2019 Outlook | European Institutional Masterclass

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  • 46 mins 49 secs

It's been a turbulent year for the world economy and markets, so what does 2019 have to offer? Topics also discussed include; adding diversification to portfolios and concerns for emerging markets. On the panel are:

  • Shamik Dhar, Chief Economist, BNY Mellon Investment Management
  • Talib Sheikh, Head of Strategy, Multi-Asset, Jupiter Asset Management
  • Rupert Watson, Head of Asset Allocation, Mercer Investments
  • Yoram Lustig, Head of Multi-Asset Solutions, T. Rowe Price



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It's been a turbulent year for the world economy on market. So what twenty nineteen have to offer? That's what we're looking at here in European institutional Master class. I'm Mark Kaga and joining me in the studio we have. You're a ballistic. He is head of multi asset solutions for M. E A. T. Rowe Price Shamika Dar, chief economist at Melun Investment Management. Talib Shake, head of Strategy multi asset at Jupiter Asset Management. And Rupert Watson, head of asset allocation at Mercer Global Investors. Well, go on. If I could come to you first. It's been an interesting twenty eighteen. But there are markets today. I think it's been a year of some disappointments. Way expected equities to do well on except for US equities, which did extremely well, which was a surprise. Other markets ah, had negative terms. So far this year, fixed income has been struggling the risk side ofthe fixed income like higher than the market that develop the negative terms. So it's been a tough year. There aren't a lot of places to hide. We have two collections. When your family was still there s O I wonder how the year we'll finish and look forward to further nineteen and share it from the economists perspective. What did twenty eighteen throughout? Where are we now? Think if twenty seven go back a little further? Twenty seventeen was the year of sort of synchronized global growth. Twenty eighteen was it was a year. Really American exceptionalism not just in markets, but for the economy as well. The American Comey's steamed ahead bit of a sugar rush turned on by tax carts but also very supportive financial conditions. Things have changed quite significantly going into twenty, nineteen, twenty nineteen. You're looking at that sugar rush fading. The tax cuts, the impact of tax cuts fading on also financial conditions. With the falling markets on DH until recently, slightly slightly higher bond yields and a rising dollar that August less well off in twenty nineteen work. Tellem shake you in a risk on or risk ofthe moment? I think I'm moderately allocated at the moment. I think the thing that's really changed over the last few months is at the market started to contemplate the longevity of this cycle. I suppose the real big bears out there point to the flattening of things like two's tens in the US and say it. It's really telling us that there's going to be recession in twenty nineteen. To my mind, that's not entirely clear. That's not in colleague Tru. I think we know that in the latter stages of the cycle, but there still are assets, which by still you, which we could go in harvest. So my portfolio's quite quite like us high yield, quite late European high yield. We've still some exposure. Teo developed market equities areas where were a bit more nervous really across the emerging market complex, but we don't sit with the doom mongers. We've had some volatilities. That's a normalization. I think it's too early to call definite end of this cycle. How long can the cycle going for it? Or is it just nice to be watching another world record? Well, I think it's going to continue for a while. Get thie. US. Economy grew very strongly in two thousand eighteen, thinks likely to continue to grow to decent rate next year, although it a slower rate than we saw this year. But it should still be fast enough to push unemployment lower with on the unemployment rate perhaps falling below three point five percent. I think as we look into twenty twenty or possibly even twenty twenty one, there is a greater risk of a more material slowed down. Firstly, there'll be less physical physical boosters we've had this year, as we mentioned earlier, but also I think that interest rates will be a bit higher, will need to be obeyed. Hi, because I expect inflation will possibly be a bit above target for the next little while. So I think we are looking at the material slowdown in, say, twenty, twenty, twenty, twenty one. And then the question becomes, Is that a mild slowdown, or is this recession? My guess? Because because the banking systems in good shape, it's going to be a mild slowdown. But of course, at some point that might look like it's going to turn into a recession. I agree. I agree with that tonight. Can I just make a comment about the phrase late cycle or end of cycle, which which you hear quite a lot? I it's slightly frustrates me because I think it ignores the fact that this has been an extremely unusual if you it it's worth remembering that even even in the U. S. Where things have been going quite well, that compared with where we ought to have been if you project the pre financial crisis trend, U. S GDP per head is still ten percent ten percent below that level. That, to me, is quite a quite a large gap. It strikes me that we need to remember that this even though it's been a long cycle, it's not been particularly impressive. Just some sort of historic concerts. What's the longest psych economic cycle that has been. How does the current one fit up? Because we hit the ten