Aviva (AV:LSE) Q4 2025 earnings call transcript

Hello and welcome to the Aviva Investors Quarterly House of New. My name is Peter Smith. I'm an investment director here in Aviva Investors. And today I'm delighted to be joined by three of my colleagues from Aviva Investors. David Hill-Allen, welcome. Head of Private Market Research. Vesalius Guionicus, Senior Economist and Strategist. And Soterios Nacos, Head of Multi-Asset Portfolio Management. The three of you are very welcome here today. So today what we're planning to do is really give you an overview of what's happening in the global economy and then talk a little bit about in-depth views we have on that and the impact it has on investments in asset classes as they currently stand on our positioning we have in our portfolios.

Before we start that, there's always a little bit of housekeeping I need to do. Probably the three main things on this page are the first three points. There is a Q&A widget, which you can use to ask questions, and I will pick them up here on my laptop and be able to ask the panel those questions. Number two, there's a resource tab where you can actually download this presentation and our house view if you would like after the event. And thirdly, there is CPD credited for this event, which you'll be able to download your certificate after this event too. So over the next 45 minutes, we're going to touch on lots of things. there's been so much happening globally over the last quarter and this year.

Soterios, I'm probably going to pick on you first. It's interesting. So this slide here, if I'd been asleep since the beginning of the year and woken up yesterday and looked at these numbers here on this page, I'd be a pretty happy camper, to be honest with you. But there's been so much happening over the last while. It really doesn't do justice to the amount of things happening out there. Maybe you could take a little bit of time to talk about the things that, you know, important investment themes that we've seen this year and how they've impacted on some of the key markets on this slide.

Yes, as you say, Peter, if we focus just on the headline numbers, everyone will assume that it has been smooth sailing. But reality has been far from that. I think if we just take a bit of the calendar back to a couple of weeks ahead of the so-called Liberation Day and a couple of sessions of Apollo that we had a 20% drawdown in equities.

And since then, it seems like equity markets have been climbing a wall of worry. There have been various different themes thrown at them, whether that has been fiscal sustainability, trade deals, geopolitical risk. But it seems markets have been able to strike those off and continue to increase their prices. So the main important driver, of course, has been artificial intelligence in equities and, of course, very strong earnings delivery. I think those two factors have been able to broaden a bit the rally. We see quite strong returns regionally in Niamh, Europe, U. S. , but, again, quite impressive returns, particularly during second quarter and third quarter. If we move to fixed income, the credit instruments we have seen quite strong with adjusted returns.

Spreads have tightened even further and they were already tied before. So from that point of view, it has been quite a good environment for people that want to collect that credit kind of exposure. In government bond markets, you had of course US government bond markets reacting quite well to some of the softening we're seeing in the labor market that brought back the Fed into playing to delivery cuts and almost beginning that cycle again.

More concerns around Europe and Japan where I think the fiscal and political instability there has been a bit more important. Finally, it would be a big omission if we didn't mention gold, which almost breaks the chart here. It's been a standout performer. And from that point of view, they have been both structural forces such as as i mentioned already geopolitical concerns the debasement kind of the idea that you want to diversify a bit away from the dollar but also some cyclical forces such as real yields and weaker with your dollar both of them have been quite important for that uh rally that a very impressive value of 47 year-to-date for gold so overall you're absolutely right there if you just look at the headline numbers they've been quite strong but there are a lot of stories underneath it.

Okay, and we will touch on some of those stories later on as we go through this. David, to bring you in on this, private markets, which is your four day, have certainly been kind of in the ascendancy over the past few years. Out of kind of interest, where have we seen the flows go to over the last year or two?

Yeah, no, it's a good question, Peter. And I think we've put on the screen here fundraising for private markets across Europe. So appreciate a European slide. I think many of the trends we could extrapolate to a global level as well. And you can see through the last several years, at least, the real strong inflow into private debt. That makes sense, given the all-in yields that were on offer from the private debt space. I would also say a number of investors were probably starved of that private debt exposure, given the ultra-low interest rate environment that preceded, of course. So we've seen a lot of inflow into the private debt space, as you can see here.

