Aviva (AV:LSE) FY 2025 earnings call transcript

Hello and welcome to the Aviva Investors 2025 Houseview Outlook. My name is Peter Smith. I'm an investment director here in Aviva Investors. I'm delighted to be joined by two of my colleagues, Peter Fitzgerald, Chief Investment Officer of Macro Discretionary, and Michael Grady, Chief Economist and Head of Investment Strategy. Over the next 45 minutes, we're going to delve into some of the key themes and outlooks that we see coming towards us over the next year. We'll delve into these, talk about the investment considerations that we think will impact our investors over the next year or so. I have a little bit of housekeeping to do first. There's a slide here which details some of those. I'm going to focus on three key areas, which is this presentation and the document, Houseview document that we've produced can be downloaded within the resources tab.

The second point to make is there is a Q&A widget, which would be great if you have questions during the presentation, if you could add these to the Q&A widget, and we'll come back to you over the next, come back to you at the end of this session and take some questions. And thirdly, the session is and has got structured CPD points available, and these will be available to be downloaded after the session through the certification widget.

Okay, Peter, Mick, delighted you can join me today. We're going to kick things off. I'm going to kick things off, first of all, with a question for you, Mick. We have an Action Pact 2024. If I was kind of to ask you your three top things that shaped 2024, maybe sort of possibly surprised you from an economic perspective, what would those be?

Yeah, thanks, Peter. So I guess the first one I'd highlight is 2024 was the year in which sort of all the major central banks embarked on a rate cutting cycle. That was pretty much as expected at the start of the year. We and others expected rate cuts to come in 2024. That was important because we'd obviously been through a year or more of significant increases in rates.

And so to have kind of reached the peak there and entered into a cutting cycle, I think did provide some support for risk assets. I guess where it was a little bit surprising maybe for last year was the extent of those rate cuts and the timing of them. So they probably came a little bit later and weren't quite so many as what people expected at the start of last year. We were sort of probably more in that camp for the US and so not so surprised there. But we were probably a little bit surprised elsewhere. Places like the UK would have expected a little bit more in terms of rate cuts last year. So somewhat of a surprise there.

I would say the second thing was the resilience of growth and the persistence of inflation. Both of those two things last year were important factors. I would say particularly resilience of growth in the US, which just powered through yet another year.

And then on the inflation story, again, it was a story of services inflation just not coming down quite as fast, perhaps as we or others might have expected over the course of last year. And then the third thing I would highlight, I think there's sort of numbers, different numbers out there that you can look at, but nearly half the world's population voted in an election last year.

So it was a hugely important year politically. And, of course, some changes in governments and administrations. And, you know, hard to look past one of the last elections of the year as being a defining moment, which, of course, was the US presidential election, the return of President Trump, which will bring with it many, many changes, which I'm sure we'll get into. Touch on later, I'm sure.

Okay, okay.

Peter, to bring you in on this, kind of looking at asset class performance last year, sort of keeping with that, looking in the rear view mirror, pretty staggering year. We can see on this slide here for risk assets driven, again, by the AI story, cutting of interest rates, some sort of extent, the relief rally after a Republican win in November.

But given everything that's going on in the world, especially from a geopolitical perspective, some of these numbers are pretty extraordinary. Can you give a sort of a brief run through of some of the asset class returns that caught your attention last year?

Yeah, so I suppose the first thing I would point out here is, and these numbers are just for this audience in sterling terms, where you can put them into kind of dollars, euros, whatever currency you want.

Cash effectively generated a return of about 5% last year. So first of all, any asset that generated a return less than 5% would have been a poor investment decision based on what you could have earned from effectively a risk-free investment. And likewise, just one needs to be very cognizant as well is that you also need to reduce the returns and all the other assets by 5% because that's the opportunity cost of holding them. So you've got some assets that maybe generated mid-single digits. Again, not a great return when you take the cash element away from that.

But where you did see some returns, some were surprising, some maybe less so. Global equities delivered 20-odd percent, so a very good return. And that was led, as everyone knows, by U. S. equities, which have now reached a pretty dominant proportion of global equities, depending on the index that you look at. And even within there was a very small number of large tech-orientated businesses that generated most of those returns.