year mark, and everyone sort of felt it had to come to an end. Yeah, well, I mean, obviously the most. The best data is in the US, and we all know that, according to the NPR, the National Bureau of Economic Research were about enter next year, the longest cycle since their records began, which goes back to the eighteen fifty. It's a that's a pretty good record. That said, if you look at other economies there for a long, long, long periods where economies continue to expand without without going into recession if you think about UK, for instance, and really largely, the period between the end of the sort of Great Depression in the mid nineteen fifties was appeared in which there wasn't really a dramatic falling out. But so cycles can vary in length twenty seven years into the expansion in Australia, and it's still going strong. So the idea that you just get to that seven or eight and then instantly falls over thing I think can extend the cycle here is the inflation really isn't a problem. Typically, people say the cycles don't die of old age, Fed kills them. The problem with that? That phrase, is it So it was only true in nineteen eighty two was the last time when the Fed actually engineered under recession under Volker. Typically, what happens is the Fed starts to raise interest rates. And then you have a financial accident that's really being what's caused the downturn for the last five or six downturns and certain. When we look across global markets here, it's very difficult to see where those cracks can be. We've seen the fate quite relaxed about inflation, and we've actually been there. I've seen the Fed being relatively relaxed about financial stability. So the idea that their ramp rates movinto incredibly contractually territory twenty nineteen. I'm just a bit more skeptical that they actually need to do that. You're on your own flesh and also the sun. If years ago, a lot of fear about deflation Larry, what's your take? I think structurally on the long term, inflation has a lot of reasons to be lower than its bean. In the past, the population of the off the world is growing at the slowest pace. We have technology which makes prices. Lawyer. You know now people go to Amazon and they have the power off comparing prices in their hands. They don't need to go to high streets and moved between shops. Toe I compared the prices of There are a lot of reasons for structure, no lower inflation. So I think the band which which with inflation fluctuated, flocked, fluctuate is gone down. We may go toe the up inside of this loyal band. Yeah, you know, labor market is very tight in the US The good thing is that now oil prices for in quite a lot from eighty five to around sixty, so that should help. But I think inflation should go up a bit. It won't reach delivers that we saw many years ago. But then you have the Fed, which needs to make a decision about whether to do something about inflation. I think they will, uh, but I don't think that will be very aggressive. What we mentioned earlier this Holy Sugar rush in on DH tax tax policies from Trump. What happens next year once? I think the view is that that kind of boost will work its way through the system. I think that's the definite consensus that all of a sudden we hit the fiscal cliff as we move through into twenty nineteen. I I'm not sure that that's necessarily true. The whole point of the tax cuts, the reform was a to give a short term beasts, and also it was to try and engender some kind of capital expenditure across the U. S. Corporate sector, and you are really starting to see tentative signs off that. So as we look into twenty nineteen beyond on idea that maybe you could get productivity starts to move higher again, potentially extends the length of the cycle will be talking about a cap ex boost, probably for the last five, six, seven years. That hasn't come, but just whisper it gently. Looks like we've seen some tentative signs of that. So you know, we're seeing corporate invest were seen corporate actually moved to more productive capacity rather than just buying back stock. And I think that can extend it. So you know, I'm not saying that he's going to be a boom and it's all going to be amazing into twenty nineteen. Growth is likely to slow, but we have to remind ourselves still above trend, and I think that's pretty decent backdrop for financial risk asses. We're just sticking on the US for a moment. If I may, you see much evidence of what directors are doing. People say directors buying has a great I don't follow that that closely. And I do fall obviously buybacks which have bean very a very prominent on the back of some of the some of the tax cuts. But I agree with the point that business confidence is quite a high level. It's not just the thigh Sam's. It's the small business surveys, and there are plenty of signs that small businesses are beginning to invest. Big businesses are investing on that could lead to pick up in productivity growth. So I agree with more glass half full, rather half empty out. Also mentioned on the fiscal side that the fiscal the boost from the fiscal policy only really starts to roll off in the second half of next year. So there's still quite a bit of the boost still to come. And it's important. Remember that it's still a boost, its coming down from sort of roughly one percent of adding one percent of GDP in the middle of this year to about point one point two by the second next year. Many interesting. The important thing is that that is starting to be outweighed by the timing of financial conditions so that Aziz been pointed out that sort of financial market effect. Mike Stratton might start away on