Transcription
This is a panel of investors, so I'd like you all to put your investor's hat on and respond, if you would, to this next poll we have. That's the QR code for the polls and the questions. Don't forget about the questions either. But here is the question for this poll.
The best investment over the next five years will be: A: AI, B: Emerging markets, C: Biotech, or D: Bitcoin. Clearly testing your risk appetite here. So please log into the QR code, participate in the poll as we get this panel discussion underway.
I mentioned that we are lucky indeed to have three of the world's most sophisticated investors sitting with me here on stage. Phillip, to my right, oversees one and a half trillion dollars across the investment landscape. David is a specialist in financials whose firm invests in global equity and global credit, and Dilhan runs one of Singapore's esteemed sovereign wealth funds.
Gentlemen, from the 2009 financial crisis and through the pandemic until at least 2020, for 15 years, we're talking about U.S. financial assets. So clearly outperformed the rest of the world that we started talking about American exceptionalism. The notion that U.S. markets are somehow uniquely superior, more resilient, more structurally robust compared with other developed economies. Now, perhaps for obvious reasons, investors everywhere are asking this question: Is the era of American exceptionalism over? And it's a perfect question, feels like the perfect question to me to be asking after a brutal four-day selloff in U.S. equities. So let's answer it right now, David. Is the era of American exceptionalism over?
I would say the gap in returns of the last 20 years from GDP to financial markets, in my view, are over. And the reason is that if you think about it, it's 50% of global GDP, but it's 70% of markets equity and fixed income. It's 70% of private credit and private equity. And never in history could one-third of the economy command 70% of world valuation. And I think as a result, we're peaking where we're peaking because, you know, 20 years ago, the U.S. Treasury had 50% public debt to GDP. Right now it's under 30, going to have 150 in the hands of the actual committee that is backing all this. It's at its limit of what they can print. And so to me, when you have a third of the economy and it's worth 70% of global markets, you're close to the mathematical limits of what you can be. Does not mean the returns will keep on being high. But stems, I think, mathematically from the limit.
Who wants to take this on? My first remark is I do share your point. Clearly, we are into, I don't know if we have the limit, close to the limit, under, but the overperformance of U.S. assets, but I would say financial markets as a whole, but U.S. of course, in particular, in the last 15 years is just amazing comparing with the value creation of the of the economy. My second remark is, I have been for 35 years, it's a statement that portfolio management, asset management industry, and I have to say that every year, almost every year for 35 years, I have this question: Is, let's say, you are the U.S. market's going to underperform the rest of the world, Europe, Asia, blah, blah, blah, always the same story. My my only remark on that is, I think it would be better for any financial market in the world that the U.S. economy and U.S. financial markets go well and continue to go well. Secondary market is based on what you said. I think if we observed and we lived in this decoupling between economy and performance of the of the financial assets. This is clearly not due to, let's say, the, of course, but due to the innovation, productivity. But. But this is mainly due to the interest rate environment after the financial crisis in 2008-2009. The quantitative easing which has been implemented, executed by all the all the central banks and along with the Fed, which is a central bank of the world. We like it, we we do not like it. This is a vicious effect. This is a central bank of the world. And it has been just incredible. Just incredible. And the financial markets, through thanks to this quantitative easing, performed everywhere in the world and particularly in the U.S. And just to, just my last remark on that, it seems because of inflation, because of, let's say, you maybe also because of the first month of the second round of the President Trump, this period is maybe over. This period of zero interest rates around the world is over. And it changed dramatically the way of making investments in the future. Doing so.
So I think it's a question of how we define U.S. exceptionalism. You can define it by reference to financial markets or more broadly as to what allows you to perform well in the financial markets. I think there are five factors that go into U.S. exceptionalism. The first is the breadth and depth of the capital markets, which is a very significant, I would say, U.S. exceptionalism. Capital markets, which remains where it is today. 65% of equity is U.S. dollar denominated stocks. You've got 60% foreign currency debt is U.S. dollar denominated and then it flows 80%. So a lot of it is driven also by capital markets as well. So that's one level to look at. The second is innovation. U.S. exceptionalism also drives in the back of innovation, and that's science. That's the universe is they have that ability to attract talent to come in, all of which right now maybe under a little bit of stress, no doubt. The third is the U.S. military power, which gives them that sort of hegemonic ability to to push itself beyond its boundaries. The fourth, I would say, is institutions, the U.S. and the rule of law, which also is coming under a little bit of stress right now. And the fifth, of course, is the reserve currency, which now accounts for 58% of central bank reserves and is used for transactional flows almost everywhere. So we look at these five factors. U.S. exceptionalism, for the time being, doesn't look as though it's going to be, it's going to be at risk. But all of these five factors, you do have things that could cause a little bit of rain and that could cause the U.S. such exceptionalism to be adverse if you think over the longer term.