And that return in U. S. equities, which was just under 30% last year, so 27%. Actually, if you annualize that over, let's say, the last three years rather than just look at 2024 in isolation, you get to an annualized return of about 11%, which is good, but it's not an exceptional return. So I think it's always important to put these sort of one calendar year periods into context. And of course, the three-year number would include 2022 when you had that large drawdown and the recovery that subsequently took place. So I think, yes, equities and particularly U. S. equities did well. And the dispersion between developed market and U. S. equities relative to emerging markets, I think, is one that's probably worth reflecting on.

And the potential for that actually to even continue in the years to come. The one that does probably warrant just a little bit of attention is the return on gold. Gold generated over about 30 percent last year. And if you look at gold relative to, let's say, U. S. equities, over the last three years, the annualized return on gold has been about 15%. So it's substantially outperformed what most people would assume is the best performing asset class out there. It has actually been gold, not U. S. equities, controversially. I know a lot of investors who don't invest in gold because they say they can't value it and they don't know how to assess it. but they're quite confident putting a multiple of 50 on NVIDIA.

So I just think gold is something that's worth considering. And I'm quite happy to go into some of the reasons, in my view, for that. And I think a lot of them are linked to the fiscal largesse that we're seeing. And we can touch on that in terms of the outlook as we're looking forward. But I think gold would be the one, I think for many people, it would surprise them in terms of the size of that return. And it also happened in the context of an environment, yes, as Mick said, rates were falling, but it was also a strong dollar year to a large degree. And gold doesn't always do well when the dollar is strong.

Okay, okay, perfect, interesting. Okay, so that's kind of looking in the rear view mirror. Mick, just coming back to you, what's our overall outlook from an economic perspective, economic growth for the year ahead?

Yeah, so I think we've got a chart on the screen just showing our growth forecast for the year ahead and also beyond. You look at that and you look at kind of global growth forecast of around about 3%, both this year and next year, actually. Pretty similar to what we saw last year. And so you might sort of think on the face of it, well, that doesn't look very interesting or exciting to talk about. But I think there's quite a lot going on under the surface that's worth kind of digging into a little bit more. I mean, in terms of the regions, our view is that you see a little bit slower growth in the US and China this year, a little bit better growth in the Eurozone, Japan, and to some extent the UK.

But they're relatively small changes, I guess, in the grand scheme of things. But what I think is somewhat masked by these kind of central estimates on growth is the uncertainty. and I think we've used the label uncertainty in the Houseview document in the sort of title we've been at this time around sort of extreme policy uncertainty. The range of possible outcomes this year is wide. It's wide. And how that plays out through economies is very unclear at this stage. So I wouldn't have a huge amount of confidence in these growth forecasts being exactly right because I think, as I say, the range around them could be quite wide. And if we go beyond growth and look at some other factors like inflation and interest rates, I think we've got another slide showing those as well.

We do think that inflation probably stays around the 2% target. We've got a little bit above target in the US. We've got some factoring in for the effect of tariffs in there in the US. we can come back to tariffs in a second. But in the UK and the Eurozone, it's kind of there or thereabouts, around 2%. Obviously, that's a lot softer than where we've come from over the last couple of years. And if you like, it's a kind of positive and good news story.

But again, I think I mentioned earlier on about the sort of stickiness of services inflation last year. That remains kind of the question mark going into this year as well as whether that remains the case. And then on the good side, as I say, effects around tariffs and so on. which then leads to the question of what the central banks do this year. And, you know, the chart here shows what was priced into markets a week or so ago, which was for, you know, one or two more cuts, basically, across the majors this year. So not a lot more priced into markets than where we are today.

You know, we think that there might be a little bit more differentiation as we go through the year than what the market's currently pricing, and I can go into detail on that. We talk about the themes. But, you know, it's very much a picture of that sort of higher for longer rates environment. OK.

So, I mean, the picture of this house fee for 2025 is one of uncertainty. Correct. So we will touch on that as we go through. I have our first poll of the day, and it's going to sort of lean into the themes that we'll speak about. But the question to ask is, as we kick off 2025, what worries you the most from a market perspective? of global growth slowing, geopolitical issues, Trump policies, AI boom losing steam, central banks calling things wrong. So there's five pretty general themes there. So we're interested to see how the voting goes on that poll.