markets. They will know that talk about President Trump and his policies. At some point, there is a question. What happens from twenty twenty one if there is a slow down because of the underlying physical position, is not great on DSO, either. Fiscal policy can't give a boost when it's needed yet, or it does, and fiscal deficit US fiscal deficits become even worse. Now I want to move on to with so many multi asset managers around the table like, Do you get this? That is really is the multi dynamo where your aunt can you see yourself getting diversification in twenty, nineteen, twenty nine, eighteen has certainly been a year where equities, bonds, they've gone up together and they've gone down together S so that's a good point. The diversification has been a challenging think tohave In two thousand nineteen way we've seen the diversification effects off long term, high quality bones of diminished the coalition between government bonds and equities turn positive, which isn't something we want to see. We want to see negative correlation because the traditional way toe head your equity re squads to use long term, high quality duration. Yeah, I think there are some factors that can turn the population negative again. For example, if global trade is going to be the issue, which rattles markets, that could be negative for equities but positive for bonds because it could mean slowing economic growth. Yeah, now the problem is that many off the traditional long relation govern bonds have very low years. So bones in Germany and gills in the UK They're very low at the moment. You can do it in with US Treasuries, which have quite attractive years of the moment. But then you have the problem of currency because if you're based currency is no dollar, you shouldn't use Treasuries is your defense s o the way we do it? Either you use active defensive strategies, strategies which their objective is to pull from. Well, when equity markets do poorly and they use different techniques to achieve that, we can use overlays such a cz manage volatility overlay that reduces your equity if volatilities suddenly jumps up. Ah, use active management. Not only tactical assault allegation that also outperforms security selection can give you some Russian. Of course you need good managers can use it, so it is going to be challenging. And you need to be more creative to get the diversification set apart that uses it is a question of finding an asset class that provides diversification or certain techniques and strategies within what I think you really have to go back to basics around portfolio construction. On that means, firstly, finding assets where you think there's evaluation cushion. It's a very obvious thing to say, but you have evaluation cushion than your margin for error becomes greater. So value really does matter. And certainly within our income product, we're very active aboutthe securities, which we select. The other one is thinking creatively about how things can be blended together. You're absolutely right. The thing that really changed this year was the correlation between bonds and equities caused all sorts of problems because we saw them both selling off together. So you need to look a bit more broadly. We've been using currency quite extensively. So you know, the classics about being long dollar yen in a risk ofthe environment would work to diversify your portfolio. We've also been using equity index options. So on the S and P and also on the euro stocks. I think really, the beauty of a multi attic portfolio is that you have a much broader opportunity set a much broader investment palate. I think it's beholden on your own behalf for your clients to make sure you use that to all your advantages on those traditional, I'll just go and buy some government bombs. You know, I still think they're going to be negatively. Korea correlated over the medium term. But you are going to get periods where that correlation breaks down. Katie. That causes problems in portfolios. You mentioned buying equities where there's evaluation cushion butt, stop. I mean, that's the strategy that hasn't always worked in the last few years. We've sort of seen growth things like the fangs of these growth stocks. Just keep going ahead. And, you know, you talk to value managers on DH. We're doing all the right stuff. The only thing we're the only people seem to disagree with us is the market defund. I look after has an income bias, So we're definitely buying stocks for the dividends which they can distribute to us, not necessarily just the highest ones. We definitely want companies where those dividend deals can grow through time on DH so they could give us a positive, absolute return. Maybe they liked the fans. They certainly have, like the fangs. Given the kind of power Bolic move that we've seen across those tech stocks over the last year or so, we're very comfortable with our job is to deliver a repeatable, sustainable level of Pinkham rather than chase Amazon or chase Netflix to the moon. And certainly we've seen a pretty harsh reversal in the back end of twenty eighteen of those kind of growth for any price type of stops and again in this world, which perhaps growth is a bit lower where interest rates a bit low, I think having more more visibility about what those earning streams are. I think it's something which we feel comfortable investing in, and that's that valuation. Where you looking for diversification? Well, I think the reality is, is diversification is difficult, too is difficult to find. And so you've got to be cautious in terms of trying to force some diversification on where diversification isn't there. So it's again