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More than just your typical market analysis podcast, EFGAM'S CIO Moz Afzal goes Beyond the benchmark, delving into current topics and global trends with guests and experts from within EFG and further afield. The podcast is released fortnightly.
Intro (00:00):
Welcome to Beyond the Benchmark, the EFG podcast with Mose Absell.
Moz Afzal (00:06):
Hi everyone. You're listening to Beyond the Benchmark, the EFG podcast. Today I have deputy CIO Daniel Murray joining us today. Daniel, welcome.
Daniel Murray (00:17):
Thanks Mose.
Moz Afzal (00:20):
So this podcast is actually a special podcast because we are going to review our 2026 outlook as we are in the mid-year outlook phase of our season. Now in terms of the ones that we didn't get quite right, we can debate which ones were right, which ones were partially. And by the way, you can download this document from the EFG website and you can download and you can read them for yourselves and make your own assessments. But Daniel, what do you think of the ones that we didn't quite nail 100%?
Daniel Murray (00:58):
I don't think there's anything where we got it sort of 180 degrees wrong. I think it's just degrees of interpretation. I think something that perhaps has been less impactful than we thought is that the Doge just hasn't really gathered any momentum. If you remember after Trump was inaugurated, there was a lot of noise and fuss about Doge. It was one of the key pillars of his policy, Elon Musk in charge, so very high profile role. And then pretty quickly Musk and Trump fell out and those just went on the back burner. So there were initial savings of around about 215 billion. And according to the website, we haven't really seen that change. So that's probably the one that's been a ... Yeah, we're a little bit offside. Again, not a disaster. The other two Ds that we talked about in the same context of that particular element of our outlook were deregulation and drug pricing.
(01:58):
And there's been movement on both of those, but particularly on the deregulation side, there's been really meaningful deregulation in financial services. So measures announced or that are expected to be announced are thought to free up around about 20% of bank capital. So it could have a very meaningful impact.
Moz Afzal (02:21):
Well, I think that what's interesting is looking at share price performance of banks over the course of the last calling nine months plus looking at the performance of some of the private equity or private debt companies being a massive divergence and we'll talk a little bit about that later. But I thought was interesting is seeing banks hitting new highs, 52 week highs and regional banks at this point. So very much kind of fitting in the mould without actually number 10 of our predictions with the banks and the IPO market would be pretty strong. And obviously Elon Musk has been completely distracted by more important things like IPOs. So we'll certainly see how that pans out over the next 12 to 18 months, but again, something that we will look into. So Daniel, one of our sort of lead predictions actually, and it was quite an important one, was that the United States will continue to lead this economic growth.
(03:24):
I think at the time we made this prediction, Europe was starting to pick up and people were pretty bullish about emerging markets and everywhere else. And then of course we've had the Iran war, which has clearly had a huge impact on the global economy and rate expectations, economic growth. So of that growth predictions, I think the US leading has been absolutely right.
Daniel Murray (03:53):
Yeah, no, absolutely. And I think that's true whether you look at actual growth, which at the moment we only have first quarter data in terms of GDP or if you look at forecast growth, for example, from credible organisations like the IMF or OECD, both on actual unexpected growth, the US is ahead and expected to remain ahead of other developed market nations. Of course, economies like China and India are growing structurally faster than the US, but those are not typically developed economies. I think what surprised me has been that we identified three structural and three cyclical factors. The structural factors, of course, are still in play, but of the cyclical factors, two out of the three have turned from tailwinds to headwinds, those being lower energy prices and lower rates. Obviously now with events in the Middle East, we shifted to a path where markets are pricing the possibility of a rate hike this year and obviously energy prices shot up.
(04:49):
But despite that, actually, US economy just looks incredibly robust. And I think there's a few things going on here. One, of course, is the underlying trend of very strong AI related investment. And I think separately, of course, there's just this huge tailwind from the one big beautiful Bill Act and the massive amounts of fiscal stimulus that result from that. And thirdly, it's just worth remembering that the US is a net oil exporter. So it's much less sensitive to gyrations in global energy markets than say Europe, the UK or Asia, all of which are net energy imports and then therefore quite sensitive to what happens with energy prices.
Moz Afzal (05:35):
Yeah. And I think it's worth just touching upon our view on the Middle East crisis and what happens next. And I think Daniel's latest thoughts on how long it will take to get oil flowing freely from the straight once it is open.
Daniel Murray (05:48):
I think it's likely to take a few months just because there are physical limitations, A, on how much traffic can get through the straight homes in any one day. Just to give you a sort of idea of how to scale that prior to the bombing campaign, there were between 80 to a hundred ships going through the Strait of Hamous daily. So it's just going to take time to get the boats and the oil and the other commodities from where they are through to the place they want to be. And then of course there's just transit time on the open seas, which will take a few weeks. And so you put that all together and it's probably going to take at least two or three months before energy and supplies of other commodities become normalised. And it's also worth remembering in that context that energy markets have been massaged somewhat by release of reserves from the strategic petroleum reserve.