As well, though, infrastructure has started to really ramp up in Europe, and you can see the 2024 number almost touching the private debt number there, and actually, again, pushing up against that private debt fundraise as well in year-to-date 2025. We would expect that number to probably exceed it. And this may be given the sort of fiscal policies within European markets, as well as the ability to capture megatrends such as the energy transition, energy security is a big one. Sintero has already mentioned the digitalization, which infrastructure is directly in the crosshairs of as well. So a number of forces really sort of focusing that, making infrastructure as a catalyst to leverage those megatrends. But on real estate, this is probably the one where on real estate equity, excuse me, is probably the one where European is slightly different to the global trend.

We're seeing a little bit more positive fundraising. If you look at those parts, they're quite low for real estate generally since the hiking cycle began.

Globally, real estate's fared a little bit better, indicating investors have a preference for a more broader geographic focus and a specific continental or regional focus.

Okay, so strong flows, and we'll probably touch on a few of the themes you've just mentioned again as we go through this discussion. Okay, so that's kind of looking at markets, how they've done a little bit in sort of the rear view mirror. First of all, let's do a poll, two polls today. First one is, and it kind of leans into the themes that we'll touch on now. First of all, what will impact markets the most in Q4 and beyond? And the four options you have are tariffs, AI, inflation and lower growth. So we'll give this a minute. Obviously, tariffs is something that's been up and down, came back into focus last week with what happened with the US and China.

So we're seeing these themes kind of ebb and flow over the last quarter, over the last year. And maybe we'll see how we're doing for a polling perspective. We'll give it a little bit longer. We had inflation numbers out yesterday in the UK, which were below expectations. We might touch on that later. So, obviously, those are kind of the four main drivers. We see they speak to our house themes as well. So, we might see what that number looks like.

That's really interesting. So, what will impact markets the most in Q4 and beyond? And lower growth is the biggest impact of listeners and viewers today, followed by inflation, AI, and then tariffs. So there's an interesting one. Given everything that we've seen with tariffs over the last nine months, I suppose maybe the people feel that they won't. I suppose we look through the tariffs a little bit now more than we did at the beginning.

So I'm just going to introduce. So the three themes that we have for our Q4 House View are, and they're kind of linked to what we've just told about, are adjustments after the policy shocks. AI's kind of impact broadens across market sectors and economies. And the third one is about U. S. upheaval widening. Vast, to bring you into the conversation, to ask you about sort of the adjustments after the policy shocks. If we look at that theme, are we over the worst of the policy shocks that we've witnessed this year? And what's the outcome on these on growth and inflation in the UK, US, Eurozone?

Well, I certainly hope so. But obviously, the recent escalation in trade negotiations between the US and China is a good reminder. This is something that we should get used to, meaning that it can re-escalate at unexpected periods of time. But let's just say that the majority of these fundamental policies has taken place. which encompasses fiscal policies, big deficits in the U. S. , big curtailment in immigration in the U. S. , tariffs and trade relationships. Let's just say that these, the biggest bulk of this is taking place. And the idea here is that are we moving towards an environment which becomes more macroeconomically and fundamentally able to analyze it?

And from that respect, of course, we have to take into the consequences of these policies. And it's quite clear from the chart that we're presenting that the biggest impact is going to be felt in the U. S. for growth in 2025 and 2026 is going to be nearly half of what it was in 2024. And that's definitely a big hit. There's an economy that's slowing. It's potentially going to start recovering in the second half of 2026. it's going to face a temporary inflation problem. Tariffs are bound to start showing up in inflation. So far, the impact has been muted, but we still expect there's going to be a picket in inflation as firms pass on the cost to the end consumers.