a mixture off simple things by things that are cheap, buying lots of different, you know, different asset classes. Much diversification is possible. There are certain currencies. You can you can you can add on. That gives you a level of diversification. But I think the reality is, is that it won't be as much. Diversification is there was ten years ago that that's it just on this point about the Fang was seeing the emergency is extraordinary. Excessive global companies now totally different rules of valuation applies and economists think economy of intangibles and the Internet networking. That's all that's been an issue for a while. I mean, we saw it round about this sort of dot com booth. Evaluation of intangibles became a big issue for the market. What it would say is that, yeah, we are a lot turns on whether we are, as I've said before finally emerging from the post financial crisis regime. Because most of the regime since two thousand two thousand nine has been characterized by a negative pondexter correlation. That's largely because inflation under control and every time you know growth slipped, the fenders cut interest rates. My own view, like my co panelists, is that that's likely to last a bit longer than people currently think. Possibly, though it are higher underlying structural level of volatility. Simply because we're moving from Q q T amongst central banks in terms of valuations that it's important to remember that that that period is also marked by a a long period of extremely low, even negative equilibrium. Real interest rates around the world there's still a hell of a lot saving going on by a number of different countries. Germany China, Japan, but also by the corporate sector as a whole. And therefore, when really interest rates of that when the discount rate that you applied to the valuation of your equities is is that low? Then you're bound to see some, you know, rise in the equilibrium valuation of stocks overall, but particularly those kinds of stocks that difficult Teo value simply because they're in the sort of new technologies you've touched. They're on special. A lot of investors, they've got this huge amount of cash they're sitting on. It's not even in the markets. Is that a sensible thing for people to be doing right now? It's ah, it's historic standards. It's an odd thing to be doing for cos you think they're especially in the U. S. Is television early? There's plenty of incentive now to sort of get that money to work and spend on really physical capital infrastructure. In fairness, I think there's been a bit of a structural change in the economy that just makes it more difficult. Teo to invest in, you know in there's partly the short term is mark argument that markets penalized but potentially penalized positive net value projects. If they deliver negative outcomes In the short run, there's that issue. But there's also the point that, actually the fangs thes companies are much lighter. But then your genes and on yet and You're cos of old who used to invest in huge amounts of physical infrastructure. Much more investment these days is in is in sort of intangible stuff, which is difficult to measure. And that means I've got a bit of sympathy about companies wanting to sort of called the reserve if you like cash. But we may be getting to the point where way might see that cash to work in a way. But certainly for end investors sitting on cash is it's totally the wrong thing to be doing now. Certainly, when you look at the banking sector in Europe, seven trillion euros of assets sat on deposit in the banking Seto just under one and a half trillion in the UK, And clients may say, Well, you know, I think interest rates perhaps go up next year. Maybe I can get a small positive return on the on those cash deposits, but I think they're missing one. One really important point. Interest rates around the world are going up because inflation's going up now. I think we've all agreed that there's not a huge bubbling inflation problem, but certainly you're seeing headline inflation rates one and a half, two and a half that kind of level. You take that off cash rate, which you receiving on deposits across many, many economies. Actually, your cash is being eroded in real terms at the fastest rate it has for the last twenty or thirty years. So I think people have to be a bit more active, and people have to think of it more creatively about where that money should be invested. So a savings portfolio probably not the right thing to be in. You need to be thinking a bit more about being invested Your cash. Think cash is a matter ofthe geography. Eso in the U. S. Holding cash may make some sense. I don't thinkit's very sensible because some clients they need to reach full five six percent of the jurors. But in some countries in Europe, for example, in Finland, pension plans are paying forty bits for under cash. They're not getting interest. They're paying in Switzerland. Different walls. The Showtime rated Switzerland is my new seventy five babes, so they are paying just for someone to keep their cash. So we're seeing Mohr investors asking for solutions to invest in us and hedged the currency. And after the hedging coast to have zero terms. So you know, it's It's quite a sad world, but still a seventeen basis point ahead ahead. If your sweats it is. But I think it's a sad world that we are. We're trying to find a solution that your cash will give you zero. It's not that we are trying to get something formula cars just not pay for holding your cash just very quickly back on this issue about the fangs, unless your globalist allocation fund you've got last time I looked had sort