(06:48):
And of course, as soon as energy markets normalise again, then those energy reserves will need to be rebuilt. And so that's also going to place an additional sort of constraint on global energy supply. The other point I think worth bearing in mind in that context is that the UAE's recent withdrawal from OPEC just suggests that the UOE wants to produce more oil than it is allowed under its OPEC quota. So that isn't going to take effect immediately, but that will of course over time help to alleviate pressure within global energy markets. So those are interesting dimensions. I think fundamentally markets will be fine, it's going to take a few months to adjust to that.
Moz Afzal (07:37):
Yeah. I think there are probably two other considerations I would just add. The first is, I guess, fertiliser and food and agri in particular where a lot of the inputs from energy and energy in particular have on agriculture and fertiliser in particular, as we go into sowing seasons in various places, it will certainly have a bit of an impact. So you just kind of wonder whether there'll be say latency in terms of food pricing as we go into 2027 and beyond. So that's kind of first thing that's something we're thinking about. The second thing I would say is, which is probably more bullish is we don't know how this Saudi UAE spat or how long it goes on for, but more importantly, what impact will have. And one thing scenario that I think is increasingly probable is one where Saudi, once they're in a better place in terms of oil supply, that they really go for it and kill off any of the marginal producers that are out there with a directionally bullish forecast in terms of their own oil supply.
(08:57):
And if you like, be the guy with the stick who gets everyone else in line and you only do that because you've got the cheapest oil. So that's something that certainly in the back of my mind I've been thinking about as we go into, it's not something I expect will have any material impact in 2026, but certainly in 27 beyond, you just wonder whether the Saudis will use this as an opportunity to really reinforce their power and the fact they are the largest and the lowest cost produce of oil.
Daniel Murray (09:34):
Yeah, no, completely agree, Mos, both really important points. I think there's a complex issue and there's lots going on, but I think something else that I will be interested to see is the extent to which the Middle East tries to create alternative routes to the Strait of Hermus, whether it's pipelines or other means, but I think clearly recent events have highlighted the vulnerability of 20% of the world's oil supply to what in effect is a very narrow passage of water.
Moz Afzal (10:09):
So looking then further afield and looking at the impact of inflation and interest rates, obviously one of the predictions we made at time was we felt that 2026 will be the trough in interest rates and clearly the Iranian situation brought forward that prediction. I mean, we did have it in, so it was very, very correct, I would say, probably more correct than we thought it was going to be.
Daniel Murray (10:36):
Yeah, I think you always need a bit of luck in financial markets. So I call that interest rates with trough in the first half of the year. I think that's clearly that has been accurate. We've seen quite a dramatic shift from the possibility of at one stage up to three rate cuts in the US now markets pricing the likelihood of a rate hike by end year. So it's pretty universal. So I think that was a good call. I suspect it probably would've happened anyway, but just in less dramatic fashion. I think that if you think objectively about what Jye's monetary policy, almost all major central banks these days have got an inflation objective, which is typically around about 2% with some sort of bells and whistles attached to that in some different parts of the world. And even prior to the crisis, certainly outside of Europe and even within some European countries, inflation was running above 2% and it looked pretty sticky.
(11:37):
And at the same time, global labour markets are tight and this is obviously particularly true in the US where inflation's sticky at around about 2.5% prior to the oil price shock and also labour markets are very tight as evidenced by persistently low unemployment rates. So there's very little reason for central banks to do anything much even prior to events in the Middle East.
Moz Afzal (12:05):
Yeah. And I think certainly is a lot more trickier to be a central banker now. Moving then onto the bond markets and bond markets have obviously curves have continued to steepen, particularly at the very long end of the curve. And we're seeing in our talk around shark invested waters, I think that's certainly borne out certainly as it pertains to, say, the UK where I always think that where you are in a sort of stressed deficit scenario, you don't make things easy for yourself if you're also going to add in political risk and uncertainty into the equation. And that vulnerability is really being exposed in the UK. And I suspect we'll also find this in France and we have elections next year as well. So I think the sort of key message on these bond markets is when you're in a sort of inflated deficit scenario, that political risk is the catalyst that can unravel things.
(13:10):
I think it's probably the key message that we had then and we have now. And clearly UK gilts have been one of the worst performing bond markets, certainly in the vast economy so far.
Daniel Murray (13:21):
Yeah. No, absolutely right. So I think this is something else where our outlook has proven pretty accurate. I think whereas with the Liz Trust's mini budget, we saw a very quick and sharp reaction and the market voted very quickly against that. I think with the Starma Reeves budget, it's been more of a sort of car crash that's sort of playing out in slow motion. So the market doesn't like what they're doing politically. I think actually the UK government is pretty constrained in terms of what it can do on the fiscal side of things, but there's clearly a lot of uncertainty there. I think it's pretty tough. And then of course you add to that the headwinds to the UK economy because of its position outside of the EU and I think it's a pretty tough position for the UK government.