So you're defining U.S. exceptionalism or American exceptionalism more comprehensively, I would say, because all of these things contribute towards why we gravitate our capital flows into the United States at year to date, right? The dollar, the U.S. being ahead of money, power to some extent. You've got to think about well, of techno polarity, you know, right now, U.S. yet. So I would summarize your remarks by saying, and you tell me if I'm wrong, that no, the era of American exceptionalism is not over. Not for the time being, for the time being. But the one thing we have to bear in mind, a lot of it is also due to foreign flows into the United States. If you think about techno polarity and the funding. So 40% of equities come from outside the U.S., 40% are equities. In the U.S., contracts and flows come from us, or half of them come from Europe. Yeah. And the next one off there's Canada, then you've got Japan, Korea, and so on. You've got that going for yourself. 31% U.S. Treasuries are funded from outside of us. These are significant flows that allow you to continue to maintain significant exceptionalism in private markets and public markets. That goes towards funding this phenomenal innovation that we're seeing that allows you therefore to assert yourself over the to the, you know, the area of technological contestation that's going on right now in the global markets or global arena.
Folks, we put the polling question to you a few minutes ago. How about we bring up the results? Because I think they will help very elegantly lead into my next question. The question was: Best investment over the next five years. Emerging markets, biotech, Bitcoin. Wow. Look at that. A lot of dispersion in those results. I suspect you have a younger group of people who might have a different. This is true, but by email, Jamal, can you mean any markets outside of the U.S.? So with this as a backdrop, Dilhan, you're someone who looks at investing on a multi-generational time horizon. That is what Tomasic was born to do back in, what, 1974? Yeah. So what do you believe will be the most durable source of cash flows and sustained outperformance over time? Is it one of these? Is it. Is it something else?
No, I think I didn't. Did. The most important thing for us is how do we build a resilient and forward-looking portfolio, right? Resilient. So you've got to take the view that there would be many shocks happening in the world. We've just been through a massive one this year, you know, and you've got to figure out whether your portfolio of companies can withstand and come back, bounce back, bounce forward, if you want to put it that way. And then forward-looking means you've got to look at where the big shifts are happening. So technology is a big. Climate, by the way, is a big shift. Okay. It's still there. It's still relevant, no matter where it is on the on the polling in earlier session. And by the way, is going to have a real impact on climate solutions. So if we look at EIA, that's the biggest change that we face today. It's going to affect energy demand. Energy demand is the biggest bugbear we fear we face today. We've got to buy EIA is there. It's going to it's going to affect all businesses. Energy is the biggest issue to making it a reality. It also abundance of energy is required because of the demand and technology solutions are not there to significantly impact the use of energy in the context of compute power for the time being. So that becomes a risk, you know, in terms of funding of EIA models, if you think about it from that perspective, you can argue that the amount of capital that's going into into infrastructure for EIA or enabling EIA is a lot more than what's required right now. But it may be not because it depends on demand, right? So the question is whether it's going to become a reality and that depends on other factors, of which energy is one. And the other, of course, is whether you're going to see the kind of effects that you think are going to come about from from from where from the risk for for air superiority today. So you've got two countries looking at this, primarily. You've got the U.S., you've got China. Okay. The race is not over yet. You know, in compute power, the U.S. is ahead. In energy, China's ahead. In product services up, because India, the U.S. is ahead. In adoption, China is ahead. So where this turns out is a big question for all of us.
You're making this so hard for me. I'm looking for simple answers that my audience. Well, I wish I had the answers. I have more questions than answers, I guess. What do you gentlemen think they did mean? Maybe I should phrase it this way. So clearly, the story of their thinking is clearly part of the mix here. The story of U.S. equity outperformance in recent years, certainly over the past three years, is really a story of seven stocks, right? The Mag seven: Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and of course, Tesla. As a result today, anybody who puts 100 into the S&P 500 is actually getting $35 of the Mag seven and $65 of the other 493 stocks. It's just extraordinary concentration. If you want exposure to AI, how do you reconcile that with the unprecedented level of concentration risk?
