Aviva (AV:LSE) Q2 2025 earnings call transcript

Hello and welcome to the Aviva Investors Q2 Houseview webcast. My name is Peter Smith and I'm an investment director here in Aviva Investors. Delighted to be joined by two of my colleagues here today, Harriet Ballard, portfolio manager on a multi-asset team, and Vasilius Guionicus, who is a senior economist and strategist. So today we are going to spend the next 45 minutes delving into what's been happening in the world of economics and also investments to give you our views and outlooks on what may happen over the coming months and indeed year. The first thing I need to do is some housekeeping. So on the slide, on the screen, you'll see a number of different areas, three areas that I just want to focus on.

First of all, this presentation and the house view document is available for download on the screen. Also, there is a Q&A widget, which you are very welcome to, and I'd ask you to ask any questions during this House View webcast, and we'll try and get to them at the end. Thirdly, there is structured CPD points for this event, which will be available for download after the event finishes. Afternoon, Harriet, Voss, lots and lots happening. I think we could spend all day talking about what's been happening over the last quarter, packed agenda, lots of, let's say, lots of things happening. We could probably talk about tariffs for the next 45 minutes. We'll try not to.

But, Harriet, the first question I wanted to ask really is more about markets, an overview of how markets have done so far in 2025. I've put a slide up on the screen here, which doesn't just cover the quarter. I think what's happened over the last three or four weeks needed to be taken into account too. So the slide here just details some of the market movements that we've seen.

Can we sort of have a look at what's happened, a brief overview of what's happened over the last quarter and a little bit more?

Yeah, absolutely. So as you said, there's been a lot of volatility, you know, year to date. and I think the easiest way to kind of try and unpick some of that is to think about what have been the kind of key market events that have happened over the quarter. Now of course the very first thing that happened early on in the year on the 20th of January is that Trump came in and started in his second term and you'd be forgiven for thinking that that was longer ago than it was but we still haven't even hit the 100-day mark yet.

But that being said, you know, he has done plenty to keep us on our toes since then. You know, obviously, domestically, we had the Department of Government Efficiency, the DOGE, was created. We've had announcements around fiscal policy. We've had concerns about fiscal sustainability in the US. That's obviously been a topic that's been talked about. I know you don't want to talk about it for the whole 45 minutes, but obviously you can't get away without mentioning tariffs.

There was a lot announced relatively early on. And then, of course, we've had that additional Liberation Day announcement at the beginning of April this month. And that has really shocked markets. so it's had a material impact on where people are expecting global growth to go and there's a lot of uncertainty as well around them so the extent that they are maintained at the levels that have been announced whether or not they come back in after the 90-day reprieve there's all sorts of things going on which we can kind of dive into in more detail as we go but ultimately it's led to equities moving lower.

Yeah, you can see that on that chart there.

Yeah, absolutely. And of course, you know, the thing that really catches the eye there is the U. S. equity performance. Now, of course, this is actually in sterling terms. So that move there that we can see, that 17%, is actually capturing two key things. It's capturing the underperformance of the U. S. equities relative to Europe and kind of also relative to the rest of the world. But it's also capturing the dollar weakness that we've seen. And so, you know, that's why that is looking so stark relative to what we've seen elsewhere.

And then, of course, more broadly, we've had a complete shift in the U. S. position on the international political stage and, you know, significant changes in how other countries are responding to that. So as the US has stepped away and altered its relationship with Ukraine and the way that they're dealing with the war between Ukraine and Russia, we've seen European defence spending plans increase.

In fact, fiscally, overall, Europe has really changed their stance. And that has driven, again, some of this outperformance of the European equities, this expectation that Europe will stand more on its own feet and feed into the European. It's a massive variance to what we've been used to over the last number of years.

I mean, that's a pretty stark performance difference.

It is. And the extent to which that will continue moving forward is obviously something that is really on investment. as mines. And then on the bond side, it's interesting because we've had a lot of market volatility. And actually, when you look at these numbers, they're relatively small. And particularly from the global bond point of view, a lot of the reason that that number of all is so small is that within that, you've seen a significant divergence in how those individual bonds, the major economies have performed. And then with all this risk and uncertainty, it's perhaps unsurprising that you have safe haven assets such as gold performing so well, so strongly. So actually a lot of the commodity performance that we're seeing there is actually kind of gold, precious metals performing well, whereas energy within commodities has kind of been more in line with the repricing of the growth outlook.