Now, in other regions, of course, you get the impact on tariffs, but you also get iniosyncratic shocks that take, for example, the Eurozone. The Eurozone, you're going to be feeling the impact on tariffs. The eurozone has also been proven to be more resilient than people expected. And I think to a large extent this has been because of the fact that ECB lowered rates quite quickly. Consumers have had significant buffers of excessive stocks of savings And real wage growth is positive still And of course there an improved sentiment because of the upcoming fiscal stimulus, which is going to be quite sizable and quite unprecedented. So we expect some improvement in growth, nothing extraordinary, some improvement in growth and inflation to be hovering around target.

We don't see downside risks to inflation like others do. In the case of the UK, the UK has been hit by a number of shocks, including tariffs, based on the deal that has struck with the US. It has an inflation problem, but it is a temporary problem. It is a problem that has been largely because of the increases in administered and regulated prices, increases and the hikes in employer national insurance contributions. We think from now on and assuming that we're going to get a budget that is going to be predominantly geared towards tax increases, there are going to be some headwinds to growth and inflation is potentially going to start converging towards target in the second half of next year.

Okay, that's very interesting. Bring you in, David, on this fast-mentioned sort of infrastructure spend in Europe, whether it be on defense or infrastructure. Have we seen much downstream activity from that? And has the market kind of dialed down the impact of it, or what's your view on that?

Yeah, no, it's a good question. And I think with these sort of big policy announcements, they tend to get a lot of headlines at the beginning, and then potentially to the back pages or when the rubber hits the road on actually implementation, maybe not even showing up in the mainstream press. And I think that's probably what we're seeing here. If you take a number of the policies that Baz has mentioned in terms of the UK push on infrastructure, the National Wealth Fund obviously was designed to help stimulate growth.

We've seen that happening already. An example being it helped unlock a billion pounds of sort of secured financing for the Sunderland Gigafactory. That project was already in train, but it helped sort of get that moving forward in terms of that security. That helped support 100,000 EVs a year, 1,000 jobs in the northeast of England. So these are sort of tangible outcomes, I would say. Another one, for example, is it helped secure, agreed with some of the banks for low interest rate mortgages on retrofitting 280,000 social homes and low-income housing. So again, the second, third over effects of these in terms of retrofitting houses will take time to filter through, but those are maybe two examples.

And then on some of the bigger, let's say a bigger package in Europe around Germany and the defense package, of course, I think we are seeing that come through as well. And not just the defense package, but prior to that, just in terms of policy shifts around defense, those obviously filtered through. So in Germany in 2019, for example, the VC space in terms of defense and dual use, if you want to call that civilian and military use or civilian and defense use, I think it was roughly 38 million of euros coming into that sector in 2019. That's now at 800 million at the end of 2024 and probably going to increase further. We've obviously seen to sit here in this world, obviously, the public markets react, defense stocks react very well.

And I think from these, we've seen $22 billion of allocated contracts or contracts in train across the German landscape, particularly for this defense bill.

We're seeing already conversation in the private markets aspect in terms of real estate, second, third over effects around conversations around Munich, for example, a big industrial hub, manufacturing hub, R&D hub, conversations around space, logistics space, these types of things. So as these companies grow, as they need more space, they take up space. There's already conversations happening around what's the impact on the logistics market, for example, or the warehousing market, because they're going to need this space as they grow. So these are things, Peter, that you wouldn't necessarily see in the headlines, but they're conversations that we're seeing happen, sort of second, third order effects.

Yeah, I think the point on logistics is pretty interesting. It wouldn't be something I would. Well, the whole supply chain for a number of these things will need reconfiguration or new supply chains developed. Okay, I mean, it speaks to the slide we have there, shows your zone growth increasing as you mentioned last next year slightly as a result of this. So there's an interesting take on it, to put some sort of meat on the bones, it's interesting to look at that. But I think it's just not a one for one, it takes time to bed down. And for the vastest numbers obviously it takes a bit of time to go through.

Yeah. Yeah.