of Amazon, Google, Microsoft and given full that this happened to Texas. Do you see value there now, or is it still elevated valuation? I'm not a security selected, so I I don't I won't have comments about specific companies or stocks of companies, but I think definitely technology still has long value first now in their twenty percent cheap building. They were a couple of months ago. Apple. I have iPhone I've I penned Amazon. I get like, two packages from Amazon every week. Netflix, my wife and I, we watch Netflix. We don't switch the TV anymore. Ah, that's why I want I want to have this, like, one day I will live with this. So I think the future is the fangs on DH. Surely there they are. Good. Long term investments. Um, yeah, well, I think they are extraordinary brands. Not all of the emotional Facebook is, and I'm not a stock selective. But, you know, I rely on my children for these things, and they tell me that they want me to get fired, because then maybe I'll go and work it out when they can get some freebies, you know? And they will. You know, when a czar getting older, that demand apple, this apple, that and you know, that's a brand that's never going to be pretty difficult for anyone to break that clearly in the run up to the Christmas season. You can't go wrong buying anybody in your family Apple products, possibly a Tesla. If there's a needy fund manager in the family, they are you. Rupert did mention the T word earlier. Trump. So, given what's been going on with the G twenty in the moment, where do you see this potential tradable this truce? Um, well, there are two schools of thought, the first school of thought. The barest school of thought is that the U. S and China are locked into a multi year, multi decade battle for economic and political and military control. On the real challenges comes around technology. Because, of course, when we were growing up hot technology was was a Walkman adjustment or whatever, and they obviously had no military likeability. Where is the hot technology off? You know, of the future will be artificial intelligence and the like, which will very obviously have a military application. So if you have, if you are the dominant technology player than you are also the dominant political player. And they're from the perspective of some that America cannot allow China tea, the world leader. And if you believe that, then you believe that the U. S and China is locked into a multi year battle with not good outcomes for for economic growth. Physically, businesses that have already expanded over their supply chains equities the like my view is that President Trump just wants a deal on that. He's not focused on the next ten, twenty, thirty, forty years like some, uh, vin administration on, actually, someone the Democratic side as well. He just wants to be able to announce a big deal on the common strong and equity markets to go up. And if that is the right interpretation is difficult to know. Then I think that the truce, you know, Well, well, well, well, well, well, well last. And even if it doesn't last, that agreement will eventually be reached telling, What's your take on it? I think it's probably more strategic in nature rather than are. The tariff is going to be fifteen or twenty five percent. Clearly, this is going to take place over many years, but kind of taking a step back. I think kind of a line to the question is, as we look forward into twenty, nineteen and twenty, twenty and beyond for the first time, probably in our careers were starting to see a degree of de globalization. For the last twenty years, we've seen an expansion in global trade and expansion in global capital flows in expansion in the free movement of people across the globe, and that's being pretty beneficial from an economic point of view. I think the question becomes how economic benefit was spread, and clearly a lot of the populist backlash that we're seeing, which you could argue, was the wave that Donald Trump came on. It's starting to say that maybe globalization isn't a good thing for me. And clearly we've got Donald Trump trying Teo re onshore car manufacturing, re onshore manufacturing of washing machines. Except I think this is trend, which has many years to run. And certainly when I think through the investment implications of that, they can be, they can be quite large. So just in time, manufacturing becomes more difficult. Many of the trade related economies across emerging markets have to really change the underlying structure, their economy. So the globalization that we've seen, I think perhaps the best is flat on properly goes into reverse. And, yes, real implications. Global economy. What's this? A Ranger? If you take a big idea like that that you see something that could play out over a decade or two, how do you then take that big idea and connected in some way to what you're doing in your portfolio today. You got an example of how that tweaks, what you buy or EISA position process really is three fold. The first is to have a thought or have have a do analysis about how how is the global economy involving? And we tend to try and break that down into themes because they're much more manageable? The next step is to think about. What does that mean for asset prices? Is it fully priced and quite a form? What we find is it's not the first derivative of macro trade where you make the money. It's thinking, What's the second third derivative off? And certainly one we're thinking about de globalization were pretty nervous about emerging markets, emerging market activities. So when you look at things like career, when you look at that whole North Asian region is really