Okay, so that's interesting. I mean, when you look at gold, that last bar at the end, you know, it's up 22% so far this year. We go back, look at last year, it was up, you know, 30% over the course of last year. So very, very strong gold returns at all time highs at the moment. OK, that's really useful, kind of a scene setter. I'm sure we'll come back to a lot of the issues that you've just mentioned with FAST. The first thing I want to do was take a sort of a weather check and ask our first poll. I'm just going to ask two polls today. The first poll that I was going to ask is, so from people online, is the stock market's reaction, which we see on the previous slide, is the stock market's reaction to tariffs slash trade awards Overdone, maybe using the word just right isn't possibly the correct term, just right or underdone.

So just interested to hear what people's reaction so far to what we've seen in markets. We hear a lot of that negative news. There's been a huge amount of volatility. As you say, we're nearly getting used to 2% increases and decreases in markets on a daily basis at this stage. So that volatility has been very, very much pronounced. So we might have a look at, as we see the numbers come in, certainly how... Wow, okay. That's really interesting. No clear winner there. Overdone, that is not what I expected, I have to say, which is interesting. You guys, Fass, do you have a comment on that? Does that surprise you, that poll result? result?

It surprises me in the sense that it doesn't seem to have a very strong consensus because you have 46% saying overdone when the other ones believe that it's just about right or under that. So it's very, very close. And I think it's indicative of the amount of uncertainty that we currently have in the global economy and in world markets.

Even the fact that it's very, very tight.

Yeah, very, very true. Okay, so let's kick things off a little bit. We've heard about what's happened in markets. Let's look a bit, try and look into the future slightly. We had our four key themes for quarter two. They're up here on the screen. We're going to take each of these individually, as I ask Pepper, you guys, with questions going through them. But the four themes, the first one, obviously hard to get away from it, Trump 2.0, kind of looking at domestic and trade disorder and disruption. Second one, solidarity and self-reliance, replacing that sort of rules-based order.

Monetary divergence, number three, and tech revolution and testing times, or I suppose uncertain times there as well. So taking those four themes, Vass, to ask you the first question, so much of what Harriet has spoken about related to pretty much all we've been speaking about for the last number of months, even more so since that famous or infamous Liberation Day tariffs. And I thought it might be interesting to take a step back and talk about what President Trump's intentions are. What is he trying to achieve? What matters to the U. S. administration? So I've just put up this slide here, which is kind of what are the reasons for tariffs from a U. S. perspective and what he's trying to achieve?

Yeah, I mean, look, Peter, you put a number of things up there, you know, supporting U. S. manufacturing, reviving, basically, U. S. manufacturing, potentially generated income to pay for enacting the tax reductions that are going to come into force later on, potentially changing the structure of global trade, making America more protectionist and more high-serenious.

Look, I think it's a mixture of these things. I think to the extent that these things are being driven to bring countries into the negotiating table, that potentially increases the likelihood that they're going to be reduced further on as Trump achieves some of the things that he attempts to do. But the bottom line is that even if we end up being in a world where we have a 10.60, 10% for the rest of the world, 6% with China, it's still going to be a considerable trade barrier.

So the effective rate right now in the U. S. is about 25%.

Yeah.

If we end up with 1060 we going to be in the mid to high teens And before that we were sitting at about 2 So it going to be a considerable increasingly effective tariff rate So it still going to be a barrier to trade and it still going to imply that we're going to end up with a significant slowdown in global trade and in global growth. Now, of course, if the main aim is to have generating revenues, if the main aim is to go ahead with the restructuring of the global trade order. Actually, if we go to the next, the next slide shows a little bit of that global trade order there. You can see the various trade balances with the main trading partners.

Now, if the main aim is to reduce the current account deficit, but equally at the same time restructure that trade order, that global trade order, then we can suspect that the reduction in the existing tariffs is going to be more limited, and therefore the hit to global trade and global growth is going to be far more noticeable and more material.

Yeah. OK. OK. And you mentioned you mentioned about sort of generating income as well from a from a U. S. perspective. The next slide we have here just shows, you know, exactly what things used to if we go back to 2018, the amount that was generated from his policies then.

Yeah.

Is that is that enough of a reason? No. For him?