Moz Afzal (14:17):
Moving on to geopolitics and obviously clearly geopolitics has taken a massive turn, but probably not necessarily in the way that many people thought. Clearly the Middle East is one big turn on geopolitical front, but it seems to us, at least anyway, the US-China relationship is in a better place or in a conciliatory place, so I'll say, certainly for the time being, it's not something that is high on our radar of risks at the moment, but we're seeing these call sort of mini geopolitical issues. Russia-Ukraine is still there, nothing's been solved, although seems like Ukraine is doing a little bit better selling the war and there's sort of more incentives for Putin to get to the negotiating table. Obviously we know about the Middle East and so we won't bore you with that again, but then we're seeing the spat between the UAE and Saudi. And one of the things that I think is an emerging theme, which we certainly need to think about is LATAM and the directionality that's going.
(15:33):
Obviously Venezuela is one. We've got Cuba is coming into the equation and of course we may have other countries that are probably going to come into the limelight at some point in LATAM as we move into the second term. And then I think one big question I think we all have is the identity of Europe in a geopolitical perspective. Where are we going to end in Europe? And I see certainly from the consultants we speak to on this is what is Europe's role? So I think that maybe touches on a little bit more into another theme with respect to European defence, Daniel.
Daniel Murray (16:17):
Yeah. As you say, lots and lots going on geopolitically. For several decades, you've become used to a world where we get occasional spikes in geopolitical risk, but generally speaking, for the world's developed economies and for the world's financial markets, it was very much just a second order thing and the world was just becoming less ... There were fewer geopolitical events and the geopolitical events that did occur in the developed world were shrinking in terms of their magnitude. And obviously that's just suddenly reversed. It's been, I think, hugely important. It is notable that following the demise of Russia, the US is really the world's only superpower and then over the past decade or so, China has emerged as a challenge to the US at the very least economically. And I think the two appear to be wary of each other, but ultimately respectful and also they sensibly appear to acknowledge that they need each other.
(17:20):
China needs to export its goods to the US. The US needs China's rare earth, China needs US chip technology. So there's a high degree of interdependence and I think that's a good thing because it means that there's an incentive for both sides to keep the dialogue going. I think with regard to Europe, yeah, it's a bit messy. And I think the slow growth rates, the challenges that governments have in terms of fulfilling their social contracts just because of the burgeoning burden of debt, it's tricky. And I think that in turn has given rise to this rise in extreme politics, whether it's a reform party in the UK, whether it's AFD in Germany or national rally in France, but these are big economies and strategically important markets. So I think it's a little bit concerning. I think these shift rightwards. I guess one glimmer of hope and ray of sunshine and any other cliche that you want to throw at it is the fact that Auban was voted out as premier in Hungary.
(18:31):
And I think for a more moderate candidate and I think hopefully that's a sign of things to come. I think practically that just makes operation of the EU much easier. So for example, it allowed the immediate freeing up of aid to Ukraine that he was previously against, but it's definitely a countertrend event. It's not something that so far we're seeing repeated, but I hope it is nonetheless an indication of things to come.
Moz Afzal (19:01):
Kind of moving on and related to that is around this sort of AI developments. And as we predicted at the time that we felt that AI CapEx will be much, much stronger than the market anticipated and that has borne out to be very, very true. In fact, we've moved from demand clearly being there to acute demand and supply disruption. And you've seen sort of memory stocks as well as some key areas such as CPUs and so on and so forth have really struggled in terms of getting suppliers. So pricing has been literally astronomical and those semiconductor companies have continued to perform very, very well. One could argue they're looking a little bit more fully valued than they were, but certainly demand trends and shortage continues to be an acute problem and that's something that we also document within our outlook that we continue to feel very strongly that the AI race and the need for continued spending on AI, be it data centres and so forth, will certainly continue.
(20:20):
So just to put some numbers on this, we've got it in our outlook, but CapEx has seen basically a 40% four zero upward revision on what they were nine months ago. So just shows you that whole CapEx certainly continues and continues to stay very, very strong and very relevant for investors. And maybe I'll touch upon the IPOs right now. Obviously we have SpaceX, but also we have OpenAI and Anthropic both filing confidentially with the SEC for listings. So this is going to be a very, very hot space for the foreseeable future and is certainly going to absorb a lot of market attention. In fact, although the S&P said that they will still stick to their one-year moratorium on inclusion into the indices and that's still very relevant, but NASDAQ relaxed their rules. So SpaceX will go into the NASDAQ 100 pretty quickly and that will certainly have an impact as we have a huge weight of IPOs coming onto the market.