As we wait for that obviously you mentioned about inflation We have inflation figures coming out tomorrow Yes tomorrow We got UK inflation and US inflation out tomorrow So we be interested to see where things go from there Yes. I mean, we're pretty much in line with consensus on our views in terms of the inflation outturns tomorrow. But we'll see whether or not that comes to pass.

Okay. Okay, we might have a look at the results. Let's have a look. Okay, that's a geopolitical issues and Trump policies. We could nearly call that in joint first place, really, followed by global growth slowing and AI boom coming behind central banks, calling things wrong.

Okay, so that's interesting. Geopolitical issues, obviously, something that is very much on people's minds at the moment. Trump policies, Trump to be as president-elect. We'll talk a little bit about that over the next number of slides. So that's interesting.

Those themes are pretty much in line with what we're looking at, which is always a good place to start. So the next slide, you can see the House view. In our outlook, we kind of listed the key themes and we kind of agree with what we've seen from that poll. So the U. S. under Trump 2.0, reshaping global trade, fiscal and industrial policies, that tech boom, artificial intelligence and beyond. And then that last piece about sort of monetary cycles. You mentioned this just very briefly, but those becoming a little bit more unsynchronized to what we've seen over the last 12 months or so. So looking at the first theme, make a resounding win for Trump in November.

first of all what does this mean for the US and should we in other areas of the world be worried about what may come down the road for us well first of all I think it is undoubtedly an important and significant change we in some sense have a viewer in terms of we've seen this before he's obviously coming around for a second term and a lot of the policy areas that he's focused on are similar to those he was focused on in the first term.

But I think arguably a second time around, maybe he'll be somewhat more effective in terms of actually delivering on those from his perspective and the administration's perspective. And that's because of the... I think they're just more prepared this time around.

I don't think they thought they were going to win in 2016 and weren't so prepared. And I think they are prepared this time and they have a strong team of people around them to help deliver on it. Look, I think there's kind of two important sort of spheres to think about with policies under Trump. One will be a set of nationalistic-type policies, and one of the other will be a set of growth-related policies.

And in a sense, they sort of run counter to each other, but they're the two spheres. The nationalistic policies, I mean, tariffs is obviously probably the big one and the one that's going to get a lot of attention as soon as next week. So we've got inauguration next week. He will likely start signing executive orders related to tariffs within days.

We don't, of course, know exactly what those will look like. There's much speculation in the press around what form those tariffs may come in, but we think that they're going to be pretty meaningful, pretty strong, certainly against China, but others as well.

And then the other sort of nationalistic is around immigration policy, where he's clearly going to clamp down significantly on immigration into the US, certainly legal immigration, but immigration more generally, as well as potential deportations from the US. So that's a major sort of domestic factor for the US.

And does that factor have any implication from an economic perspective?

Yeah, look, I mean, there's, I think, no doubt that the level of immigration that we've seen into the US over the last couple of years has been very high, has had economic impacts. It has boosted activity there.

And so I think there will be some degree of slower supply growth as a result. So that's on the nationalistic side. On the growth side, I think it's fairly clear that they have an agenda to cut taxes. That won't come for a little bit later this year, maybe not even until November, December time. And so the sequencing is kind of important when thinking about these different policies and how financial markets might respond as they're implemented. But yeah, so corporate tax cuts could go down to 15%. Corporate tax rate, for example, extension of personal income tax cuts, tax cuts in other areas as well for households.

So quite sort of significant changes there. And, of course, the other that he's talked a lot about is deregulation in many different forms, something, again, that can sort of be started pretty quickly, although depending on whether they need to kind of go out to consultation, it can take a little bit longer to implement. But, you know, things like softening environmental regulations, he's clearly got a desire to increase oil and gas production if possible.

That's one way of perhaps doing that. also some deregulation around financial sector as well. So various kind of growth-related initiatives on that side as well. And then energies, which I sort of relate to the oil and gas, I guess. Energy sector is another big one that he's kind of pushing on.

Just on as well, I think people don't fully appreciate it. Not only are they more prepared, but they're also more emboldened because this wasn't a sort of like a 1-0 victory in a football match. This was a 5-0 drumming. You won the popular vote, you won the electoral college, you won every single swing state, you've won both sections of the House and the Senate. I mean, if this is not your moment to push every piece of your thought process through the legislative process, you're not going to get a better opportunity. So I think you need to put that emboldened attitude in as well as more prepared.