Well, for him, it really depends on how he thinks about things. But again, the amount of revenue that can be generated could end up being modest and non-existent. Take, for example, 145% tariffs in China. Effectively, this implies a de facto non-existent trade between the two countries. So if you assume that the elasticity, the response of trade to the imposition of tariffs is very large, which basically makes revenues non-existing because there's nothing to trade there, well, then this does not really generate much of the revenues. And on the other side of the coin is that for those goods that will be purchased effectively, this will be paid off by U. S. corporates and the U. S. consumer through increases in prices.

So, you know, again, I don't think we're breaking any significant news on this front. But the reality of the matter is that there are no winners from the imposition of tariffs, especially of that amount and that size.

When you talk about the 145% tariff on China and you speak about the elasticity of that, pretty much from what we've seen so far since Liberation Day, we've seen sort of those reciprocal tariffs across the board have been sort of put off for a certain amount of time. Not so in China, but it's hard to see 145% staying in that realm, or is there an expectation that that will come back? We've heard over the last couple of days a little bit of rhetoric about that.

It is really hard, but then again, who could have imagined that we were going to have so much flip-flopping, so much change from day to day, even on the same day, based on announcements, based on imposition and implementation. So the base case is that, yes, there is going to be a reduction in the existing level of tariffs. But the range of outcomes is very, very wide.

Okay, that's understood. Follow-up question to all of this, and you kind of mentioned on this before, but impact on sort of growth, global growth, inflation, earnings trade, even on politics. We have a slide up here which shows sort of global growth. Obviously, the interesting one is the light blue bar, which is the US. But you can see over the last couple of years what that growth rate is and the expectation going forward. A little bit of comment on that.

Well, you can clearly see that we've downgraded quite materially our forecasts, at least not relative to what we had before for 2025 and 2026, but also to what have been the norm over the past three years. So we're expecting U. S. to grow by 1.3% this year with a noticeable probability, with a material probability of a recession. After all, now casting models suggest that the first quarter was quite a negative quarter. So you only need an additional consecutive quarter to, strictly speaking, characterize it as a recession, although we'll find about this much later on with a significant lag. But in general, the rule of thumb here is that significant trade barriers impose barriers to trade.

Therefore, they slow down trade and therefore they slow down growth. Europe will be affected. The UK, which is a high beta to the US growth, one of the highest beta countries to US growth, will be affected. Emerging markets will be affected. No one will really escape. And this alludes back to the point that I was making before, that there are no winners from the imposition of trade barriers.

Okay, so it goes all the way back to the first graph we looked at and looked at sort of performance of different markets so far this year. And whether that's been underdone or not, it certainly reflects the uncertainty that we're in at the moment. Harriet, I haven't come to you yet. You've been sitting very patiently here. So I'm going to ask you the next question.

Given what VAS has talked about, do you manage multi-asset portfolios on a daily basis? What do you do during these kind of times? So you batten down the hatches. How do you manage a multi-asset portfolio during these type of events?

Well, it depends what you mean. Do you batten down the hatches and put everything in cash? No. But does it make sense to move your portfolio to a more defensive position? Yes, probably it does. I mean, I think in periods of high levels of uncertainty and volatility, there are always going to be opportunities created. That should be the time when active portfolio management can create additional performance for their clients. So, you know, we would hope that you need to remain calm in these periods and need to sort from all of the noise, the signal.

And we focus on trying to extract the longer term view and be humble about what we can know and cannot know. So, you know, as Vass has alluded to, there has been a lot of flip-flopping, a lot of changing our minds on policy around trade. And therefore, you would not want to put a large bet in the portfolio on a particular, you know, trade policy outcome.

But I think you can take a view on the longer run implications of all of this, you know, which Vass did to around growth, and try and position the portfolio to be ready for that environment.

Okay. And try and build in additional protection to the portfolio in that way. Okay. So we'll come back to that later. We'll be talking about sort of our asset allocation positioning and that kind of thing around our active positioning. To go on, okay, we've talked about tariffs, but we could speak about them for the next hour or two. I'm not sure what good that would cause because things change so quickly at the moment. But let's talk fast a little bit about Europe. It's come into focus, more focus this year. Harriet mentioned that relative outperformance so far versus the US.