OK. So if we move on to the second theme, which is around AI, hard to ignore. We're hearing about it on a daily basis. It's impacting our lives. We use it in work now. But I suppose from a theme point of view, we have AI's impact sort of broadening across market sectors and economies. And again, I'm going to start with you. In what ways is that surge in AI investment reshaping sectors beyond technology?

And what are sort of the macroeconomic impact of that?

Well, it's a big subject. It's a big topic. And that's what everyone has been discussing, not just now, but for at least a couple of years. Look, I can understand all the concerns about lofty valuations and the expectations about future profits. But to me, the reality of the matter is, first of all, the big tech companies have been putting the money where the mouth is, meaning that if you look at cloud CapEx, basically the actual investment that took place was actually bigger than that was forecasted a year prior to that. I mean, we're getting close to half a trillion right now. And basically, we are going to expand further out as we move into 2030.

But the whole idea here, when we talk about the AI broadening, is one where you're getting the benefits trickling down from the hyperscalers, which, in simple words, are the big tech companies that are creating the AI, further down the supply chain. So take, for example, data centers. Now, in order to create and maintain data centers, you require electrical suppliers, you require electrical equipment, routers, cooling systems. You require utilities to provide the electricity, you require IT, hardware.

So even this can trickle down to things like real estate or insurance. So effectively, while we're still at the end of the first phase, meaning the expansion of the hyperscalers, now these benefits are going to start to trickle down further down the supply chain. And the other thing is, of course, the adoption, the adopters, the ones that are going to start using the AI in order to increase productivity. And we've started seeing that being implemented in a number of sectors.

biotechnology, pharma, financials. So, to wrap it up together and talk about the macroeconomic consequences, I'd say the AI broadening themes about going further down the supply chain, distributing the benefits. There is definitely a high chance of an increase in productivity, which is going to have a macroeconomic impact in terms of growth. But there are also things that we need to start preparing, adjusting and see how we're going to basically handle that. Because, for example, there is empirical evidence that shows that those that have adopted more artificial intelligence, these are the sectors that experience the highest unemployment rate. So, we've got a slide on that next slide.

I think we do have a slide on that one, which is precisely this one. So you can see like computer, math, management sectors that are adopting in relatively high rates AI, they are experiencing relatively high levels of unemployment rate. rate. So therefore, this is something that the whole of the industry needs to start thinking, including policymakers, in order to ensure that we get a result that is also enhanced productivity, but it's also socially acceptable.

So I mean, in summary to all of that, we could speak about this for hours, possibly. And, you know, it's interesting to see the actual capex spend from last year, what was thought to be spending to now has increased dramatically. And we're seeing that spend is going to actually broaden out to suppliers of data centres, all of that kind of stuff. And then obviously the evolution from an employment point of view is something that we're going to have to get ready for. So I think they're two interesting tangents that maybe people don't think about that much, but certainly we're beginning to see that impact globally and economically.

You also mentioned, and you've teed this up for Soterios, question on valuations. This is probably the question I get asked most when I'm out and about is, is profit evaluations, particularly in AI and in fact the megatech names, where do you sit on that? Are we just seeing, in my mind, are we just seeing investor FOMO? For those of us over 40, that means fear of missing out.

Or is there something to this? Is there more to it? I mean, where do we sit on that from a valuation perspective?

Yes. I mean, that's clearly the marketing page that's in place at the moment. So let's frame it. What's the bull and the bear case? The bull case is quite clear. It's around profitability, strong margins, and, of course, these capex continue to surprise markets as much as possible. The bear case is pretty much the valuation point that you made earlier and the concentration, the narrow leadership. And I think Vast was quite clear on how he set it up earlier, that one, we have seen cap expense. We have, from the hyperscalers, we have seen AI enablers delivering very strong returns. We are now at the phase that we want to see a greater adoption rate by other industries, other sectors.