Absolutely.

When you ask, are we worried? I mean, or should we be worried? Sorry, other places around the world. I mean, I think the reality is, is governments around the world are just going to have to respond to the situation that they find. And in some cases, that may be responding in a way that, you know, is, if you like, cooperative to the, you know, US administration's desires and may mean doing certain things that are helpful. And in other cases, it may be the opposite to that and retaliating and, if you like, escalating things. So, you know, it's going to be dependent on different, you know, in different regions, how different places are going to respond.

You know, I think, for example, in China, there's an expectation that there will be some domestic policy support to come in to try and counter some of the effect of tariffs on Chinese goods. in Europe. It may mean we see European governments stepping up and being more active in buying US LNG exports, for example. So, there are some positive things, but of course, the negatives might be retaliatory tariffs, for example.

Yeah. Okay. Peter, to bring you in on this, obviously, we've just seen looking at the returns of last year, Trump's win has had a positive impact to some extent on markets. overall there seems to be kind of what Mike's saying, lots of sort of known unknowns as we are at this very point. How do you manage portfolios with, you know, not, you kind of have some sort of idea and we go back to these known unknowns. How do you manage portfolios?

So first I think you have to do so with a high degree of humility. And one of the things that people are quick to say is assets have done reasonably well since Trump has been elected. But actually if you look at one of the bellwethers between the Russell 2000 index. That's unwound all its gains. It's now sitting on a loss pretty much since the US election. And then you also have the counterfactual. You don't know what would have happened had Biden even run or had Kamala Harris run. So I think you have to approach this with a high degree of humility. Nobody really knows what executive orders Trump's going to sign next week. Maybe he knows, maybe he doesn't.

They've been floating whether tariffs are going to come in at a high level, whether they're going to come in at a focus level, whether they're going to be ratcheted up. So anybody who claims to have an insight into what's going to happen next week, I would say you're probably lulling yourself into a false sense of security and sort of delusion. And therefore, my advice is to not deploy too much risk until you've got a little bit more certainty in terms of what is actually going to happen.

But I think it's unlikely that nothing happens. And most of these actions will result at least initially in higher prices and higher inflation from a once-off perspective. And I think what it will do is just put greater pressure on central banks and on governments. So I think it's going to be a year of huge uncertainty. And I think, yes, there is a certain playbook you can use based on sort of the 2016, 2017, 2018 period. But I think you're dealing with a very different organisation, a very different Republican Party and a very different president. And I think it's going to be quite tricky to navigate, but also to underweight US assets.

Interesting. Conscious of time. That's theme one. Theme two, somewhat linked to this whole area, kind of deglobalization. Second theme for 2025 is kind of that reshaping of global trade, fiscal and industrial policies. Mick, we are moving to sort of an era when trade in other areas are certainly under more pressure, and we're moving to a different time possibly, and we're seeing fiscal spending increase.

Discuss that a little bit.

Yeah, so we talked a little bit about trade and tariffs. On industrial policy, this is something that's kind of been resurrected. We all thought this was a thing from the 70s and 80s. It's back. It was back in a big way last year and the year before in the US under the Biden administration, the CHIPS Act, the IRA Act. Those are two things that pushed very hard in terms of encouraging certain outcomes in terms of industrial policy objectives.

Similarly in Europe with the NGEU policies as well. So we've seen policies to either directly, well, to encourage investment or direct investment, much of which is related to green transition type issues, but also in terms of economic security type issues as well.

I think we're going to see things a little bit different going forward. I think there'll probably be even more focus on economic security and defence as well. And those will be two areas that will have important sort of industrial policies associated with energy. I mentioned earlier on in the Trump administration, which is, I don't think necessarily going to be discouraging renewable energy, but they are going to be encouraging more of more sort of fossil fuel extraction as well.

So there's kind of a bit of a reshaping in that sense. But as you say, perhaps, and I think the chart we have on the screen at the moment speaks to this, perhaps what feels even more significant at the moment is what does all this mean from a fiscal perspective?