being tapped into that global trade cycle were quite light across those risk us. It's coming closer to home, a place where we're very, very nervous, actually is in Europe again. It's a very open economy, which has benefited from the global trade cycle on any deterioration in that, coupled with weakness within their domestic economies actually makes us quite bearish. People are panicking about what's going on in Italy. I think they're missing the point there really should be looking at is that you seeing a meaningful deterioration of the economic data across Europe Because I think it's Bean caught up with his de globalization story. You're on when you're looking at market pick up again. What's your take on here? Because it gets the headlines is all around Italian government budgets and death. The headlines are mainly brexit in Italy. Ah, yes, I think I think you I would keep some cash on the side on get and be ready to go into Europe because the valuations are very attractive. Markets in Europe have Bean punished for quite a while. I think Italy they will probably muddle through until there is election for the European Union. But they have to somehow reach some compromise. If I know. I know it's difficult because the two parties in the coalition in Italy promised there voters to give them all, increase minimum income or have some, some more pensions. It's problematic, but they will have to come to some agreement. Also, I think you know, if you look at the game theory logic says that Brexit will somehow get Tau conclusion that will be beneficial for market. So I wouldn't go now in investing your because there are too many political risk that nobody can predict. And they can go really badly. However, if there is some resolution markets Khun Takeoff was there Any mention came through. But how applicable is that in situations like this? I mean, we're living through the middle of Brexit. I think whatever your views on Brexit, there's an awful lot of emotion in the room rather than cold logic. Yeah, there are a lot of emotions, including myself, so it's difficult for me to give you an objective view about Brexit. It's It's a complex game theory with many, many players. Not only two players, not only the EU and the U. K. In the U. You have twenty seven countries, and in the UK you have more than probably more than your ethical att least four. So you have You have many views on both sides and the The thing is, Aziz said, the economy in Europe and the UK is fragile. DDP growth rate is not fall above zero. If there is a help Brexit may derail both you and the UK into decision. I'm sure both sides some people on both sides. I understand they need to reach some kind of agreement. I hope in the end logic will prevail. Otherwise we Wei are heading in tow tough economic situation that we last for many, many years. They just picking up on that. I mean the issues around the eurozone, on with what's going on with breaks it as well. What the economic impact of just having this long term really quite serious set of uncertainties around economies? Are you starting to see any evidence is that that's affecting what companies do without planning? Does it act as a sheet and growing growth? So let me let me do with Europe on Brexit say, if that's okay, I remain pretty bearish about the end. What, specifically the eurozone? For three reasons, One euro zone has been far too dependent on global trade in the past. It needs to generate more domestic tomorrow on. Frankly, a lot of this sort of and optimism that was generated at the start of twenty eighteen by looking at countries explain which we're doing quite well What that ignored. Was that actually very little of the additional net exports that Spain or island we're generating? We're going to Germany, for instance. They were generally going outside the eurozone, you so you're really needs to re balance. The eurozone really needs to re balance. I think that means Germany needs to start frankly, importing a bit more than it currently does. It has the largest country in the world. The second reason I'm slightly bearish about Europe is because essentially politics very difficult way. Talk about brexit ous If it's if it's a if it's an issue in isolation, it isn't. We've seen what's going on in France at the moment. Populist movements gaining strength around the continent. How worried are you? One of the big countries in Europe could do agrees. But well, I mean, that brings me to Italy, which is the third point. You know? You know, I'm a bit of a nervous about Italy. I have to say, because first instead of Italy is. It's not just about the size of the public debt. Italy has been actually quite fiscally responsible for the past twenty five thirty years. It's run a primary search. This the issue with Italy is thie is the relationship between public debt and its banking sector. A lot of the public debt is held by essentially a very weak banking sector. So long as markets continue to believe that the ultimate back store for weak banks will be the Italian taxpayer and not European tax payer Wei don't have some form of banking union, then the threat of the doom loop reappearing will always be beat that now that threat has been kept a bit at bay, largely by one things that CCB has been buying quite heavily, buying Italian bonds quite heavily for quite some time and also married Gerard. You made a statement a few years ago, one of the most powerful statements ever made by center back. I'll do whatever it takes now. Why I'm worried is that on the one hand, the baby will be reducing its cue coming into next year. And secondly, marry a drug leaves towards the end of next year and