Aviva (AV:LSE) Q3 2025 earnings call transcript

Hello and welcome to the Q3 Aviva Investors House View webinar. My name is Peter Smith. I'm an investment director here in Aviva Investors. Delighted to be joined by three of my colleagues today. David Nowakowski, senior strategist. Dean Cook, a portfolio manager within our multi-asset team. And David Heddallin, head of private market research. Over the next 45 minutes, We're going to touch on our views and outlook for the global economy and investment markets.

And we hope that we will delve into both of these topics in great detail. And we still have to remember and bear in mind the topic of our house view quarterly this year or this quarter is the U. S. exceptionalism losing its luster. But before we get into the detail and before I ask you guys some questions and put you in the spotlight, there are a few housekeeping items I just need to cover. This slide here details a lot of them. Top three, if I was to point them out to you, are the presentation is available for download and as is the quarterly housekeeping document that we produce.

Number two, we would love to get questions throughout this webinar and we'll hopefully pick them up at the end. And there's a Q&A widget that you can access at the bottom of this page, too. And the last thing, obviously, this session qualifies for CPD. And so you can download a certificate once it finishes. So, gentlemen, you're very welcome to this session. I hope we've had a pretty roller coaster ride over the last quarter. And there's going to be a packed agenda today. We're going to be under pressure, I'm sure, the whole time. So I'll be looking for quick responses from you.

News flow has been crazy and there's something new happening pretty much every day. You know, yesterday was about European tariffs. The day before about Japanese tariffs. The day before that, we were talking about the Fed chairman. It's just constant news flow. So hopefully we'll be able to deal with some of those questions that we have. We'll probably be focusing and speaking about tariffs and Trump quite a bit throughout this conversation.

Dean, I'm going to pick on you first. You're very welcome. This is your first time on the House View. We have a slide up here. As I said, it's been a roller coaster ride for asset classes generally in quarter two and year to date. When I look at this, it hides a lot of the detail of that. When I think about the tech-heavy Nasdaq at one stage was down from its highs by 25%. It's since regained them by 35% since it's low. So this doesn't really capture that, but good place to start, I think. So if we can sort of have a quick review of how markets have done year to date.

Sure. Yeah. Thanks, Peter. So a quick canter through equity markets. We're up about 3.5% if you're to look at global equities. About 65% of that benchmark is comprised of America. So given that America was flat over the period, no surprises that the global index is lagging some of those regional markets that we've got alongside it. As you mentioned, US equities down heavily in the second quarter. I think the nadir for the S&P 500 in sterling terms was about 18% down, and as you say, sort of rebounded strongly since then. Those equity numbers are in sterling. They are indeed, yeah. So emerging market equities have benefited a little bit from of the rotation out of U. S. equities during that period where investors were considering how much they wanted in U. S. denominated assets.

Fair to say we've also had some quite resilient domestic growth out of regions like China, which are very important for the emerging market complex. Europe similarly has benefited both from some rotation out of U. S. equities, but also some optimism around expanded fiscal expenditure in defense and infrastructure, which can be quite important themes for the year to come there. Japan, fairly cyclical market and more sensitive to a potential global economic downturn should tariffs have landed at the levels where they were originally pronounced, so some volatility there. UK equities benefiting from a bit of the defence tailwinds that we were just covering. In credit, the spreads that investors require above and beyond government debt have remained more or less stable over the course of the year so far, So what you can see on the screen is income returns, similar for emerging market debt.

Government bonds have been an interesting place to be. So on the one hand, we've had central banks following through on interest rate cuts and talking potentially about more should they be needed. And on the other side, and something that I think we'll come on to today, fiscal risks have been in their ascendance. against that backdrop. It's no surprises that gold has done very well, sort of an uncertainty asset and also a beneficiary of our final asset we're going to cover, which is the US dollar, which had its worst first half since 1973, depreciating against all other G10 currencies.

Okay, that's really interesting. When I see the dollar down 7.2%, sterling, euro investors, I think it's down over 13% so far, up to today. So we've seen that weakness and we'll talk a little bit about that later on, I'm sure. I was going to start with a poll, if that's okay. The poll that we were going to ask is kind of linked to the themes later on, but it's really what will impact markets the most over the next six months. Kept this relatively tight, tariff negotiations, budget deficits, geopolitics or AI slash tech. So some of those things that we will probably look at later on. While those whole answers come in, I'm going to actually turn to David Havalan.