Because we have governments running large deficits the US in fact the largest of the major economies with really at least in the US no prospect of that really shrinking anytime soon. In fact, Trump's policies mean it will probably widen rather than shrink.

And, you know, in terms of where we expect to be this year and next year, even compared to six months ago, which is what the charts show is kind of a worse situation in terms of deficits than what was anticipated previously. So, you know, it's obviously, it feels like an important question at a time when bond yields have risen quite significantly over recent months and, you know, in the press and so on in the UK, I guess most particularly even this week and last.

So, you know, I think there are some challenges there around how sustainable these kind of levels of deficits will be. But, you know, at the same time, I don't see governments backing away from these policy prescriptions.

I mean, this kind of lends itself to your world a little bit. How do you navigate these ballooning deficits? I mean, lots of people quote in the US the sort of phrase drill, baby drill, don't they, for the oil?

I call it print baby print because basically a lot of this has been financed with excessive budget deficits over an extended period. And I think you can look through all of the historical reasons for the performance of gold. I think gold is responding to that printing and effectively a debasing over a long period of time of some of the fiat currencies. Now, I don't want to say this is completely out of control, but there is none of these policies are deflationary, right? So they're all on the margin. You had a global economy that was reasonably efficient. It wasn't necessarily the most resilient, as we found out in COVID with supply shocks and national security. So you're prioritizing other things which are not necessarily deflationary and you're entering a world where you're just going to have more inflationary pressures.

It doesn't mean you can't cut rates. It means they're unlikely to go back to zero or one percent and therefore you just need to have a different framework for looking at markets and you need need to have a different floor on where rates are going to go, absent a deep recession, which is not in our central scenario. And that throws up all sorts of different things when running portfolios, particularly the intersection and the relationship between fixed income and equity.

Okay, okay. We'll start for a quick poll, actually, as we move on to our sort of third theme. That poll focuses around what we've all become very familiar with, AI. Will the AI revolution continue to push stocks higher in 2025. Peter, you mentioned this at the very beginning, you know, seven names within US S&P 500 driving that performance that we spoke about of 20, 29% or around 29, 27% in US equities. Will that continue in 2025? An interesting question and certainly one that We will have a look at now. How are the numbers?

Wow. Wow. That's really interesting. So around 76% of respondents feel that that AI revolution will continue to push stocks higher. And you mentioned about valuations of NVIDIA. And it's interesting to see that majority of people feel that's going to continue.

So I'm a bit less confident on this topic. And I think it's, do I think AI will be here in three years, five years, 10 years? Yes, I do. Do I think it's possible today to identify who the winners will be and how that's going to play out? I do not. And that's a little bit controversial. One example I use on this, and I was managing money in the late 90s and early 2000s. And I still remember this advert, which was Vodafone. And their advert that was out on TV was, we're connecting people, not places, because obviously mobile phones were suddenly coming. You didn't have to be beside a landline.

Vodafone's share price at the end of 1999 was £5. Vodafone's share price today is about £0.65. So the company still exists, still pays its dividends. But if you'd invested at those prices, and I'm not saying we're at that level yet. I'm just saying one needs to have a high degree of caution on this topic. There's examples, right? This goes to another one. There's numerous examples. You go to Nokia, you go to Ericsson, and everybody will go up, people either look at Microsoft, but it wasn't obvious that they were going to be one of the survivors.

I think it's a benefit of hindsight, which is always the best way to manage money. They were in a pretty strong position, but they also had to pivot away from consumers and really double down on businesses. So do I think the AI as a theme is going to be persistent? Yes, I do. Do I think it's going to be the key driver for stocks this year? I'm a lot less than that.

Okay, okay.

make a bring you in on that what's your view uh from that will the boom continue what are other aspects that we need to consider well i think i mean if you think about um so what's driving if you like the the share market boom well a lot of it is is sort of the uh hype and expectation uh that's coming from you know what they call is the hyperscalers that are undertaking these massive investments right and they are huge enormous investment you can see You can see on the slide there.

Exactly.

So the chart on the left-hand side just tries to show how much more quickly investment is growing in that area compared to sort of more broadly across the economy. And so, you know, whether that's data centers or other related investment areas, you know, announcements from Microsoft and others have been huge in this area and will continue unabated in this year and no doubt beyond.

