Is ‘normal’ coming back in style? Highlights from our webinar

Alexandra Ivanova, Fund Manager, Fixed Income: 

Inflation has been coming down steadily. The most recent data shows that we are quite close to the target, and that gives a lot of room for central banks to continue cutting interest rates in this environment. However, what the market does is almost front-run and expect these cuts ahead of time. So that's what the market pricing has been showing into the beginning of September, for example. I think the growth picture looked a little bit questionable given some softening in the labour market, especially in the US. But as soon as we started to see that there is going to be some changes in the US administration, with Trump coming back and launching some fiscally expansionary policies, we need to start repricing that in the yield curve. So that makes us quite cautious in the back end of the curve because as investors we will need to get some risk premia added to the yields in the long-dated bonds. But at the same time, the front end has repriced significantly. And I think the risk-reward at the same time is much more balanced. And it's a good place to find opportunities, especially in the US Treasury curve. 

Edward Zhou, Analyst, Global Equities:

In US dollar terms, the US has historically delivered the fastest EPS growth over time. For the casual observer, people might be scared by the lofty, optically high entry multiple of the US, but you have to analyse it a bit deeper and look at the sectoral compositions of the US and the differences it has over time and versus other regions. The US, as we know, has a higher weighting to the technology sector, which tends to exhibit higher free cash flow margins and faster revenue growth over time, and thus have a higher valuation, which provides an upward bias to the US versus other regions. And on our team, our belief is that long-term corporate shareholder value follows long term EPS growth plus dividend yield over time. And we continue to remain optimistic on the US, given that it should deliver the fastest combination of EPS growth and dividend yield. And one caveat to note is that with the recent US government political changes, there will be heightened volatility in the region. So it's a great opportunity for active fund managers such as us to dynamically assess risk and reward in the region and reallocate capital based on where we see the best opportunities.

James Goldstone, Fund Manager, UK Equities:

The UK market has perhaps been tarnished slightly, with a view that it's lots of old economy sectors. We don't have a big technology sector. There's lots of resources, there's lots of financials. And we certainly see some value in those areas. And we've got good exposure there because in many cases they're big payers of dividends. But by the same token, the UK does have a group of really very high quality, high growth, high return global leaders in their respective sectors, and selectively we see value there as well. So we see value across the market. It's just a question of being very focused on the fundamentals, making sure that we're invested alongside management teams that we trust, that are looking after businesses with strong fundamentals and defensible fundamentals. And then the shares on an appropriate or attractive valuation. 

John Pellegry, Product Director, Asian & Emerging Market Equities:

We are stock pickers. We are guided by valuations. And so I don't think from that perspective it's too surprising that we are underweight India and overweight China. So certainly we think that the total returns that we can expect over the next three years, which is our investment horizon, are greater in China because expectations are low. We're more likely to beat those expectations, whereas in India expectations are quite high and so difficult to beat. The interesting thing about tariffs is that this is going to create a lot of noise next year. And as active investors, it's a good environment when there's a lot of noise, when there's uncertainty, when there's complexity because the fair value of businesses don't change that much regardless of what is happening in the environment. But share prices do. And so our job is to really capture the difference between the price and the fair value. And if we can do that in an environment that is quite disrupted by tariffs, for example, then we feel we've got a good chance to outperform. 

Michael Craig, Head of European Senior Loans, Senior Portfolio Manager:

I think one of the biggest thematics and what investors are asking about is, what are we seeing in the upper middle market? So companies that have EBITDA above 50 million. Between the cannibalization between direct lending and broadly syndicated loan markets. So liquid and illiquid. Particularly as the owners of these businesses, the sponsors are becoming more sophisticated around how they source the capital. The balance sheet. And so they've become quite agnostic between doing a direct lending and a broader syndicated loan (BSL) transaction. I think investors need to follow that, and people like us coming up with structures where it's a combination of liquid and liquid, and we're agnostic between direct lending or BSL. And that gives investors a bunch of positives: fast deployment, quarterly liquidity and evergreen structures. So that's a thematic that's been coming in Europe for the last two or three years. And it's going to be heading into 2025 and beyond.

Simon Redman, Managing Director and Client Portfolio manager for Real Estate in Europe:

The whole real estate sector has repriced. So having repriced, that's a good entry point. And then we look at individual sectors and individual regions around the world to find the best opportunities in overall, what is a good environment. Europe has been the first to fully reprice and start recovering. It'll be followed by the US very shortly, and Asia is somewhere between the two of those within each sector. Then across the world, we like the industrial sector, and that varies from warehouses, what we would call last-mile logistics. So when you're having your Amazon Parcel delivered, it has to come from somewhere. Normally that comes from a very big warehouse in a lorry. The lorry goes to somewhere a bit closer to home to another smaller warehouse, last mile, as we call it, into a van to be delivered to you at home. It's that last bit of the delivery journey, the last-mile logistics, that we particularly like at the moment. It's undersupplied in most areas around the world. Another area within the industrial sector is light industrial. So industrial parks, smaller units, lots of small individual firms making stuff, widgets, those sorts of things, and that's very compelling at the moment. We like what we call the living sector in various markets around the world. In Europe we've been investing quite a lot in student housing recently, which is undersupplied in many markets. 

Ashley Oerth, Associate Global Market Strategist:

What's really new about today's moment is the launch of ChatGPT that ignited this enthusiasm for the technology of generative AI. In other words, we've evolved this technology of artificial intelligence to be more interactive, more creative, more responsive, and something that is, I would argue, more dynamic that can be applied to very many use cases that previous forms of AI could not. So we're really excited about this prospect. But really the tools that we have on the market are more sandbox in nature. In other words, they're capable of a lot of things, but they're not specialized. I think that there's a lot to be done in terms of not just the specialization of these tools, but also the know-how and how to apply them in the very many contexts that we believe that they can be applied to. So that's one aspect. And I think that as part of that, we're also very early in the adoption cycle. There was a survey published earlier this year by the Census Bureau that showed just 5% of US firms report using AI somewhere in their business or process for delivering a service or good. And I think that this gets at the point that we're still very early in this story, that I think that we could see this play out over the next number of years. And as part of that, we're increasing the know-how of how to apply these technologies, but also the specialization of them. I'm pretty excited about what the future holds for artificial intelligence.

John Morris, Analyst:

It's still quite early days in the overall adoption cycle. But equally we are seeing within more and more different industries and job roles that there are specific applications cropping up. I think the most advanced one today is probably assistance for coding and software engineering. That's very quickly become quite a standardized tool that the industry has adopted. And Google, on their latest earnings call, they said that over a quarter of all of their new code is now being generated by AI. It still gets reviewed by humans, but Google is not exactly a small company, so the scale of that adoption is quite clear. And then we're seeing similar tools being developed and rolled out in other professions. An interesting one recently was for doctors, a copilot. A doctor has to make notes on every single patient appointment that they do, they have to write a referral letter, which is often quite standardized. There's this huge administrative burden on our doctors. And what this AI software can do, and it's being developed now and we're hearing fairly good things about it, is that it can listen to the appointment, the interaction, and it can fill in all the relevant fields and start summarizing the conversation and hopefully just significantly reduce that administrative burden on the doctors.