David, you're very welcome. It's your first time. Aviva Investors has a long and successful track record managing private markets. It's the first time we've spoken about it in this forum. So you're very welcome. I really wanted to really ask you, why do you think private markets has sort of come into the spotlight to the degree it has done of late? You know, can it be attributed to some of the things we're going to speak about later?

Yeah, it's a great question. And I think just to put in context what we've seen this year in terms of fundraising for the private market space using pre-Quen data, which tracks sort of funds raised, LPs and GP money capital raised, is on course for a very strong year. 2021 was the peak. We saw how to pause through the hiking cycle through 22, 23 and 24.

Fundraising still occurred, but not to the same degree. And actually, if we annualize up the year to date numbers for pre-quadre, we're actually looking to exceed that peak in 2021. So we are seeing, to your point, absolutely this interest. And I do think there's a number of reasons for that. I guess one of them is actually what we've always sort of known about private markets and the diversification benefits, the yield, the longer term nature of that, which has always been attractive. But in some respects, arguably, it's become more attractive given the macro uncertainty that we're seeing and the volatility coming through. So that's probably one that investors have probably those conditions have come front of mind for portfolio construction.

I think the other one is a function of the higher for longer rate environment that we are in. And things like private debt, for example, which perhaps weren't as strongly allocated to historically, given the all-in yields available in the private debt space, are now firmly in scope for investors potentially. And again, investor requirements are different depending if that risk-return equation works for them for a private debt perspective. That is now part of the allocation discussion versus maybe five, ten years ago it was not given the rate environment that we were in. So there's a number of considerations happening here, some of which I think we've known about for private markets that were there before, and some of which have emerged since that point.

Okay. Well, look, great to have you on board. Thank you, yeah. The two new boys, I see, wore ties. So anyway, you're very welcome. Let's have a look at the poll results. Let's have a look. Okay. Tariff negotiations. That's not really a surprise.

Number one, concern. Geopolitics. Number two, budget deficits. AI tech. Okay. Okay. That's interesting. It kind of speaks to our key themes to some degree. And that was the reason sort of we asked this question. So on the next slide, you can see the key investment themes that we have for this quarter. The first one, what I mentioned at the very beginning, that sort of erosion of U. S. exceptionalism. Second theme, U. S. domestic upheaval.

Third, rapid evolution of the tech revolution. So that's linked to that AI tech theme. And then the fourth about sort of covering sort of monetary easing. So over the next, let's see the time, about 20 minutes, we'll touch on these points. David, I'm going to ask you the first question around these themes. First question is, with the erosion of U. S. exceptionism, has the U. S. really lost its luster or even sort of stature in the world order?

Yeah, thanks, Peter. Good to be with you. When we talk about U. S. exceptionalism, it's an umbrella term that covers a lot of different things. And part of it is America's place in the world's order, the beacon of freedom and democracy, attracting millions of immigrants over the years.

And that is changing somewhat. But same with its role in NATO and its position vis-a-vis its allies, where it's becoming more transactional and that affects geopolitics and has prompted Europe, for example, to invest more in its own defense. That's lifted deals. So those things do have some market impact. But in terms of the house view theme of U. S. exceptionalism, what we're really referring to is the financial aspects. So the exceptional above trend growth that the U. S. has had both before and after the pandemic, much stronger than expected and stronger than other developed markets.

And that's partly driven by tech dominance and the AI theme that has come to the fore in recent years. That part of American exceptionalism seems mostly intact, although the growth theme is going to be damaged. We think that will show up partly in the second half. There was a weak first quarter as well because of the tariffs. I think the voters got that right. That is still having an impact and has yet to be seen to some extent in the data.

That trade war is affecting other things as well. And another part of the U. S. exceptionalism is the U. S. dollar's role as safe haven and the global reserve currency and the attraction of U. S. markets in terms of global capital markets and so on.

And the ability of the U. S. to run very large twin deficits, so fiscal deficits and current account deficits, drawing in that capital from the rest of the world. And so we see that here in this first slide, where the erosion of that exceptionalism is partly manifested through an increase in risk premium So what do we mean by that Well the blue line here is the US long bond the 10 treasury yield And even as the Fed has started to cut rates it cut 100 basis points towards the end of last year the US yield has steepened and the long bond now trades almost 100 basis points above swaps.