This is an area that we're seeing help to drive growth in Europe, fiscal stimulus. There has been a big focus on defence since Trump came into power and certainly his push back on NATO and these kind of things. We've heard lots about the German debt break. Does this improve the outlook for Europe? You mentioned worries globally, but does it improve the outlook for Europe? And how do you factor in things like Ukraine and Russia and what's happening there?

So let me start with the latter. As far as Ukraine and Russia, I guess there are going to remain a risk.

OK.

Because there's always a risk that things can go wrong. We are not going to get a peace deal. and there could even be a re-escalation. So that's always a risk. Now, going back to your question, whether does this improve the outlook, all that's equal, it does improve the outlook. And if I may say, the U. S. administration appears to have been a blessing in disguise for Europe in the sense that it reached such a point that basically there was no other way for Europe than to try and sort itself out through some structural changes. What happened with Germany is quite historic in terms of direction and in terms of size. It is the biggest fiscal package that we have had in post-war history.

It is a change in fiscal mentality in Germany, and that's definitely going to improve both German growth as well as European growth. Again, this is conditional on the state of the world, depending on where we land on tariffs. So we're also getting a response on the European Union front as far as defence is concerned. We do have a playbook from the NGU. This is partly being employed through mutual debt issuance, about 150 billion of euros. Is this going to be enough? I guess, and another 650 at the state level.

Potentially no, but it is a step in the very right direction. So all else equal, as I said, it definitely improves the outlook. And I think the markets are seeing that because, one, despite one would have expected the pricing of additional fiscal risk premier, you're seeing boon yields going down because they're acting as a safe haven. The euro has been behaving as a safe haven. We started off at 107, 106, and now we're gravitating towards 115 in the space of just a few weeks, really.

Yeah, yeah.

So I think the bottom line here is that conditional on the outcome for tariffs, it definitely improves the outlook for Europe.

Okay, okay. I mean, the slides we have up here kind of demonstrate how much actually will be needed for the individual countries to reach either a 2% or a 3% target. And this goes back to my point, is the existing package enough? I think 2% potentially is not going to be enough in order to act as a deterrent to potential future threats potentially coming from Russia. So they would have to be rethought and pushed higher into 3%.

So that's why I'm saying that the current package is potentially not enough. and therefore more will be needed. It does highlight that there are a number of countries that will have to do much more, significantly more, as it is the case for Italy and Spain in particular But the direction of travel is quite clear There has to be more defence spending Europe will have to bear the brunt of supporting Ukraine and it will have to move towards much more self-sufficiency, basically.

That's interesting. Since President Trump's come in it's in a way galvanised Europe to work together.

It did that.

Okay, that's very interesting. Okay, so next topic that I wanted to touch on, as well as sort of worrying about tariffs, we also have the constant market focus on interest rates and where they're going. We've even had President Trump calling into question the independence of the Federal Reserve chairman this week, which is a whole other matter. But much of what we've spoken about today does focus on sort of growth or no growth or inflation as a result of tariffs. So I've included a slide here, and it's basically a slide on what the market thinks basically this week, how many rate cuts there will be by the end of 2025.

And it's fair to say the market has been, I'm going to say, pretty bad at predicting these in the past. But I just thought it was interesting for viewers to see where the market and what they're pricing in rate cuts up to the end of December 2025. Do we agree with that current market pricing? What's our view? Is stagflation a worry?

What's your view there? So there are two levels. One can actually see it. The broad level, the 30,000 feet view.

So basically, if we put Japan on the side, because Japan is a very special case coming out from years and years and years of deflation and disinflation, you can actually see that the market is pricing monetary policies for this year and the next year. So basically, the market is taking the view that although we are going to see inflation, especially in the U. S. , pick up because of the pass-through of tariffs, Eventually, the slowdown in growth is going to force the hand of central banks to ease monetary policy. And this is something with which we agree.

Now, then you can take the second level view and say, do we agree with the individual pricing? Potentially, you can say that for the ECB, it seems to be a bit aggressive, 1.4, 1.5 terminal rate, potentially puts it into very accommodative stance. So that's saying that 75 basis points of cuts down from 25 to 150.

Exactly.

Potentially, you can argue that it could be a bit higher, the terminal rate. But again, the difference is not really massive. I think on the whole, it seems about right.