You know, stocks, very much an important question and linked also to what we just heard and what was European because of the interest rate policy and the supporting index performance during the last 15 years. If you want to be exposed to Asia, any over thematic can be, I don't know if it would be the right, let's say, you bet for the next five years, who knows? What is key is because of this, according to me, because of this normalization of interest rates in which we we just jumped in. Um, I think it it will be absolutely crucial for any investor in the world to pick up the right to take maybe, but also the right player and the right corporates for, let's say, delivering the right level of performance. What I mean by that is I'm not sure that after 15 years of incredible performance of passive investments, which was fine, no problem with that, which was fine, but strong, so much supported by the monetary policy, I think for being able to perform during the next five years, one decade in this normalization, it will be key to be able to pick up the right. In with the active choice, the right corporate and the right vehicle for for making the investment, which is absolutely crucial for the next utero.
We are now in a non-violent which has nothing to do which will have nothing to do with the past. I, I think there are today. We are at the inflection point from the monetary system. Meaning never in history we had global GDP, public debt, 100%. Never happened. Secondly, we never had the reserve currency with 7% deficit. Yeah. At a time of peace, full employment and market all-time high. 7% deficit in the U.S. or in whoever was the reserve currency. England back in the 1900s, France in the 1800s who only through wars or pandemic. So my view is right now the safest way is, as we've said before, protect yourself from governments that are likely to engage in quantitative easing, cheat on inflation numbers and basically debase your fiat paper. Hence, you need to own gold. I was born in 1971. Central banks had 50% of reserves in gold. Today's 25%. The central bank for the first time today on more gold than U.S. Treasury. Secondly, China just issued U.S. Treasury and Euro flat to U.S. Treasury and German bond and they had 40 times more demand. Secondly, I'd just run numbers, valuation today requires 2 trillion revenue in 2030. Yeah, that some of the revenues of the Mag seven, ex-Tesla, it's lower than that. So that means someone is telling me that by 2030, we're going to find another Mag six. Good luck. I tell you, you can keep your money there. Certainly not mine. And third, the big risk, as microRNA said, of overly engineering, passive investing means has now become a function of money printing. Basically, as governments print money and people receive checks, it all goes into passive, it goes into seven stocks. And that, in my view, will have perverse ramifications on the the economic development. I think as a result today, as Mark, the allocation is to reduce exposure to minutes Mag seven. Secondly, increase allocation to the rest of the world on a GDP basis. Why? Because if we're not going to find 2 trillion in revenue to justify the revolution, which I think is impossible by 2030, given the level of public debt around the world and where taxes need to go to pay for this debt, the likelihood is we're going to have a significant correction.
Now, can I just please. I think we have to make a decision. The public markets, the private markets also, because the power of markets generates a lot more capital today. That's what business activity is on. So I tend to agree that if you look at the public markets, there are risks there for sure. Now, we can call it valuation, bubble, etc., for sure. The question is, of course, we talk about U.S. exceptionalism. You talk about timeframes. You know, we've seen markets go down the U.S. over the last 15 years as well. You know, we have, but it's been able to come back because of the gravitational pull of the U.S. capital markets. I think the two issues we have to think about which will impact this story. Number one is the effect of AI on job displacement and societal resilience, because the effect of that would be some political response, you know, depending on the countries and so on, because at the end of the day, lives and livelihoods matter more than the stock market price of of the Mexico. Okay. The second, though, is actually the U.S. dollar becoming weaker, which has really become the case this year. So I would say that, you know, I'll just give you one statistic between 2012 and 2022. If you were a Singaporean and invested in U.S. stocks, the S&P went up 33%, at 30%, and the U.S. dollar depreciated against the Sing dollar by 33%. So you have been -15% in your return. So just that today. If I look at what's happened with the U.S. dollar since March, since April 1st, at least it has depreciated against many currencies. The euro is one, the Sing dollar is the other, and I've now been forced to hedge the U.S. dollar. Okay. And the cost of hedging has now gone up because I find everybody's hedging. Can either hedging, the Europeans are hedging, etc. It's come to a point now where the costs of my hedges are becoming too much that I have to therefore think about a natural hedge. What's a natural hedge? Means I've got to be looking for things that give me on a net basis the return I expect for the risk associated. So some U.S. dollar denominated assets will not give me a net return that would justify my allocation of capital there. So weakness, a U.S. dollar to a non-U.S. dollar denominated investor is a big issue. And that I think will have an impact in a couple markets. And if you look at the net financial position, U.S. has 30 trillion of foreign capital. 