And of course, that to lead to greater productivity. So we are monitoring the last two parts quite closely. but it's very important to see that we are already seeing some signs of broadening out. And here we are showing you a graph of very broad indices, so the equity market across US, European, and Japan. And what we are showing you is the profitability in terms of return on equity. And what we can see clearly is that the trend in US has been very very strong We are close to actually at all time highs while in you While in other regions that haven been benefiting as much from that theme you are still below where you were in pre pre financial crisis So we're already seeing some evidence of that playing through in the equity markets of that broadening theme.

But of course, valuation is a very important tool. There are certain parts that are stretched, and therefore the factors that I just mentioned, we are very vigilant in terms of monitoring them quite closely in order to almost reassess our positive view on the AI internal.

Okay, so that's interesting. We'll probably touch on our positioning from a portfolio perspective later on, but interesting, as I said, it's a question that comes up a lot. We're also, you know, AI is this topic of conversation that everybody's talking about at the moment. But to come to the third theme we have is around U. S. upheaval widening.

You know, the U. S. , I think, I've never known us to be sort of so many headlines focused on the U. S. over the last nine months. Some of that is obviously linked to Donald Trump and the impact he's had. But when we talk about U. S. upheaval widening, what do we mean by that?

Well, in short, I would say that we're talking about a meaningful or material erosion of institutional independence. I mean, that equal passes many levels. So, you know, for example, we have had federal workers and regulators being removed from office. We have had a significant containment of immigration. We have had a complete rethink and a complete resketch of the trading. and in general, relations between the US and foreign countries, between the administration and domestic companies, between the administration and foreign companies.

And in general, we have now reaching a point where we're putting a big question mark on all these credible institutions that we used to take for granted right now, are they still running with the same degree of independence? And the biggest example I think that I can think of is definitely the attacks on the Fed. I mean, the Fed has been constantly under attack in order to lower interest rates.

This is not the job of any administration. That's why a central bank has become independent. It has a very clear mandate, a dual mandate in the case of the Fed, and it should be left alone in its own devices to design and implement monetary policy. We're not out of the woods yet. Recently, this discussion, these threats and attacks seem to have been reduced, but I think that's probably because we are in a shutdown period, and there are other things that are concerning people. But, you know, we still have the Lisa Cook final decision to come from the court in January. We know that Powell's term expires next year and he will be replaced. We have to see by who is going to be replaced.

So in general, this is what we mean by U. S. upheaval. And we think that over the recent months, this upheaval has really widened because it has actually spread into a number of institutions. So, for example, people that voice their concerns or their views that are not aligned with the administration, or even if they actually produce statistics that the administration does not like, then they're shown the door.

So, this is a big concern for us. It has implications for markets because it has implications for risk for me as well.

Okay, so, I mean, that's an interesting question. It was going to be my next question for Soterios. It was, you know, from a portfolio management perspective, especially for you managing multi-asset funds, in that low-risk element of multi-asset funds that have a lot of government debt or fixed income in them, can you explain, you know, when we talk about even debt sustainability, how that affects, we hear people talking about the shorter end the longer end of the curve, how that works.

Yes, sure. So, a simple way to frame kind of the question is, where do you want to be exposed in a cautious fund that has quite a lot of fixed income, bearing in mind that capital preservation and protection on the downside is quite important for those portfolios in particular. Historically, it was quite simple. you would buy some sort of broad government bonds. And because growth was the main element, when growth was not doing well, central markets would start, or markets would start to price cuts and central markets would deliver. And that generally flowed through across the whole curve. So pretty much that was the playbook before COVID over all of these 10 years that we had before COVID.

Recently, though, we have seen, if you like, a bit of a segmentation across the curve. And what I mean by that is market participants generally think about their exposure in fixed income in the short end and the long end. Simplistically, in the short end, market participants try to call what's the next step from the monetary policy side. So what central banks are going to do to respond to inflation stocks, to respond to...

That's interest rates. Exactly.