OK. We may get more interest rate cuts by the Bank of England. We may get a bit less by the ECB. But on balance, I would say that it seems to be an intuitive pricing. OK, OK. Interesting. Harriet, kind of linked to this, U. S. treasuries have come under a bit of pressure lately, which possibly caused President Trump to change his mind about the reciprocal tariffs from two weeks ago. How do you see this playing out?

yeah i mean you know as as far said the longer term view is that the rates would go lower but in the near term we have had the markets trying to grapple with this concern around inflation yeah we've had the market grappling with the idea of fiscal sustainability and in the us you've also had the market trying to start to price in some sort of instability premium with all this uncertainty and volatility that is going on. And, you know, you mentioned as well, you know, Trump questioning the independence of the Federal Reserve. And again, you know, this is not helpful. It's not helpful for bond markets. And, you know, clearly we are not the only ones watching rates.

Trump is watching rates too. You know, 4.5% on the US tenure seemed to be at a level at which he was not comfortable with yields going beyond. and why was he not comfortable about that? Well, very high rates in the US make it very difficult for him to have his fiscal plans coming through. It makes it much more expensive. So that's why he might care. He might therefore try to walk back or reassure markets in some way. And I think we are probably set up near term for a lot of good deal headlines to come out.

But, you know, as Vass alluded to, the growth impact, the growth shock is there. And from here, it really depends whether or not we're talking about, you know, a two quarter slowdown or something a lot deeper and, you know, moving more towards something like a global recession. And that will be the main driver of bond yields.

OK, OK, that's interesting. Actually, just in relation to that, a question I have at the beginning of the year, sort of markets anticipated that, you know, and generally people felt President Trump would kind of take into account he was so pro markets that he would be looking at them in a sort of rear view mirror. Fas, are you surprised to the extent that he's been sort of so strong in his moves around tariffs and that kind of thing? Does that surprise you, given where we started at the beginning of the year, where we thought things would be more cognizant of how markets reacted to his?

Well, in reality, Trump has done what he has said he would do. and when he actually pushed things too far, he actually backbettled. So the market can be of tremendous power, even for politicians in convincing them to withdraw extreme things that they have in store.

I don't know if I'm surprised, I have to say. He seems to be someone who has very strong convictions.

Whether these things are based on economic 101 or not, that's a different matter. But the reality of the matter is that the market has actually pushed him implicitly to backtrack on a number of things that he has done. I mean, take, for example, tariffs. There was the initial announcement, there was the backpedaling. There was chasing the Fed chairman, then there was the backpedaling.

So potentially the advisors around him are advising him that certain things that he's proposing might be too extreme for the market to digest.

It's hard to believe it's not so long ago in February when the S&P was hitting all-time highs. I mean, there's been a big flip there talking about backpedaling and backflips. Markets changed its view pretty, pretty strongly. OK, last theme. I mentioned the themes at the beginning. Last theme, testing times for tech. It's been about two years since mainstream sort of adoption of AI and understanding of AI, although maybe I'm still trying to understand it a little bit. We've seen tech names kind of giving back some of the gains and stellar returns that we've seen over the last two years. Pressure from DeepSeek, the Chinese sort of alternative. What's our view here, Vass, on the future?

There's a slide here, which I think is really interesting, but what's your view here on how things might play out?

So we need to ensure that we separate the alpha from the beta here in the sense that obviously tech has sold off, but it has sold off on the back of the broader market selling off. And at the end of the day, between 22 and 24, you had gains of about 130%.

Yes.

So seeing the losses today are just a blip in that. Look, I think you mentioned deep seek. Deep seek was something that basically questioned the U. S. dominance. But what I think we need to understand is that with tech, with AI, this is a disruptive movement. This is a disruptive technology. So therefore, it is bound that there will be players, there will be people that will be disrupted. So therefore, there will be winners and losers.

We still think that in the end, there will be efficiency and productivity gains. But we're relatively early, as you mentioned, for the last couple of years. We're relatively early in that AI cycle. During that process, as I said, there will be winners and losers. There will be times where the market sells off because of beta. There will be times where the market sells off because of alpha. The number one thing that, as you point out rightly in this chart, that I would be watching is that we're yet to see revenues in the AI actually more than compensating, more than offsetting the capital expenditure allocated to them. Now, this is forecasted to change over the next two to three years, But that's definitely something that should, we think, be in people and investors' radar screen in order to be able to establish whether or not, indeed, we're going to get these efficiency and productivity gains that we think eventually will materialize.