And so, you know, there's kind of that aspect to it. So there is a big investment story that's going on. I think adoption and usage is a kind of more open question at this stage. So, you know, I guess adoption rates started picking up pretty sharply in 2024. Viva Investors is using Copilot now.

I mean, there was a couple of surveys that we quoted in the House View this time around, which asked businesses around questions around how effective they'd found their adoption. The two surveys come out with quite different responses, which just tells you, I think, and one was very positive, the other one was actually not very positive at all. Just tells you, you know, I think it's very unclear at this stage how much of a kind of productivity sort of miracle, if you like, might come off the back of AI.

But it does things out at the moment. You know, the investment is there. the earnings are coming through. And so, you know, perhaps the sort of the share price valuations are reasonable.

Okay, okay. Okay, let's go on to the last theme. And it's kind of, we've spoken about this a little bit, grabs a lot of attention. I get asked about it quite a bit. It affects the amount people pay on their mortgages, the amount they get on their savings. So, interest rates, So cuts, as you mentioned last year, 1% in the US, pretty much 1% ECB, 50 basis points in the UK.

How do we see this paying out for 2025, given even what we've seen over the last week?

Yeah. Where do we see this going from this chart here? Very synchronized. Very synchronized on the way down. Yeah. Yeah, so far. Sorry, on the way up and so far on the way down. Yeah, I mean, so our view on this is we will see a more unsynchronized path from here through the course of 2025. I mean, if you look at the state, for example, of the US economy continues to grow really strongly.

You know, inflation continues to sit sort of a little bit uncomfortably above target. And as I said, the policies that they're likely to be pursuing there under a Trump administration, probably don't help that mix very much either from a policymaker's perspective. And so it makes it sort of more difficult to see the Fed cutting much more from here over the next sort of 12 months. Maybe we get one or two cuts at most through the course of this year in the central scenario.

And is that in line with sort of market?

It's broadly in line with market. I think there's roughly one price for the year now. as things have moved around a little bit already this year. But, you know, if we look to the UK, for example, not much more price than the markets in the UK, sort of one and a half cuts price thereabouts over the course of this year. And I guess we find that a little bit more surprising given the state of the economy.

So, you know, UK economy, from a growth perspective, pretty much stagnated in the second half. It was very little growth in the second half. We had a good first half of 2024, but a very stagnant second half of 2024.

We do see some improvement in growth in 2025, but not sort of enough, if you like, to really generate any sort of further inflationary pressures. And, you know, we do expect the Bank of England to be forecasting inflation to be quite a low target in the next 18 months or thereabouts. So we think that they can deliver more than what's priced. We think we could get four or even more rate cuts from the Bank of England this year. They'll probably be maybe a bit more backloaded towards the second half of the year, but more than what we're expecting to see in the US.

Okay. I'm conscious of time. I'm going to stop you there and move on. Maybe there's a last poll which kind of moves us into the area of sort of market pricing, equities, bonds, that kind of view on asset allocation. If we look at this poll, I kind of thought, let's have a look at what are people's views in 2025 of the average return of a 60-40, 60% equities, 40% bonds, global portfolio, given five options here. Here we go again. Basically, it's going to be the same as last year. Great returns. An optimistic view. Cautious view. Minus 5% to plus 5% negative. Or it's not going to be good.

Down more than 10%. So interesting to see, given what we saw about the driving of, I suppose, AI and those stocks, it'll be interesting to see how this number comes out.

Okay. Let's say, can we call that cautiously optimistic then, if that's the 51% cautious, minus 5 to plus 5, and then 41% optimistic?

That's an interesting take on that. Peter, let's bring you in on this. When we think about that, we have a slide here showing our asset allocation at a sort of summary level, equities, bonds, credit, cash and currencies, and we can see then equities as well. Can we just spend a little minute on our thinking behind this and our views on this?

Yeah, so I think it's an interesting, it's kind of a perfect normal distribution with a slight kind of positive skew. And I don't think it's unreasonable, to be frank. The one thing I would say that concerns me, not necessarily my central scenario, is that if you were to get a pickup in inflation that was relatively sustained and didn't enable the central banks to continue cutting rates much of which is actually already priced in So they might only be pricing in one cut or two cuts in case of Europe a little bit more But if you saw those cuts having to come out of the market and potentially even hikes because you had inflation coming back that would be pretty negative because that would lead to losses in my view and fixed income and losses in equities.