Interest rates will move lower and that would benefit the exposure you have in the short term government bonds. On the other hand, what we have seen, particularly over the last couple of years, is that the long-end exposure is not as much driven by those interest rates from the central bank that the Fed or other central banks are setting. They're more driven by fiscal risk premia, so back to the initial point you made around fiscal expansion. That's where we are starting to see some evidence that there's a lot of supply of debt that needs to be absorbed. And, of course, market participants are price sensitive, so they don't want to pay something that they don't see is a fair price.

So what we're showing you here in this slide, simplistically, is how U. S. two-year treasury yields are moving and how U. S. 30-year treasury yields are moving. And you can see that particularly since this year, we're seeing that the short-term, so the two-year, is moving lower, while the 30-year is not following through. So back to your initial question, I think specificity of where you take that exposure, not just which region, but also which part of the curve, will be quite important for those cross-country portfolios.

Okay, perfect. And we'll talk about where we sit on that curve later on in the discussion. Last question around kind of the themes asked was kind of around risks. And we mentioned two in our house view document. First one is non-transitory inflation, that infamous transitory word coming up again. And the second is around labour markets and softening of labour markets.

We're concerned about stagflation as a result of that. Is that what we're saying here?

So the part of the first risk that we discuss in our house view comes from the observation, as you show there in that chart, that poor good inflation has started picking up. So basically what's been happening is that in the post-COVID period, we had a surge in inflation. By and large, this was driven by services inflation. Services inflation has been coming down.

It is true that the pace of disinflation has slowed in a number of countries. But now the issue has started becoming that although there's still some disinflation that's coming from services, this is partly or wholly something, depending on the jurisdiction, offset by the pickup in poor goods inflation, in goods and poor goods inflation, not just energy, for example. So that's something that I think it merits close monitoring. It's not in our base case that inflation is not going to convert to target, but given the fact of how much is priced in, how much central banks have already moved and how much other central banks have priced to move, and potentially take monetary policies in either neutral or accommodative territory, it would be quite a challenging situation to find ourselves in neutral or accommodative territory with inflation above target.

That would precipitate potentially relatively rapid hikes in order to stem that increase in inflation that would disrupt economies and markets. In terms of the second inflation, look, the issue is quite difficult in the U. S. right now with the containment of immigration because we know that aside from demand, the supply of labor has also been impacted. And therefore, it's really difficult to find exactly which point in time one has been the main driver of the other. What we found in our research, however, is that over the recent months, the increase in the unemployment rate in the U. S. has been mostly driven by the demand side of the economy. Because it has been mostly employed people that became unemployed that drove the unemployment rate higher.

And that implies that there is a material risk for further downside in the labor market, which means that this can ramificate to the rest of the economy, to consumer spending and potentially lead to a recession. The Fed having to cut rates materially more than what is currently priced in. But stagflation, I have to say I'm not a big fan of stagflation. I don't think it's a sustainable situation. Right now, we know inflation is temporary. It's a one-off shock. As long as it does not affect inflation expectations, and at least for market-based measures, we're not seeing that.

So I'm worried in case the second risk materializes and then it basically leads us into a more meaningful slowdown in the US than we currently have now, basically.

Okay, that's clear enough. Okay, just looking at time here. So I'm going to move on kind of to the second part, which is more on positioning and views on markets. To start that off, I was going to ask a poll question, which is very simply, but do you think equity markets are overvalued, fair value, or undervalued? I'm seeing questions coming in or which came in touching on bubble, mentioning words like bubbles and that kind of thing, so some of the stuff you touched about from an AI perspective. But certainly, there's been lots and lots of stuff written recently about the market being overvalued mentioned concentration risk and those large megatechs making up 30 of the S 500 So that is obviously a concern But let have a look at how we doing Oh wow So there you go So as I said there been a few questions about overvaluation of equity markets.

That kind of proves that point, which is interesting, recently involved in going around the country at events. And if I had to say that tilted more towards fair value. So it's just interesting to see the difference there. But how you agree with that point on overvalued, but with some good reason?