20 in the equity market, 10 trillion in the U.S. market. Europe has a net financial position plus five, means Europeans have invested more elsewhere. China plus a ten also because of the closed capital account. I mean, they can't get out. And Japan plus five. So there's a plus 20 and a minus 30. Now, this has worked because so far the rate of return in the states has always been higher. But we're now getting to a point where valuation, an all-time high. We have, uh, of this Mag six, few of them ever did real CapEx plans. They made gazillions of cash flow monetizing data. Amazon received less than 2 billion of equity. Yeah. And now this company, on a combined basis, they are deploying more than three, $400 billion per year of CapEx. There's an accounting trick. They're buying computer chips and they're amortizing them over ten years. Now, I don't know you, but last time every five years I take all my computer and I send them to Africa, to my charity. So and now they're telling me that this is the most powerful computer in the world and they amortize them on ten years. And you think that's real earnings? That's an accounting trick. You know, I was trained to these guys and hands. In my view, when you look at the EPS growth for something like seven, in reality, it's non-cash. They spend the money on computers. But I mean, I'm not there yet. Maybe inshallah, but the numbers are so high, the probability that this won't happen is high. My last point on the AI, you know, on any open AI tool for a basic, let's say, you know, whatsoever today or what four plus four does, our brain uses 220 million less energy than AI. Now, I'm not a scientist, but climate change is real. I climb and I died. I can tell you from the Alps, glaciers are falling. And the idea of and now we're going to have billions of people asking stupid questions and burning 220 times more energy. Yeah. And you think that that's an investment? I mean, good luck to you. You can have your money, not mine. Now it has. I think the last point, I spoke to most of the two of the brightest venture capitalists in America. They are selling anything. Why? Because I said no one knows if this is true. Secondly, no one knows when. Third, the level of capital expenditure today, only governments can back it. And I find it hilarious that opening AI now wants to be government bailed out on its CapEx. So I'm going to second. So why should the U.S. taxpayer give a guarantee on its CapEx and profits to private shareholders? I mean, I understand the world is finite, but come on.
So nobody wants to say that the era of American imperialism is over, but you're you're kind of making a bearish case for U.S. markets. But, you know, it's economy. You can diversify your portfolio everywhere else. Okay. So let's talk about that. Where else, where else do you go? It's valuation under 25 times. What? It's an amazing company. Yes, 123 times revenue, man. I mean, and you have 493 U.S. companies which are very much interesting as well. So you can diversify your portfolio, including in the U.S., but we are also all our region. You spoke this morning about Japan and the reform in Japan and we spoke a bit about Europe. Europe is, I'm not sure that Europe is, let's say, is a new haven for for the next two decades, but for sure, it will show valuations are lower. Yes, that's for sure, hopefully. But there is a clearly a rationale behind that, but not, for example, in Europe, for the first time in the 20, 30, 40 years, maybe 50 years, for the first time, there is an alignment to an EU, let's say, for strengthening the let's say, the economy competitiveness of the EU, which is the first time because for 40 years, 50 years in the EU, we are focused on regulation for protecting the customer, which is the only target and the only focus of the EU. Now it's new. They also think that it could be helpful to think about the production and to above the corporate and to strengthen the vis-à-vis environment. Fine. There are a lot of proposals. We make a lot of proposals. I don't know if I'm not sure that it will, for sure, it will take time, but this will to develop the EU economy is also maybe due to the wakeup call of beginning of issue. But clearly, we see this is promising. I hope we will have time in theory, until exactly interim full year. We speak about simplification of regulation in Europe, for example. For for. For the moment, I still wait for any simplification. So in theory, now we have to implement and to execute.
One last question to put to all three of you while we still have time. I'd like to try and tie what we've been talking about here together with the overarching theme of this forum. Economically, the world over the course of this year, and I think arguably this predates the the arrival, let's say, of Donald Trump to the White House. The world has been pivoting from efficiency to security. It's the story in trade. It's the story of manufacturing. And increasingly, it's the story in technology. Should it apply to investing as well? Does it make sense to buy assets that are secure and resilient, and if they're structurally less attractive, do you bake in a geopolitical discount?