Okay. And meanwhile, usually when US yields rise, you'd expect the dollar to strengthen, but the dollar has weakened. as we saw about 7% against sterling. In trade-weighted terms, it's about 6% weaker off of its highs at the beginning of the year. So if you look at the next slide, this shows the international investment position. Busy slide.

Yes. So the dotted lines are what U. S. investors own in non-U. S. assets. And that's quite substantial, but it's grown slowly. The solid lines are what international investors own in the U. S. , and those have grown very rapidly. And they've also changed in composition, where you can see the gray line that has jumped from being kind of low in the pack to top of the pack. That's international investors' exposure or ownership of U. S. equities.

And if you combine equity and fixed income holdings, that is now $30 trillion. dollars. So that's historically unprecedented. It's about 100% of GDP. And so non-U. S. investors are very, very exposed to the U. S. And that puts the dollar and the risk premium, I think, is a big risk going forward.

Okay. Okay. I'm going to come back to you at some stage on a question around that. But before I do, I'm going to ask you another question, Dean. So in relation to this, I suppose, do you see, how do you see markets reacting to what David's spoken about? You know, you spoke earlier about equity markets rebounding to the extent that they did. But are we seeing any cracks from, I suppose, certain sectors or asset classes?

Sure. Yeah. So I guess taking it in an order of most impacted to least impacted, at David's points on the dollar are very well made. And that's where we've seen not just a fall, but a sort of failure to recover, despite the underlying economic fundamentals being pretty firm. And as David also highlighted, we think that that could be the start of a sort of more longer term trend. It won't be necessarily in a straight line. But if one is a foreign holder of US assets, you might have a portfolio comprising equities, bonds, and maybe some illiquid assets. Well, it's quite difficult potentially to sell large amounts of those in a hurry, particularly the illiquid side.

So what's the most liquid asset these international investors will have in their portfolios was probably dollars. And so by changing the amount of hedging that goes on in their portfolios or simply just selling dollars allows international investors to reduce their exposure to the U. S. market. Sort of next down in the affected stakes would be the bond markets, so government bonds.

Here's an interesting dynamic where you've got a couple of things going on. Firstly, a U. S. administration is quite happy to carry on spending, sort of reasonably large budget deficits, and all else equal, if you're going to lend to that particular government, you're probably going to want a higher return to do so to reflect the increased risk. Hence, sort of a bit of upside pressure to yields that we've seen.

Similarly, I mentioned earlier that Europe is going to go through quite a large fiscal expansion over the next couple of years on defence and infrastructure. And that's going to bring more supply of bonds to the market. So if one is allocating globally to large and liquid markets, suddenly European government bonds are a bit of a kind of competitor, if you like, to European markets.

Finally, and probably least affected to David's points around the sort of exceptional nature of companies within the U. S. market, we think the U. S. equities, as we've seen from not only the rebound, but also the strength of underlying fundamentals there, and US equities probably not quite as affected given their unique characteristics.

Okay, interesting. Time is not on our side. So let's go to theme two. So we have US domestic upheaval projects for 2025 and beyond. David, back to you on this kind of, you know, US domestic upheaval, how will these initiatives, you know, impact things? So when the initiatives I'm talking about sort of, you know, from the newly agreed budget, tariffs, cutting government jobs, immigration policy. How are all these things going to impact on the U. S. economy?

Yeah, so there are some big changes going on since Liberation Day. We've had the imposition of tariffs. We haven't had the worst case. So other countries haven't retaliated. We still have to see where the tariffs settle. But that's basically like a tax hike on the U. S. consumer. So that is going to have an impact in various ways.

The budget is another decade-long impact. It extends the previous tax cuts that occurred in 2017. But it doesn't really change those previous tax rates. But a lot of new tax cuts are part of that bill, including increased deductions on seniors, taxed on tips and so on being eliminated.

And that's actually front loaded and backdated. So into the beginning of 2025. So those are positives for growth and will support, whereas the Medicaid cuts and food stamp cuts, those take place over time and they kick in a bit later. When you put it all together and combined, as you said, with the impact of immigration on the labor market, which we're starting to see, you can see that the main change or delta from 2024 to 2025 is on the U. S. , where the growth rate is nearly halved. That's on the slide here that we're looking at now. You can see from 24 U. S. , that light blue.

