For example,
in private equity, where price discovery because of the very
long term holdings and the illiquidity, can be quite difficult.
If you suddenly you can trade your your private equity
(30:46):
stake with tokens, we may find that the returns to
private equity are slightly different, possibly lower, then we might
have felt previously.
Speaker 3 (30:54):
Don't forget that. Yeah, we talked about this. Actually I
mentioned myself but I think the ac organization is happening
also on mutual funds, on bond so it's not just
for the liquid acid. They say, one area where I
think I can see the biggest potential, And yeah, we
do believe that investors are probably still, at least individual
investors under invested in private assets, especially private debt. But
(31:17):
again we have to be very careful because I think
this is an asset, an area where you need the expertise,
and I think investing, you know, even passively in a
way doesn't make a lot of sense for us. So
I think it's an area where we have to look
at all.
Speaker 2 (31:31):
Right, anything we've missed, do you think, Luca, anything that
we must tell people that we haven't told them.
Speaker 3 (31:37):
Yeah, something, it's interesting, right, we didn't talk about China,
and this is something that when I need our clients,
I'm always surprised by the fact China was for a
long time. Maybe not the first question, but the second question,
what's going on in China? A cheap And I'm wondering
if this lack of interest in Chinese because investors, given
(31:58):
what's going on, especially on the refront, they effectively treat
China as pretty speculative, potentially and investable because simply they
don't see a lot of potential there. And it's a
tricky one because if you look at the performance of
Chinese tech companies this year has been fantastic. China is
(32:20):
not booming. In fact, the latest data has been very,
very weak. But I think after a few years off
I think of political and policy mistakes, I think China
is slowly going into the right directions try to recreate
a more business friendly climate. I think in some areas
China as well out of the US in a lot
(32:40):
of areas. So I started to think, and China trades
thirteen times forward earnings, right, So I'm just wondering if
this lack of interest is because of the uncertainty around
targets or it's something more secular. And I do believe
and that we believe that China being the second biggest
economy in the world, you cannot just stay out of China,
(33:03):
you know, obviously, and you can invest in possibly you
need to look at which sectors get the support from
the government. You have to be more tactical in nature,
you have to be there on the ground. But I
do believe that emerging markets in China may have they
may kind of become popular again, and hopefully this will happen,
(33:23):
not because the US is doing very badly, but because
they're doing the reforms, the things that I think they
should do. So I think it's there's something that to me,
it's again surprising, this lack of interest, apparent lack of
interest in China overall, not only in Chinese as but
also in the Chinese economy. It seems like now with
tarists is a completely different world. It doesn't really affect us,
(33:46):
and it's wrong because it's such a big part of
the global economy that you have to look at China
as well.
Speaker 2 (33:53):
It's interesting, is a conversation that comes up quite a
lot on the podcast. But it's so you know, and
I think such a binary conversation. For half the people
it's as well, that's an investable there we won't be
doing with that. And for the other half as well,
it's very cheap, so you know, you're compensated, but it's
not quite so cheap anymore after the performance of the
tech sector of the last year, isn't.
Speaker 3 (34:12):
Yeah, And to be honest with you, you know, when
you look at the tarist thing, it's incredibly difficult, right,
we don't know if the tar will be ten percent
or one hundred percent. It's incredibly difficult. But again that's
normally where the good money has been made. If you
always wait to know everything, well, then obviously we'll be
already in the price. The fact that the Chinese assets
(34:34):
are doing very well, to me, is already a sign
that probably the worst of the tarist is behind us.
The market is feeling that the Trump administration will kind
of find a compromise that actually is not that I'm
bad for China, and I think the market is already
reacting to that.
Speaker 2 (34:53):
So there is one last thing I want to ask you.
What are you reading that's interesting you might recommend to
our reader.
Speaker 3 (34:57):
I'm reading a book on the Story of Ideas, which explore,
you know, the philosophical aspect of equality, justice and democracy.
And I think for me, you know, after a long
day at work, you want to have something different. I
struggled to read books on economics on the tube after
you know, ten hours of work.
Speaker 2 (35:18):
Yeah, no, fair enough. Can you remember the author of
your book, History of Ideas?
Speaker 3 (35:23):
Yes, someone called David ran Siman, and it's called the
History of Ideas. So it's a very good book, very good.
Speaker 2 (35:33):
Book, excellent. We'll all read that. Look.
Speaker 3 (35:36):
Thank you, very muche, Thank you, thanks for.
Speaker 2 (35:43):
Listening to this week's Marin Talok's Money. If you like
our show, rate review, and subscribe wherever you listen to podcasts,
I keep telling your questions or comments The Merrin Money
at Bloomberg dot net. You can also follow me and
John on Twitter or x. I'm at Marinus w and
John is John Underscore Step. This episode is hosted by
Me Maren Sumset Web. It was produced by Samasadi and
Moses and sound designed by Blake Naples and Kelly Gary.
(36:06):
Special thanks to Luca Paulini.
Host
Merryn Somerset Webb
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