I think that's definitely when something has been moving 20% up over three years. I think the bias is people will respond that this is overvalued. I think the point we made earlier on profitability and whether we continue to see the earnings growth that has been evident this year come through over the next couple of years, then, of course, that valuation will be more warranted. But if you like, the burden of proof is when these earnings will continue to deliver at that same pace. So I'm not totally surprised. I wasn't expecting undervalued. I had to put it there.

Okay, so let's go to sort of the next slide here, which brings you serious again into it. So, you know, we've touched on lots of things today. Current view on equities. What is it? And the next question will be about fixed income, but let's start off with equities. How are we positioned from an equity standpoint?

So we do have a modest overweight in equities across our portfolios. We try to balance that in almost like a regional diversified way. So we have an overweight in U. S. , Europe, and emerging markets. The reason there is we recognize the valuation point around the U. S. , but we do see quite a very strong earnings growth. and signs of broadening out, coming through. So we do want to take that exposure. It can give an all-star positive tone on artificial intelligence. At the same time, we're seeing more evidence that this also plays through the emerging markets. And emerging markets also do offer a margin of safety in the valuation. They're definitely not as threat as the ones we're seeing in the US.

And Europe is quite linked to the points we were making earlier on fiscal expansion. And what we do think, we do have a strong story around growth in Europe versus consensus there. So I think, broadly speaking, we try to almost balance our equity overweight across three regions. And it backs up a lot of what we're talking about already.

From a fixed income side? Fixed income side, I think we already kind of covered the main themes.

We do like to be overweight government bonds, particularly in areas we think that the labor market for growth are showing signs of slowing down. So that makes U. S. and U. K. And back to the point we made earlier, we do think that monetary policy is what we want to play for. So therefore, we're trying to place this position towards the shorter.

Yeah, exactly.

We do also like Australian government bonds. This is more around the shape of the curve. It's quite steep. So from an income point of view, it's quite an attractive position to have in the portfolios. On the other side, we don't have a favorable view around Eurozone government bonds and Japanese government bonds. The usual on-comment one is primarily a function of fiscal that we expect to come through, particularly in the next year. And Japan, again, quite linked around fiscal, but also the political instability that we've seen over the last couple of weeks.

Okay, interesting. David, I feel I haven't asked you a question for a while. To bring you back in on things, we've had a longer-term view on private markets. What is your view? Do we have a preference for debt or equity? and what drives that?

Yeah, no, it's a good question. I guess related in some respects to the asset allocation piece, but more at a private markets level. If you get the question about bubble the most, Peter, I get asked the question about debt or equity probably the most. So it's a relevant question for sure. I think what we've seen is, and a lot of this was sort of teased through in terms of fundraising numbers, that this sort of, let's call it, I don't want to say a rotation, but a shift in investor views. Debt has been on a very strong run for the past several years, both in fundraising and compelling all-in yields effectively, right? To some extent, actually, the all-in yields on offer from debt were competing with equity in terms of the return profile.

Given that the Delta One relationship with rates and the cost and debt versus the private market equity piece, real estate infrastructure takes quite some time to reprice. I think it's fair to say now we're at a stage now that we feel that repricing across the infrastructure and real estate space has taken place. It's a more stable environment in the higher for longer world.

And at the same time, debt yields coming down. We're entering a cutting cycle in Europe. Vast mentioned around the ECB cutting cycle. Keros mentioned tight public spreads. Those obviously impact the yields on offer in the private space as well. plus the wall of capital entering the private debt space in terms of illiquidity premium. We've hit this pressure there. So what you're seeing is stabilization on the equity side and all in yields slightly coming down on the private debt side. Leads us to say maybe that risk adjusted calibration, some of the daylight that was quite compelling previously for debt is now shrinking. That daylight is starting to shrink and we're starting to see some opportunities at least for equity.

And we see debt has a clear place to play in portfolios as well.