And then you're in the left tail of your return distribution. Not my central scenario. But that's the one that keeps me concerned. That's your 2022 kind of all over again. I would not see it having the same magnitude of impact because of the starting point, particularly of rates. But that should be a concern. But it's not a famous last words. I'll probably get corrected this. But I don't see it as a 2022 sort of situation because of the level of rates. where I think the 60-40 portfolio is interesting and I've read so many times over my 25 years in the markets that there's the death of the 60-40 portfolio, it's still here and it still does a decent job, is that if you get a recession, not our central scenario, but if you get one, you've got 10-year treasuries trading at 4.8, you've got 10-year gills trading at 4.8, you've got front-end rates that could be cut aggressively And if you've got a deep recession, you could see those 10-year yields trading with a two-handle.

And that will provide you with a reasonable cushion for the losses that you would inevitably suffer from your equities. But your central scenario should really be a small positive return on your equities and probably a small positive return on your fixed income. And that would probably lead me into sort of that 5% to 10% sort of range for a 1640 portfolio.

And views equity-wise, where do we see?

Yeah, so yes, we do have a preference for U. S. equities over, I would say, a 12-month horizon. I think if you're being slightly more tactical and you're looking at sort of the next two to three months, European equities I point this out to people have outperformed quite handsomely so far in the last as Mick says Peter that's like 8 trading days so far this year but they have outperformed by about 3% and that's because everybody's positioned the other way everybody expects US to outperform you don't get quite as good news Europe's not quite as bad so I think just remain humble remain nimble and really don't get overconfident The one area where we do have reasonable conviction, certainly on a 12-month and beyond, is you probably want to remain underway to emerging market equities and particularly Chinese equities for a whole series of structural reasons.

So that would be how I would look at that equity framework.

What about sort of on the fixed income side, if we go to that slide? Yeah. Yeah, how?

So, I mean, so the reason we look at this and fixed income, you can cut it in a lot of different ways, right? So you say, am I looking at total return? Am I looking just at spreads? We're looking here at total return just to be key. The reason that leads you probably to be less confident on investment grade is just because you've got very tight spreads and you've got a high duration component. So unless you're expecting aggressive cuts, you're probably not going to make that much money. If you're running a portfolio where you're restricted in terms of your equity allocations, I think high yield is a reasonable place to allocate to.

So if your choice is investment grade or high yield, I'd take high yield. But if your choice is equities or high yield, I'll take equities. So that's sort of what's the playoff that I'm doing. And within government bonds, we certainly believe and continue to be of the view that Japan is running an inappropriate monetary policy. those rates our expectation is that they will go up some of that is priced in not a huge amount and therefore we certainly would recommend an underweight in in japanese fixed income markets and it's been a long held view we we first went underweight and in those portfolios that could go short japanese 10-year government bonds when they were trading at 25 basis points swaps are about 115 today.

So it's been a slow grind, but it's a slow grind sort of higher, and we think that will certainly continue. And the final one, and I know I've come back to this, the final one is you just need to work out what is the role that fixed income is trying to do in my portfolio, and it will have different purposes in different portfolios. But in a traditional 60-40 portfolio, where I think of fixed income is, I want it to be there, I don't want it to lose money in my central scenario and we're happy if it doesn't make too much maybe pay me a little coupon but I want there to be a cushion that if we get a material slow down and I lose on my growth side it will provide me with some protection and I think we've got sufficiently high levels at the 10-year point that that cushion is there.

Okay okay um yeah we've focused lots on themes um one question I wanted to ask um you Mick really was kind of risks when we look out there at our central scenarios in the House view, what do you think the risks are there?

Well, it's two that were actually identified in the poll at the very start of the session today as kind of the two most important factors, which is, well, I think the question said Trump policies, but I would say trade wars, which could be a result of the sort of tariff policies that Trump is looking to introduce. You know, if we see large-scale retaliatory policies globally, that will be a negative and the uncertainty that that's going to could create in that scenario could be material and therefore I would be kind of pretty concerned about the downside that we could get from that and then the other one is the geopolitical risks which was also highlighted on the survey so you know look the there will if there's one area of consensus in the US whether it be you know from the Biden administration or the new Trump administration it is a view that there needs to be a sort of further distancing from China.