much will depend, I think But in the past it's been the Irish taxpayer that's picked up. The tab for the Irish banking system has been the Greek, the Greek bank system. Why couldn't it be the Italian taxpayer for the Italian? But they couldn't afford it? It would be B. I mean, if you're turning banking sector, what's going on? There's a lot about debt talent. If it were to go belly. Are thie implications with Italian taxpayer in terms of the size in public that are just enormous. And I think markets understand that in fairness to the eurozone, the technocrats understand that as well. Which is why there is so much emphasis being placed on progress towards banking but ultimately mean in a broad sense, the eurozone taxpayer would be the ultimate bank stop. But so long as that's not complete, I think it's really remains anything. That's the worry about Italy. It's just the scale of the problem. It's the third biggest bond market in the world. Clearly you could have. You did have a default in all but name in Greece. The ability to do that, the ability to do any meaningful restructure across the Italian debt. Stat. It is very, very low on, Really. You know, the only way out of it is that they can start to boost structural growth within their economies, trying try and deliver above more meaningful, uplifting trend growth so they can grow out of it on. We all know structural reform in an economy is incredibly to do incredibly difficult to do. Throw in the dysfunctionality of the Italian political system as well. It goes from being very difficult, being almost impossible. As you say. I think that's why the markets are nervous. We'll bring you in on this one. What's your thoughts about how big a risk is today? If you like is well, I think you know it least essentially defaulting or going under or have you might wish to drive. It would be fairly catastrophic on DH. Therefore, I think that it's pretty unlikely to happen, not least because in the build up to it Italian economy would would would sink. Italian bonds would sink. The banking sector would be close to going bust on although way and that when we look into it, Lee, we think what? The politicians are not doing a great job. Italians think that as well, so you know, it's not like Italian government has huge support from the Italian people. Their appeals letdown anybody. So my guess is that if he went through two years off on Italian government saying we should pull out of the eurozone, we should default the economy, would tank markets, would tank, people would get very scared, risk of losing their savings on an Italian government would have to to to U turn. So I don't think that I don't think Italy actually doing it actually collapsing is particularly likely, but that I think that it's pretty likely to be a long, continual drag on confidence across the eurozone. On the real issue for Vour Italy to recover is whether it can grow. The numbers on Italian growth over the last twenty years have been utterly dreadful, way bemoan comment made earlier about where the U. S would have bean if it carried on the pre crisis trend or where the UK would have bean alai. Khanum is more or less have fallen short, but Alice at least hardly grown in twenty years. I mean, that's an astonishing you know that I can't identify. I'm not a story, but that can't be really any major economies that have barely grown in twenty years, and at the moment, it's difficult for a great deal of optimism. The politicians will turn it around. Let's move from Europe to the other other side. We're about five minutes left. We've touched on emerging markets on tell viewers, saying that's long term. You got some concerns. It's sort of world trade is going on. Globalization goes into reverse. Blade came to get everyone else's thoughts on it. Your what do you think the opportunities or threats are in emerging markets? Because we've had this year with amazingly strong dollar, which has not helped the sector till I I'm actually way overweight on both the middle market equity and thinking about the market equity. Definitely, there are a lot ofthe headwinds. However, I think the dollar may remain at current levels. So so most of the lost ring may have bean behind us. Elsom issues with specific countries in the middle market equities. That's reason. Active management in selection of critical. When you invest in this class as well as other classes, especially in this class, if you look at the valuations, they are very attractive. Market debt just had a collection. So you, Khun, get into it with good valuations. The fundamentals of many Imagine emerging economies are sound on DH. I think people are still searching for years so they would be attracted to another market. Because it gives you attractive years, it's still difficult to find them elsewhere. So I actually think if you're a long term investor and you can cope with relativity and you have a good, active manager, you can select the right securities and markets within market equity and that you maintain diversification across regions and imagine architect with the cross sovereign's hard currency, local currency in corporate, in a market that I think it's ah, very good, as of class fel long term investors back to your point around the reverse globalization. If it's taking place, why is it the Americans, for example, might want to take all those jobs back to the states? Or might they not want to say, You know, we'd rather have countries like South Korea being part of our block, so you can make stuff for us. But we don't want you to be tied into the Chinese economy. And it's not so much that everything goes back to the States. You get