Yeah, you can see that nearly 3 percent to about one and a half percent. we'll see again what the tariff impact is. So that's a pretty meaningful slowdown. Whereas the UK and the Eurozone were coming out of very slow growth phases and that's improving a bit into this year and next year. And again, the EU fiscal package, which I think we've talked about in the previous house view as well, that's going to kick in again, not as fast as some hoped, but it's going to have some impact there. And China has also stimulated.

So we've actually upgraded a little bit on its growth, close to 5%. It's still not really rebalancing into consumption, and the property market is a drag.

And it's trying, because exports to the U. S. will be affected, it's exports to the rest of the world. They're not flooding the markets, but they're definitely having some deflationary impact there. So those are the main changes that we see happening there.

Okay, I mean, so you mentioned sort of, I suppose, about fiscal spending when we talk about, you know, the recent agreed budget bill. Dean, when we think about that, you know, lead to an increase in U. S. government debt. We already mentioned earlier sort of that pressure on yields that we've seen. Should we be concerned about ballooning fiscal spending in general? Like when you think about the U. S. , Europe to another extent, the U. K. maybe less so. But within a multi-asset portfolio, especially the lower risk multi-asset portfolio, have quite an allocation to government debt.

How do you deal or are you concerned about that sustainability and how do you deal with that within a multi-asset portfolio? How do you manage that risk?

Yeah, it's certainly something that we think about and think about quite seriously. There's a few angles to think about. I suppose the first is the principles of multi-asset investing, which is about diversification. So we're trying to build robust portfolios that are resilient to a number of different market scenarios. Within that, a number of our strategies have the flexibility to use shorter dated government debt. So it's not just sort of emphasis on the long end where we think that the fiscal risks are going to be at their greatest. And so you can blend different parts of the government bond curve to produce the type of returns that you're aiming for for clients.

And then finally, for the funds that can, we're able to deploy tactical asset allocation. And so there might be opportunities where one is able to be tactically underweight longer-dated bonds and where the fiscal risks we think will lie and therefore yields go up and be overweight the shorter-dated part of the government bond curve, which is going to be more, I guess, sensitive to monetary policy and monetary policy expectations where you might be able to see some capital gains.

Okay, okay, that's interesting. Certainly a question I get asked a lot by investors. David Haddalen, we mentioned about the fiscal spending. If we take Europe, for example, Germany in particular, we've had this sort of set to increase government spending on, I suppose, defence, but also on infrastructure. How does this impact something like infrastructure equity? What businesses are set to gain from this type of investment?

Yeah, so I mean, look, the package announced by Germany, we can probably put the UK in there just from a sort of wider fiscal package in terms of the tailwinds for infrastructure are clearly there, right? So that's a really positive development in terms of infrastructure. I think what's interesting when you look at the bills, I don't want to get into the weeds of the bills, but when you look at both of them really have a focus, a number of focus. One of them is around decarbonization and energy transition, which, again, feeds into, particularly for nascent technologies, not just infra equity. I would also say the wider R&D, you know, Dean touched on this, a little wider R&D space, the venture capital space, climate tech in particular, looking at decarbonization technologies, et cetera, which are very, I would say, equity intensive.

So in terms of infrastructure equity, those nascent technologies tend to be funded more from the equity side of the infrastructure books. for example, and it's the more longer term, mature, stable cash flow generating assets, your rails, your social infrastructure, your roads, which would be more obviously need debt, but also on the equity side. So both bills cover both of those. So I think from the lens of the investor, the bills satisfy if you're lending to infrastructure space, I think there's scope there for some clear tailwinds, but also on the equity side, more nascent technologies around that infrastructure equity space for newer technology decarbonization strategy, which I think pose real strong tailwinds for the European market as a whole.

And how soon does that come into play?

Well, I think from the perspective of the packages, I think we're already starting to see some of that feed through.

There's already a push, as you know, the net zero commitments across the European Union, et cetera, already there. I think for some, at least in Germany, that will start to feed through relatively soon. But again, as we all know, the private markets is a little slower moving. These things don't happen. It's not a Delta One relationship with an announcement and sort of capital feeding through the market. But I think the main takeaway here for infrastructure in particular is what we seeing is a coordinated responses from policy from regulation structural levers and governments using infrastructure as a lever for economic growth which again from an infrastructure investment point of view whether debt or equity is a positive Okay Thank you Time as I said let move to theme three rapid evolution of tech revolution David Nowakowski DeepSeq released lots of worry back in January about how cheaply it was made and how good it was at that point.