Okay, interesting. Conscious of time, I'm going to go to take some questions. It's hard. I'm trying to look at questions and listen to you guys at the same time. So the first question I'm going to ask, which is a question that's coming, and it's a relatively fast-paced answer to all of these because time is not on our side. UK budget coming up. I have to ask you about that. That was probably when this question came up, right?

Look, the situation is definitely challenging. The fiscal hole is estimated to be between 25 to 30 billion, potentially at the lower end of that range, actually, given some positives that we have had recently. I think the Chancellor will manage to do that without violating the manifesto promises, income tax, VAT, corporate tax and national insurance contributions. The majority of the package, I think it will be on tax increases. It will include some spending cuts. In order to be credible, the spending cut would have to be immediate as of now, not put in the future, which has been a common practice from previous chance. If she manages to do that, and if she, you know, with a bit of luck, depending on the downgrade of the productivity from the OBR, that we don't know what it was, if she manages to increase the headroom, which right now, 9.9 billion, it's one of the lowest, it's the third lowest in history, actually, of all transfers, then I think it will be perceived positively by the market in the sense that I think yields, the long yields are going to reprice out the risk premium that has been since many years now embedded into yields.

Potentially, it will affect growth to a certain extent. So we may see the market pricing in more Bank of England interest rate cuts. We've seen that over the last few days since the inflation numbers.

Oh, yeah, yeah.

That has definitely increased the amount of easing effect. Yeah.

Okay. Well, quick question for you, Sturis. It's funny we haven't touched. US dollar. Use on US dollar. Yeah.

I'll try to be brief. We still maintain an underweight exposure on the dollar. Institutional skepticism, kind of the points of password making earlier, the growth trajectory. And of course, we have a Fed that's looking at a labor market. So we think that the risks there are tilted towards the downside. So all of those are important drivers and generally kind of inform our view around the Fed.

Okay, so generally we're in portfolios who are underweight.

Tactically, yes.

Okay, looking at time, David, last question for you around office sector. Office sector has been much maligned. But as we sit here in this building in the city, things seem to be pretty busy. So what's going on here? What's our outlook briefly for the office?

Yeah, good question. Another one we get a lot, Peter, I would say the office sector, definitely not dead. We believe it, particularly in the better quality half or quarter of, let's call it prime offices. We feel a lot of opportunity we've been developing out from our book, but wider we feel there's been very little supply through this cycle. The correction, there's been a large revaluation. So yields, attractive entry price for this particular product.

Bass touched on the outlook for Europe. There's a linkage with GDP growth and office take-up. That's the top half of the case shape recovery, if you want to call it that. The bottom half, I think there's still some structural challenges for weaker quality products.

Okay, understood. Nice quick answer. Okay, time is not on our side. Let's go and have a look at the key takeaways. I'm going to ask, Bas, key takeaway from the discussion we've had today from an economic outlook perspective.

There are definite challenges to growth following the policies that have been implemented. The growth outlook is not going to be even. It's going to be quite uneven between different jurisdictions. And it definitely poses a number of challenges for monetary policy and fiscal policies.

Okay. Okay. Curious on the market side. You just sum everything up.

So the AI cycle, as well as kind of the fiscal expansion and the sustainability of fiscal, of course, still remain some structural forces of all effect equities between the AI side, but also fixed income in terms of not only the risk premium that markets will require, but also in terms of the central bank, the action market.

Okay. Gentlemen, thank you very much for your input today. It's been really interesting. As I always say, we could be here for another hour discussing these things. It's unfortunate we're always under such time pressure, but that is the way things are.

Thank you all for your participation. So I'm going to leave it today. Many thanks for everyone listening in and watching. If I can ask two things, the first is please sign up to our next House View webcast, which will take place in January. and the second ask is please fill in the feedback form also available after this session. It's always great to get feedback, always great to hear new views and it enables us to, I suppose, to improve what we already do. So on that note, thank you very much for watching and we'll see you again.