Okay. So is that spend going to generate the revenue set up?

Exactly.

Okay, fine. Perfect. Okay. So that's looking at the themes. I want to finish kind of with a poll question here. and yeah it's kind of an interesting one very binary yes or no answer and it's based on everything we've been speaking about interesting the audience view on this are we moving to a new world order or will the U. S. remain in its dominant position so are we moving to a new world order yes or no let's have a look at that um i think um when we think about what we've been speaking about it's impossible to stay away from from the discussion around tariffs as much as i try to do that it's uh we've probably spoken about it too much at this stage um but we'll try in the next section i think we're going to have a look at asset allocation um and focus a little bit more on on what we have to say from a portfolio management point of view, Harriet.

But let's just have a look at... I can't promise not to talk more about tariffs. Yeah, I know. I'm not going to ask you. Okay, let's have a look at the result there.

Wow. That's extraordinary. Okay, 50-50. Wow. Well, there you have it. Yeah. Uncertainty. Uncertainty is the name of the game today. I mean, it is very indicative with both balls. extremely tight, 50-50, that's extraordinary. Yeah, isn't it? But it does speak to the uncertainty and the unknown. And you know as we been saying things can change overnight in our expectations of what happening at the moment OK so Harriet then you get the really easy questions now based on the uncertainty The next slide we have up is looking at our current asset allocation and our views and, you know, outlooks for the markets that we hold positions in. Can we initially touch on our view on equities?

How are we positioned currently in our multi-asset portfolios where we have active discretion? Yes.

So we are, as I said, tilted more defensively. So we are underway to both U. S. and European equities. In the U. S. , we've talked about some of the backtracking that Trump has done around some of the tariff announcements. But ultimately, a lot of the damage is likely already done. The levels of uncertainty that we have got at the moment means that businesses are going to be delaying investment decisions. Consumers are going to be delaying their purchasing decisions.

And it's very, very difficult to plan, you know, not just for us as investors, but for real businesses and households as well. And so that will have had a tangible effect on growth, even if, you know, all of the tariffs are taken away tomorrow. On top of that, we also have obviously we've touched on already the U. S. 's dominance in tech and how long it can sustain that dominance to justify the current valuations that it has. We've had, you know, the U. S. equity market has fallen between eight, nine percent or year to date.

But, you know, additional signs that that is spilling over into revenues. That's just been a price adjustment. The signs that that's spilling over to earnings as well. definitely open up further downside. Have we seen that yet? Earnings season has just sort of begun. Yeah, not quite yet. Not quite yet, but it is definitely something that markets and investors will be watching closely. And then in Europe, there's a greater margin of safety in terms of valuation. But as we've been talking about the European outperformance relative to other markets, it does suggest a certain amount of complacency regarding the Europeans' exposure to tariffs and its ability to perform well in an environment of a more severe growth slowdown, I think, is questionable.

And so, overall, we remain underweight to actually...

So, defensively positioned. From an equity perspective. What about fixed income? How do we view that at the moment?

So, you know, as we said before, taking a step back, what's really going to drive the performance of bonds is going to be ultimately the growth outlook. I think that's one thing that we have managed to retain in terms of our expectations or kind of focuses we had in 2024 was that growth was going to be more important than inflation. and that was something that we one of the few views that we've managed to you know kind of hold into this year and even through this period where we have tariffs coming in and we are expecting to see a significant um in price shock yeah um we still think as vass highlighted that the growth impact will will dominate and in an environment where you have growth falling yeah you know generally bond yields will decline.

So we have an overweight position in the US and the UK. In the US, we have seen a lot of steepening in the curve. And so our overweight positions are focused more on the shorter end.

Okay, okay, perfect. Okay, so just thinking about that world order thing, I'm amazed by that, Paul. And there's another question for you, Harriet. Anything kind of you were talking about in the team, multi-asset team regarding that current possible change of the world order. And that kind of what we've seen is that dominance of the US equity market over the past 20 years and the dominance of the US dollar going forward. Thoughts on those two things?

Yeah. So these are two big topics that I think have been spoken about, not just on our team, but very broadly across the industry.