Markets took a bit of a surprise and questioned sort of the ongoing spend on AI by sort of those megatech names. Those concerns have kind of dissipated to a degree. Why is this, what's our outlook for AI in general? And do we see China taking over this lead or are US companies still set to sort of move the whole thing forward?

Yeah, thanks, Peter. Lots of questions there. Sorry. I'll try to tackle all of them. Like I said before, this is the theme that thanks to our partners on the equity front and the research front. We get a lot of input from them, and we try to integrate their views. And we've had now, you know, around four months since the deep seek moment, which did cause a lot of question marks. It was an innovation, and it called into question how much these firms would continue to spend. Certainly, their costs might go down. Perhaps their need for semiconductors would go down a lot as well. Since then, some of those questions have been answered because it was a positive productivity shock.

They could do more arguably with less, but they could also do more with as much. And there are really only four firms within the MAG-7 plus China that are rapidly developing the AI space. And we've seen them announce and deploy additional capital and raise those numbers and that's benefited the downstream producers in Taiwan and mainly in the US. So that helps a lot and you can see on this slide there's a 50% increase and then a 30 some odd percent increase the last couple of years in CapEx. So that's hyperscalers, that's data centers and compute and so on and these are very power hungry areas to your point. That's going to require a lot of grid and a lot of generation.

So it does have other impact as well. In terms of U. S. dominance, that's less clear. Clearly China is a formidable competitor. But for now, and combined with the trade war and other restrictions, we expect it to remain in the lead. And the rest of the world, I think, also, regardless of its geopolitics with China, has some questions whether or not it wants to become more reliant on China. I think in general, the trend is the other way. But as with EVs, they're going to be producing a lot of cutting-edge technology that's useful to the rest of the world. So it's not complete decoupling either.

There's another slide that we had as well, which sort of, I suppose, speaks to this a little bit more.

Right. So this is also in terms of answering the questions we've had, and we're in the middle of the earnings season now. So far, we've had good quarterly earnings overall for the S&P, but the MAG7 are kind of leading the path, at least the MAG6, maybe.

And both in terms of fast growth and expectations. For now, in terms of question marks that still exist, so first of all, that CapEx, it shows up immediately in earnings. Yeah. It might be poorly deployed. It might not be the right investment later on. We'll see. So maybe years from now, there will be big write-offs. We had that in the tech bubble.

But for now, it's causing a mini boom for sure and driving the S&P earnings overall.

Bring you in really brief.

Sure. So looking at those numbers, earnings growth, S&P 493, 9%, MAG 7, 28% based on year-in-year. From an investment point of view, obviously, I get questions from investors going, or should we be worried about valuation levels of these companies? Really quickly, what's your view on that? Sure. I think I'd be worried if the valuations weren't backed by actual earnings. But we're seeing very strong earnings growth, very strong free cash flow growth. I think overnight we had one of the large hyperscalers increasing its CapEx forecast for next year based on increased demand. And I think that's sort of the critical thing. So you're beginning to see enterprises deploying AI, and we're at the very early stages of that.

We see it in Aviva, like we're using this.

Okay, that's really interesting. I think that AI thing we'll continue to talk about on a quarterly basis, as we will do tariffs. The last theme, monetary easing, marching out a step towards the same neutral destination. That's a lot to say. It's a bit of a mouthful. David, last theme. So kind of continue to note central banks' globally cutting rates. the Bank of England, ECB have lowered rates this year. ECB came out today and held them.

The Fed has held firm on rates so far this year, much to President Trump's disappointment were discussed in many ways. Where do we see things going from here? Inflation has come down, but possibly a little bit sticky. Concerns about economic growth, word stagflation comes into play sometimes. What's our view on this?

Yeah, so it's not quite stagflation. We still see U. S. growth maybe a little below potential, but positive and unemployment is pretty low. But that puts the Fed in a tricky place because before inflation was coming down towards 2%, but now recently it's risen and it's going to rise further in the second half as the tariffs show up more. They showed up a little bit in the June CPI report in certain categories. And so as it starts printing above 3%, their willingness to cut will only increase if there's some sort of rise in unemployment or further slowdown.