Some would call that decoupling.

I think the Trump administration will probably be even tougher than the Biden administration, which is pretty tough in itself. And so, you know, that will probably mean more sanctioning, you know, potentially use of secondary sanctions and so on and so forth. That also applies in other geographies.

Russia is another one that will be in focus from a sanctioning perspective we just had more sanctions announced this week in the u. s uh around oil so uh you know geopolitical tensions i say with the other one okay okay peter anything out on that so so the final one i'm conscious of time so i'll keep the succinct is the there's a there's a general sort of perception that if you have a healthy economy it leads to to healthy asset prices right and that's a reflection but my my fear is you get a and i and i think but i I think that feedback loop is now working the other way where asset prices are driving to some extent consumer consumption and driving the economy.

So if you were to get a correction in asset prices, pick your reason for it. I think it could have a magnifying impact on the economy and on consumers, particularly in the U. S. where a substantial portion of savings are linked to asset prices. And that's not just the U. S. It's also the U. K. and Europe.

Okay, perfect. We were going to touch on questions. There's a few here. One which I'm kind of happy has come up because it's something that's got a lot of focus in the last. Well, since Trump's re-election and we mentioned sort of financial deregulation. And Peter, I'm going to ask you this and put you in the hot seat.

Bitcoin, as a manager of portfolios, what is your view on that? We see it coming up a lot. We've seen it in the press a lot. Its value has increased substantially. It's one of those sort of Trump trades that we've seen views as a selector of assets. How do you?

So, I mean, I don't want to be too facetious with this, but I've got multiple ways that I can lose money. I think gold, for me, has got a history going back millennia in terms of the store of value. I think that's even in a large asset manager and many of our competitors don't even invest in gold. They find it too difficult.

For me, I think the intrinsic value of most of these coins, call them what you like, is zero. And therefore, I don't include them in our thought process. I think they can be a useful, I monitor the prices because I think it's a useful barometer for what's happening to liquidity and financial speculation and excess. In terms of an allocation to Bitcoin and to other coins, not for me. people can go on and do that outside of our portfolios.

Okay, okay. One other question, because I'm just conscious of time, we kind of reached our 45 minute. Around currency, strength of US dollar, views on that. I'm going to open that up. Which of you would like to take that, you can argue?

Let me have a first go. So we do have a generally positive US dollar view. We'll see that in the slides earlier on, I think, in terms of an overweight to US dollars.

Obviously, since the election in November, the US dollar has appreciated quite a lot. We're up around 5%, 6% over that period of time.

That's not surprising to us in terms of either the speed or the scale of the move. It reflects, as I say, that policy mix that Trump is looking to implement. We think it could have further to run. So, yeah, overweight.

Okay. Okay. Interesting. I'm not going to get your view because we don't have time. Okay. Let's finish. Last question. Quick answers. It's around kind of your takeaway for today. Mick, from an economic perspective, what would be your takeaway for the outlook for 2025?

So 2025, in our central case, look, we expect growth to be around trend. We expect inflation to be around target. All sounds quite dull. It's not going to be dull. 2025 actually is going to be a really challenging year because there's a huge range of possible outcomes. I said it at the start. That's what I want to repeat. There's a lot of uncertainty out there this year, I think, and you just have to be prepared to respond to that.

Peter, investment side of things?

I think you need to enter this year with even greater humility than you should enter any other year in which you manage money. And I think the uncertainty around the trade policies and the reaction to those, hopefully it will become more apparent by the end of this month. I think that for me is really going to set the tone for a little while.

OK, perfect. Thank you both. Thank you. This is all we have time for. We've gone over slightly by a couple of minutes, but it brings a close to our webcast.

Thank you, Nick, Peter, for your time today. Two things before you leave. The first one is please take this opportunity to sign up to our next webcast for our quarter one house view. Secondly, there is a questionnaire which we'd love you to give feedback on how today went, what improvements we can make. we're always trying to improve this event. But that really leaves things. As I said, have a super rest of the afternoon and hopefully we'll see you again for our next HouseView webinar.