And it's really important. You think about US asset allocation. Most investors are overweight to U. S. assets because of that historic outperformance of the U. S. Yeah. And in a world where investors need to price in some sort of instability, lack of credibility premium to U. S. assets, and U. S. assets become less attractive because of that, it's conceivable that particularly foreign investors, but maybe even U. S. investors also say, you know what, maybe I want to hold a little bit less of U. S. assets in my portfolio. And we're not saying that everyone is going to be running for the exit altogether or that, you know, there's going to be no money left in the US.

Clearly, that's not true. These are very deep liquid markets. And you can't just all walk out the door. But very small allocation changes in very large pots of money can have very material consequences for market prices. now that's obviously a much slower moving trend a lot of these large pots of money these decisions are taken very carefully gradually slowly so these things don't happen overnight but one area where investors can perhaps alter their allocations more quickly is on the FX side so they may say you know what I have a huge amount of US equities in my book and historically holding the US equities and the dollar exposure has been a nice benefit because they've balanced each other out well.

When equities are fallen, the dollar is generally rallied. And so that's been a very good diversifier for you. Looking forward, that relationship seems to have broken down. And if you don't expect that to really work for you moving forward, it makes sense to try and hedge some of that FX exposure. And I think that could be well driving a lot of what we're seeing in the weakness so far.

Okay, interesting, very interesting. As we move on to questions, I'm going to ask Fasa a question, first question. One thing that I always like to ask is what kind of keeps you awake at night? What curveball that could be out there that we haven't thought about?

So first of all, it's always about black swans, right, for things that we cannot predict. We have no idea. It can be a geopolitical risk. It can be an economic systemic risk, whatever.

The other thing which I think is a risk that the market is not pricing is the reverse of what I was mentioning before. The market is saying tariff, disruptive policies, slowdown in growth. Eventually, this is going to lead central banks to ease policy because it's going to weigh eventually on inflation. Now, there is, however, a path in which this increase in inflation in the U. S. more specifically, filters through into inflation expectations.

And that basically maps out into a stagflationary scenario in which central banks can no longer afford to ignore the increase in inflation expectations. And then they will not be able to ease policy. This implies an environment of high inflation, high interest rates and very low growth. This is definitely, I think, a risk that the market is not pricing. It's not our base case, but it is a risk that we need to put some probability. That's slightly keeping awake at night.

Okay, interesting. Okay, another question I have for you, Vass, is we haven't spoken about it much, but it's a question that's come in quite a bit, is around the UK economy and views on that. Views on UK economy?

Well, the UK economy is definitely undergoing a slowdown over the past six to nine months. It is an economy that has quite a high bidder to the U. S. , so to that extent, the slowdown in the U. S. is definitely going to affect the U. K. economy. I think it will boil down to how much and how fast the Bank of England will ease policy, which will also be a function of how quickly inflation falls again back close to target. Now we have a lot of uncertainty, not just on the international front, but also on the domestic front, through the Nixon increases that are likely going to be affecting multiple fronts. Our view here is that the Nixon increases are going to be predominantly absorbed by employment decreases and by lower wage growth.

There will be some pass-through to prices, but we don't think it's going to be that much lasting. So eventually we think the BOV will be forced, if you like, to actually cut interest rates potentially more than the market is pricing.

Okay, that's very interesting. I'm conscious of time. Always try and run it tight as possible. So thanks for answering those questions. I thought the last thing I want to do is just a quick summary from both of you. I always like to ask both of you just for a summary of what we've spoken about today, your view. Fas, let's start with you. Economic outlook going forward.

Well, as you said, a lot of uncertainty, an unusual amount of uncertainty, which I think is going to weigh both on consumer spending and on business investment plans, which means that the probability of a U. S. as well as a global recession is non-negligible. It's quite material.

Okay. Okay. That's an interesting point to leave it with. Harriet, what about you?

High levels of uncertainty.

You can't say uncertainty again. But, you know, volatility then?

Volatility, okay. High levels of volatility are likely to continue. We've got to remain humble. We've got to continue to adapt.

And I think whilst we focus on the long-term outcome and try and protect as much as we can for the near-term volatility.

Okay, interesting. Perfect. First of all, thank you both for your input today. Always really interesting. And it's been super. Hopefully we'll have other things to talk about the next time we sit down in the next quarter. But for everybody listening, thank you for your time today. Obviously, you can sign up for our quarter three house view, which you're able to sign up for and register on the page that you're going to be able to view.

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