Because we haven't had the worst case tariff war scenario where other countries retaliate and raise their tariffs, in other countries, inflation has stayed low. But as you say, kind of sticky. It's still not getting to 2% everywhere. The eurozone is one place where it is. But they're close to done. In the UK, for example, because of regulated prices, inflation has gone up a little bit recently. It'll probably come down quite a bit in the fourth quarter and first quarter.

But central banks aren't sure about how all this tariff stuff will shake out. So they're being a bit more cautious. But they're still inclined to cut in most emerging markets as well. But it'll take some time and possibly into 2026 to get those down to target.

Okay. Okay. Perfect. All right. Okay. So we're going to, I'm just looking at time-wise here, half three, 15 minutes to go. We're going to take a slight shift here and go to a poll question, which kind of leads into then our little focus on markets and asset allocation, which will put you under the spot a little bit more, Dean. The whole question I have here, given the choice, what asset class are you most likely to allocate to over the next six months? Equities, bonds, could have said commodities, but we went with gold, private markets or something else.

So we'll give this a little 30 seconds to feed through. I was looking at this earlier to have a look at, you know, where we've seen flows, market flows in the first half of the year. And there was obviously a move at one point of flows coming out of the U. S. from an equity standpoint, more into Europe, sort of larger flows coming into Europe, and more diversified sort of global allocation to equities as well. So we've seen some change in investor appetite so far in the equity space for the first half of the year. So it'd be interesting to see where we see that going for the second half. I'm just looking, we have a good amount of people giving an answer to that now.

So, wow, it's extraordinary. It's always the winner. Continues to be the winner until it's not. That's an extraordinary number. 64% given the choice would allocate to equities over bonds, gold, private markets. Actually, private markets ahead of gold and bonds, which is an interesting one, David.

Okay, so let's go. I'm just looking at time-wise here. So let's bring that into play, which kind of speaks to a little bit what you're going to talk about. So first question I'm going to ask you on this slide was views on equities, and it kind of aligns with what the result there. So yeah, views on equities, let's break it up by region.

Sure. Yeah. So in general, sort of reasonably constructive on equities overall. US equities is one where we've got a modest overweight. I think if you were able to lift tariffs up, open a little box and put them in and get rid of them, then we'd probably be more constructive than we are today. And that said, I was just talking about the underlying corporate fundamentals. The second quarter earnings releases are coming out pretty strong. We look like we could beat estimates on the earnings side by about 8% this quarter, which is a very strong beat rate to be hitting at this sort of time in the cycle. Banks doing particularly well at the moment, lots of capital markets activity.

So encouraging signs of maybe earnings growth beginning to broaden out again there. Europe is appealing from a valuation perspective, and I think we were talking about the next kind of six to nine months we should start seeing in guidance things to do with the fiscal expansion program there. Emerging markets has been part of our arsenal for a short while. We felt that in the context of a global trading block where tariffs were coming into the fore, emerging markets were perhaps a little better prepared than the rest of the world to deal with the environment.

Okay, okay. Again, pretty attractive valuation. Okay. So if I was to ask you, I'm just looking at time, if I was to ask you from a government or from a bond perspective, so if we look at government bonds, if I was to ask you one takeaway view from around government bonds, what would it be positioning-wise?

Sure. What would you focus on? Yields are higher, so you can withstand a little bit of yields creeping up in terms of your total returns. Preference more for shorter data bonds than longer. You mentioned that.

Okay, that's interesting. It makes a lot of sense. David, I was going to ask you about currencies. We've spoken a little bit about it already and seen the performance, the weak performance of the US dollar. On this side here, what we're showing is our view relative to US dollars. Do you want to just speak about that for a little while just to talk about different currencies there and our views?

Sure. So the main view is dollar centric because of that slide we talked about earlier. We've seen some northern European pension funds and Taiwanese firms rapidly hedge some part of their books. But it's only the tip of the iceberg in terms of total exposure.

In terms of so this is a structural multi-year view. The dollar appreciated 46 in real terms from 2011 which was arguably undervalued until the end of last year beginning of this year Since then, it's given up only a small fraction of that. So it's potentially a big trade with a long way to go. If and when the U. S. weakens or some of those exceptional characteristics wane, that would give it some cyclical wind as well in its tails. But for now, we're pretty confident on allocations being changed in some way. So perhaps, you know, on the tech theme, people continue to have some exposure or add to S&P 500 or NASDAQ, but maybe less than before.