I think you're a villain. So in your question, I know it clearly. If you are, let's say, you suffered some changes in the way of approaching the global trade, you have to take them into account in your portfolio construction, no doubt. Although why is it part of your macro overlay? Absolutely. Absolutely. If you if you continue to to to build a portfolio, let's say, to invest based on what was your upbeat and your approach during the last 15 years, I'm sure I have no doubt that we will all be longer. No, no. So you have to adopt your your portfolio. And yes, maybe with the we develop this concept of local for local, maybe. Yes. But for sure, we have to take it into account. No, not you. Japan. Asia. Yes.
Dilhan, how do you factor geopolitics into your investment strategy? That we we do this now for eight years, you know, seven years. And so everything we look at now, we look at geopolitical trends even more so in the last, I would say, couple of years. And it's not just about the contestation between the U.S. and China. That's obviously the big one there. But we have to think about whether we're going to really into a multipolar world, what some people might call the great rebalancing. And in which case, you know, you take the view that between the two big powers, you have a bunch of middle powers who will be asserting influence, regional influence, Asia, but perhaps even global influence between the two superpowers. And then if we look at from that perspective, then the allocation of capital becomes more complex, as the way to put the money to work, because you have to look at second, third, third-order effects for that. And and then you've got to figure out what does that mean for your cost of capital, because the written word has to be on a risk-adjusted basis. Right? So that's a fundamental issue. And macro issues become relevant. Currency as one geopolitical risk feed into that issue as well. Trade balances, fiscal balances, all that will come in. The question that I think we grapple with, where do we rotate our capital into? Okay, so you have two choices, geographical and asset classes. Right. So geographical, which market can absorb that rotation of capital away from the United States? Private capital and public capital, private. It's a little bit different because you've got illiquidity in debt. But public markets is other issue. Number of public market companies. U.S. has halved in the last 20 years. Right. So even then, the choice of the U.S. is one thing, by choices also U.S. is even worse to some extent in terms of volume, investable space. And then if you look at the promising markets, you know, in terms of equity performance the last 2 to 3 years, you look at India, you look at China, look at European last 12, 12 months, you saw the absorption capacity is not there for rotation out. And then you look at alternative asset classes, private credit. Well, people talk about it being risky, but it's less risky than being in equity in a cap stack. Right. So it depends on how you play the private credit market. You can look at fixed income. We're not fixed income investors, but that's one way to go into it because now interest rates are not zero. So actually you're getting paid for cash. You can go to commodities, etc. We're not commodities investors, but that's what people will be looking at as a diversifier. But you can look at infrastructure, which to me is uncorrelated to our equities returns. And I would look at that because if you go into REITs spaces plus infrastructure, for example, you get yield and total return and it is a balancing thing. But the fact is that for all these alternate asset classes, it's all denominated in U.S. dollars. Right. So the rotation that you have to think about is very complex, which is why I debate the question as to whether by is American on our panel, by debate the question is whether U.S. exceptionalism is coming to the end soon. Now, it might be that the structural issues we face in the United States are issues that have to be thought about in the risk analysis. But the rotation, it's not easy. And that's the reality.
David, quickly, last word to you. Yeah, I think just stop on the 32nd floor of a JC building and see how it was created in 1974. The finance minister, now 81, running the Central Bank reserve back then sold all its U.S. Treasury and bought gold, and that's how J.C. was created. And so in my view, only three times over the last 150 years, the dollar tried to debase. When it did, it lost 35% and then basically added massive geopolitical accord to put a floor. This time I doubt we will have one. But most importantly, it's coming at the time where never again in history, over the last 500 years, we had public debt equal one times GDP. That means all your fiat paper, doesn't matter which one is bad, and has to me this fake illusion. The returns keep on being nominal would be the biggest wake-up call. That's why the smart investor called what is called the Turkish portfolio: physical assets, including all types of commodities, because you can't print them, you can't print water, you can't print them, very can print the infrastructure, you can print gold, you can print platinum, copper. Yeah, you need to find it. And at the same time, ultra-high quality equity. Now, the issue is, are you happy to put 25% of all your savings in five-year companies, which are amortizing computing at ten years when your normal computer amortizing free? I'm not.
Ladies and gentlemen, please join me in thanking our pilots. Dilhan Pillay, David Serra, Philippe Setbon. All. Thank you.