(21:37):
And you do sense that this will mean that we'll kind of force consolidation as we do that rotation. So Daniel, maybe if you can touch upon the sort of emerging markets and what's going on there
Daniel Murray (21:55):
Yeah, it's astonishing when you look at the composition of the sort of global emerging market equity indices where if you add up Korea, Taiwan, and China, the combination is somewhere around about 70 to 75% of the total index. You add in additionally sort of Brazil and India and there's not a lot left. So these five markets just make up the entirety pretty much of global emerging markets equity indices, which I think is an incredible story in itself. As you sort of highlighted earlier, a lot of this is AI related and the markets of Korea and Taiwan are relatively concentrated. So there is an issue over, I think diversification and also there's question marks over the sustainability of these rallies. But I think phenomenal story and these sort of smaller markets grew into one absolutely in the eye of the storm with regard to all the excitement about AI.
(22:55):
So really interesting. I think also interesting on the fiscal side, we talked about the high real rates and that's certainly, I think that's still an important factor longer term and I think a lot of emerging markets continue to demonstrate pretty strong underlying fundamentals, whether it's growth or the fact that a lot of them have been much more fiscally disciplined than developed markets. So I think these things still stand, but obviously a lot of EM have also been negatively impacted by higher energy prices and the fact that a lot of them are less energy importers. So that's been a bit more of a challenge.
Moz Afzal (23:39):
So finally moving on to sort of private markets and certainly our focus in our media outlook, certainly when we gave our outlook, sorry, was around sort of secondaries, mid-market buyout will continue to do pretty well. In fact, secondaries have done amazingly well and slight change certainly for us thinking about infrastructure as we move to a different part of the cycle. And I guess the big debate certainly in private market land is around sort of private credit and maybe to sort of quickly highlight our views, gating provisions in private markets have now are fully in action. In fact, you've got to challenge yourself if something hasn't gated, why they haven't gated given the general view around the private credits infrastructure or private credit structures. But I guess Daniel, this is something that is very much in mind's eye for a lot of clients at the moment.
Daniel Murray (24:51):
Yeah, absolutely. I mean the scale of it, it seems in a much smaller scale, for example, than a global financial crisis. It doesn't seem systemic, looks like there's about two to two and a half trillion in direct lending that's taken place, which basically describes the private credit market. Maybe it's a little bit more, it's a little bit less. Obviously that's a big number and clearly that would have an impact if the credit quality of underlying credit quality were to be too badly affected, but it's not so big that it would be systemic. I guess another consideration is that it's something like a quarter to a third of that direct lending has taken place against software business, which obviously is one of the areas that's most challenged by AI. So certainly something to keep an eye on. I think most people don't have a massive exposure to private markets.
(25:50):
It tends to be a smaller share of the portfolio. So I think that also makes it a little bit more containable. But of course, also because it's a private asset, it's relatively opaque. We don't have massive visibility as to what's going on. So of course it pays to be careful and cautious and look at it. But what do you think, Mose, you're pretty close to this space Yeah,
Moz Afzal (26:13):
I would say that the gating provisions are normal and what you would expect a fiduciary to do. So I think that's important. And I think the other thing is quite frankly, be with established top quartile players who've been through various different cycles, the global financial crisis and so and so forth where you've seen these extreme events and they've been able to manage through them very well. So I think that's probably my kind of two cents worth in that space is that quality matters, particularly in a more difficult environment. And I'll say, look, double B spreads, triple B spreads, are your spreads are tight. So for me, this is rather than some sort of macro economic impact that is clearly happening, I think it is you can just hone into the fact that there's an illiquidity mismatch, i.e. These sort of evergreen vehicles that people have been going into expecting daily or weekly liquidity.
(27:12):
The reality is not that liquid and that's why these gating provisions have come up, but spreads are tight. So it doesn't seem to be like a fundamental sort of economic impact here. It is possibly too much money going into an asset class that can't take that amount of money at this stage and the second thing is maybe more micro impacted the software that was the catalyst that got people thinking about it. So I think nothing from a macroeconomic perspective that concerns us right now. Daniel, thank you very much for walking us through the outlook.
Intro (27:59):
This podcast is provided for general information only and assumes a certain level of knowledge of financial markets. It is provided for informational purposes only and should not be considered as an offer, investment recommendation, or solicitation to deal in any of the investments or products mentioned herein and does not constitute investment research. The views in this podcast are those of the contributors at the time of publication and do not necessarily reflect those of EFG International or New Capital. The companies discussed in this podcast have been selected for illustrative purposes only or to demonstrate our investment management style and not as an investment recommendation or indication of their future performance. The value of investments and the income from them can go down as well as up and investors may get back less than the amount invested. Past performance is not a guide to future returns, return projections or estimates and provides no guarantee of future results.
(28:52):
I