Or they can just hedge out the dollar. And in some cases, they can move money into other asset classes like private equity, which has more opportunities in Europe as well. On the yen, it's a special case. Inflation there is running at 3%. The Bank of Japan has decided to sit on its hands for a bit. But if and when they start their hiking cycle, that could also provide some impetus. And their households and corporates and pension funds have very large unhedged exposure as well. So once that begins to bleed, that could prompt them to take action.

And emerging markets, as Dean mentioned, they're pretty well positioned in this environment. And if equities catch a bid and it's a constructive FX environment, that only reinforces that.

Okay, thank you for that. David Hedalen, around your views when it comes to private market assets, particular asset class that you like at the moment, I'm also conscious probably there's quite a few people watching this would have allocations to even to real estate. So in general, views on views on different.

Yeah, look, Peter, I think we touched on the compelling opportunity in private debt, all in yields, illiquidity, premia, combining to for some investors, at least that risk adjusted return being very favorable. We've touched on infrastructure as well and the fiscal piece. And there's clearly a demand side of that as well in terms of infrastructure. I think real estate is really interestingly positioned, actually. So as you can see on the chart here, this is the index value of the start of the hiking cycle, June 22. This is capital value losses for private real estate, according to the MSCI indices for major European markets and also the U. S. just for context. And I think a couple of takeaways here, obviously, is that the drawdown was material, sort of 20 odd percent, depending on the market you're looking at.

And secondly, for, I guess, viewers who aren't sort of in the weeds of private markets, the time that this took is sometimes quite long. And as you can see here, a lot of these markets bottoming out at the back end of 24. So sort of over a two-year period for those markets to really reach their floor.

A year later than linkers and tips.

Yeah. They're related to it. Exactly. So there's a piece here. But I think where we're at from this is this was a cyclical adjustment, not a structural one. So unlike previous market crashes where GFC demand was sucked out of the system, there was no demand or previous supply shocks or supply imbalances where it took a long time to soak up excess supply. Supply is actually in a pretty good place. The fundamentals, as David pointed out on the macro, are in muted growth but still growth and still positive territory, which is important for real estate. So actually this sort of cyclical adjustment and not a structural drawdown is quite important for real estate. So where we're at now is yields have rebased to a level that we feel they've hit the floor.

Borrowing, which is key for real estate, is now accretive to returns. It wasn't for a period of time. The cost of finance exceeded the yield on property. That's now inverted. But it's interesting now. So within real estate, we also see, as I said, there's other asset classes potentially competing for that allocation to private markets. So I noticed 10% of viewers going from private markets. So I'm delighted with that. Maybe a little bit more next time. But the point is, where does that go? And it's not just a real estate story. It's not just an infrastructure story. So our view on real estate is quite constructive. We see some strong-term returns coming through for that particular market across Europe and the UK.

It will be a K-shaped recovery. High-quality product always performs best out of the blocks during recovery. We see no reason why that shouldn't materialize this time around. So again, the bottom-up analysis in terms of the markets you're in and the sector that you're at are important. At the moment, we favor the living sector. So that's the residential sector in particular. They're chronically undersupplied across major European markets, as well as logistics, albeit more domestically focused than exposed to the international tariff picture.

Okay, that's great. Super. Looking at time, managed to leave a little bit of time for questions, which is good. I was worried having an extra person in the room might allow for that. So the first question I want to ask, and we have a few questions about this here, and we haven't touched on it, is kind of UK economic outlook. And I'm going to ask you all to come in on this, but keep it brief.

So we'll start, David. Views, UK economy, where is it at at the moment? What are our views there?

So there isn't great confidence. And we've seen some weaker signs, especially in the labour market. And it's taken some time for inflation to come down. We think inflation is going to eventually start to level off. And then because of base effects come down quite quickly. Again, that'll probably be Q4 and more Q1 next year. The question is, is Bank of England forward looking enough to cut rates now? We also have the budget in October, which is going to be an impact.

Looks like they might raise taxes. And again, if they're forward-looking, once that occurs, they'll see some slowdown in the economy and some weakness and might cut rates to offset that. So we see some opportunity there in the bond market in particular and probably a steeper curve.