global's. I mean, I don't think anything that Mr Trump said over his candidacy or presidency says that that multilateral approach of building bridges is on the agenda. So I think it is a simpler way used to make steel here. We don't anymore. Now we need to start making here, even if that pushes inflation up, even if it's less efficient. To do that, etcetera. There's a kind of groundswell of popular opinion. I think that that has got some someway to run. Yet I think a lot of that's bluster. I mean, NAFTA was the worst trade deal in history on then Scott. Whatever it's called, suddenly, the best trade deal in history is a huge difference between between the two. I mean, I think you know, the most GM of just laid off for thirteen thousand people because of those trade tarts. So they're definitely you know there are implications following through from from the blusters, you say Yes, but you know, we're on the topic of Imagine Markets GM is shutting down in the U. S. Is not shutting down in China. It's not shutting down in China because China is set to grow fairly rapidly for the next several decades. Of the increasingly demand will come from the emerging world. There will be a modest shift quickly in China. But elsewhere towards consumption on the emerging markets, I think will be increasingly able to stand on their own two feet. I also think that you know when you when you are. If you're a long term investor in your time horizon in several years, then about the only thing that matters is his valuation on emerging market current Izzy's on equities are cheap on the gap between the valuation on emerging market equities and, say US equities is close to a high. Andi think that emerging markets, as we look into next year, should stabilize and then pick up, whereas of course I think we're all agreed that thie us slows down. So I think now's a good time. We've been buying emerging market corporate debt. It's really the death side of the equation that we like the moment. I must say quite light on emerging market equities, and I think your point about consumption is well made. And if you look up how old emerging market stocks have performed versus how new emerging market more consumption orientated, they've done pretty well. Actually, it's been the old emerging markets, which have really struggled over the last six months or so. I think I think that's a thing. I mean, being discriminating about emerging markets. Going forward, I think, is a sensible thing. I agree that I think three of the headwinds that faced imagine markets this year are our lesson impossibly disappearance, a festival that was the fear of the reversal of the carry trade. A few lines. You know that with U. S interest rates rising, the dollar going up, a lot of these emerging market investments will start pretty ropey. Now if, as we're saying, rates in the US start to plateau, maybe some of that fear will dissipate. Secondly, there's a whole trade thing I think on. Maybe maybe it's just always a bluster. But some of what came out of Venice, Ari's think or go quite well further trade situation over the next two, three, six months, at least. So that's that said, when they may be listening in short, round. And the third thing, of course, was all prices, you know, have much higher oil prices. Which bad for imagine Jenna. But they've started to come down so discriminating approach. I think Asian emerging markets in particular, something very, very, very attractive for reasons that your amount I'm gonna get a quick, Yes, no answer to each of the next question. Then a final thought. So my question, Yes. No answer. Come to you first. Europe is Do you think Trump? You begin to factor in the idea he might run for a second term as president. I think he will run. Whether they will win depends on markets. That's the reason he will do it, whatever they can to push markets higher. Because if the economy is in a state, he has no chance of winning a second term. So if there's a feel good factor, he's got a good stabbing, a second four year term. I think he'll run on. The chances of his winning, frankly, depend on the quality of the Democratic opposition. Tell him I think you'll run it. And I think he'll probably win. To quote Mr Clinton's old adviser. It's the economy, stupid. They will try and reduce the economy into the next election, which is one of the reasons why I don't believe in this fiscal cliff idea. So yeah, I think he's got a pretty good chance. He'll run none in terms of whether you think how much you think about in terms of your positioning, you know, there's a lot of stuff that goes on. The world goes on in the world and it's pretty difficult. Forecast any of it, so at least to much weight. Got consensus. But we might be wrong way. I'm just gonna get We've talked a lot in the course of the last forty five minutes. I want to get a final thought of those one crucial lesson or message. You want to leave from the whole of this forty five discussion. What was that? Global economy? Okay, that's it. The volatility that we've seen is probably going to persist. It's normal. Portfolio construction is ever more important. Nick, can I pick on something I didn't speak about earlier? I think I know. Deal. Brexit's very likely. I think that might cause some economic turbulence in the short run. But I think we might be surprised at how quickly the economy gets over that second half. You're, I think, given now evaluations today and the headwinds ahead of us, I think active management is going to be much more critical than passive investments are going to disappoint. I have to thank you all very much indeed. And thank you for watching from all here, E.