Okay. Other David?

I think, I mean, David touched on the macro piece. I guess from a policy perspective, the tailwind to private markets for us is there's a number of them. We touched on the industrial policy for the UK. That's clearly a tailwind to the infrastructure space. And not just that, it's also the spinoff from the R&D and the VC world as well.

Moving into the social infrastructure space, you could argue that real estate is an infrastructure. Either way, the built environment is set to benefit from that. And in addition, I would also say the Mansion House agreement, where we're looking for international viewers, this is the push for more private market allocation within the UK pension market. That's something that we see is quite important and a tailwind to that. So, you know, the macro as we see it, and we take the house view as our sort of view to underpin our underwriting thesis across our strategies, we see the market as quite constructive at the moment for the UK from a private market lens.

Dean, from an investment point of view, how do you look at it from multi-arset?

Yeah, I think the same time as data has been a bit weak and expectations are low. So when expectations are low, sometimes it doesn't take an awful lot to surprise on the upside. So we've taken a bit of hope from some of the small trade agreements that have been made with places like the EU and latterly with the states as well, as signs that there could be some underlying optimism kind of coming down the pipe for UK equities. On that basis, we favour the sort of more mid-cap area of the market as compared to large, so slightly more domestically orientated. And also, if UK economic growth prospects start to improve, that's potentially good for the currency and it'll be better for mid-caps.

Okay, that's really interesting. Another question here, Dean, I'm going to ask you again. Gold, where it is at at the moment. We saw your very first slide, how well it's done so far year-to-date. Views on gold going forward?

Sure, yeah. It's a really useful asset from a portfolio construction perspective. Difficult to model if you're trying to build a portfolio. There's no yield, so difficult to kind of use a conventional portfolio construction tools to do so. But we think about its effectiveness in difficult market environments. So if other asset classes in your portfolio aren't working, if bonds aren't working, which they didn't in 2022, which is another strong year for gold, if the dollar isn't working in risk-off environments, which it isn't at the moment, then gold is a beneficiary. So I tend to think about it more from a sort of strategic perspective in portfolio composition. And then on the margin, depending on sort of what price trends are doing, opportunities on the tactical side.

Okay. That's very interesting. I would agree with that. And in terms of precious metals, gold and silver, which has actually outperformed up 35% year to date, I wouldn't say it's a canary in the coal mine, but it's definitely affected by global dollar sentiment and is kind of a signal that the weak dollar trade structurally should be intact. Okay, okay. That's really interesting. Conscious, it is now 3.45. I'm on a bonus here if I get you. Get this finished quickly and on time. I'm going to ask you both, David Narikowski and Dean, for a quick summary, kind of the key takeaways. So we have a slide here. David, starting with you on the economic outlook, quick takeaway on that.

It looked a lot worse in mid-April, but the severe tail risk of escalation and investment freezing up and stock market tanking has been averted. So we still see slower growth in the second half, but nowhere near as severe as the tail risk was. the U. S. exceptionalism, it is partly damaged, but we see bond market risk and the risk to the U. S. dollar caused by the twin deficits as the major impact, not so much the U. S. tech dominance.

Okay, that's really interesting. Dean?

Yeah, echo David's comments. Corporate fundamentals remain pretty robust. The earnings outlook still sort of predicated on positive economic growth remains good. Return prospects from government bonds and credit remain reasonably good given starting yields are fairly high. And we could be in the sort of early innings of some structural shifts vis-a-vis capital allocation, talking about the dollar, but it's not going to be a straight line. It's going to be a journey that one has to be reasonably active in playing.

Okay. That's super. Thank you all. So, yeah, thank you, David, David and Dean 3Ds. Thank you for your time today. It's been a really interesting conversation. I'm just thinking back to the last one we did, and it was all about uncertainty and worry about current markets. So, it's nice to be in a less volatile place today. Famous last week. So that brings us to the end of our House View. I hope you've enjoyed it. Thanks for watching.

Two things I just wanted to leave you with. The first is please sign up for our Q4 House View webinar, which takes place in October. You're able to do that on this page. Also, it would be really helpful if you could fill out our feedback form want to make this better, want to improve it, and it's your feedback that will help us do that. And that leaves us to at 3.47 to close this for the day. Thank you very much for watching. Enjoy the rest of your day and we'll hopefully see you again in the next quarter.