Transcription

• Speaker #0

  This podcast is only for the attention of professional investors in the financial industry. OuterBlue by Amundi. Welcome to OuterBlue Convictions, Market Analysis and Asset Allocation Views.

• Swaha Pattanaik

  Welcome back to the Amundi Convictions podcast series with me, Swaha Pattanaik. Markets and the rest of us have been trying to keep up with the twists and turns of a ferociously fast-moving news cycle. As a result, large intraday shifts in asset prices are becoming more and more normal. But perhaps what's less normal is how resilient the equity and credit markets appear to have proved in the face of news that points to a challenging economic environment further down the line. Joining me to discuss what's going on and what the Amundi Investment Institute is expecting on all of this, we have Monica Defend, head of the institute. Thank you for joining us, Monica.

• Monica Defend

  Thank you, Swaha.

• Swaha Pattanaik

  Monica, you've just come back from the IMF spring meetings in Washington. It seems whenever they have one of these meetings, there's always a new crisis for them to discuss. You have had an amazingly long plane ride to digest everything you've heard. What was the flavor of what you heard in Washington? And taking a step back from the white noise, what are your thoughts on some of the more structural shifts that you think are underway?

• Monica Defend

  Yes, you're right. It is, as you were saying, an amazing week, very thickly thoughtful, I think. Actually, what really came to my attention is the bifurcation between the so-called intelligentsia, that is very focused on policy ambiguity, credibility of institutions, war, and the impact on the geopolitical framework, on the economy, on the financial markets, on financial stability, and the market participants that honestly are kind of looking through the world and with a risk appetite that is still strong despite all what is happening. So I came back and we've been discussing within the Institute where do we stand on this and the idea is that from the controlled this older narrative that we had in mind at the beginning of this year. It is really not long enough to describe the world we are entering. We are entering something more demanding, more challenging. We would like to call it adapting to raptors. But let me explain what you mean with that. An example, the Middle East, the raptor would be the case for freedom of maritime transportation not to be there anymore. So what you do is to adapt, acknowledging that this might be the case, that in any case you want to be back to normal conditions or the conditions that were there before the war, with, for example, oil prices between 60 and 70, but oil price as well as energy prices. embedding a geopolitical risk, as well as the need to reorganize energy, security, reorganize trading routes, because stability, if you want, is less automatic and less universal.

• Swaha Pattanaik

  I remember the time when the new normal meant something very, very different, didn't it? With very low rates and everything. So let's talk about the new, new normal. What do you think is your central scenario for oil and how is this shaping your central bank expectations which are important for markets going ahead?

• Monica Defend

  So the idea is if we maintain the 2226 window, oil prices want to normalise back to what we thought was the fair value before the war. So between 60 and665 US dollars per barrel. because of this geopolitical premium that we say embedded. And more in general, the idea is that what we are seeing is broader than an energy shock because it is extending to infrastructures that will need to be rebuilt, shipping costs, insurance costs that will be higher, confidence, consumer confidence, investors confidence. confidence that are going to be lower and this will eventually be reflected into projections that will see lower growth on one side and definitely higher inflation. And in general inflation, we think that a world where those tariff monetized access will be there, will structurally print higher inflation. So what are the central bank left with? It's a kind of disciplined optionality, which means on one side they will have to protect their credibility, they will need to keep inflation expectations well anchored and they will need to retain flexibility to react to shocks that might materialize. So what we have done, for example, for this year is to postpone the cut for the ECB and for the Fed to 2026. The only central bank where we retain cut will take place is the Bank of Japan, but today rate level is 0.75. Having in mind that natural rate is in between 1 and 2.5, so still it's a central bank that is in an accommodative stance.

• Swaha Pattanaik

  Thank you, Monica. You're talking about this geopolitical premium. It's almost like a friction premium with a lot of expectations for everything becoming harder in the transit that you were talking about. yet As we were discussing at the beginning, this is not reflected across markets uniformly. What do you think the markets may be underestimating at this point?

• Monica Defend

  Starting from the condition of markets that are risk-on, despite the geopolitical risk, but also despite the stretched valuation that are still characterizing the equity market in particular, We believe that... Probably the first underestimation relates to the way markets are pricing this event, the Middle East tension. They are seeing this as a shock that is episodic, while the real underpriced risk is that this rupture can actually become a new regime. So, probably this is the main factor that is underestimated. The second is that inflation persistence because of security and resilience spending, inflation will persist. So, as I was saying before, probably we will enter an higher inflation regime. Third, the market is broadly bullish on the artificial intelligence trade, so still expecting capital expenditure that may be from hyperscaler could move into a neighbors but in our opinion this should reflect into an higher dispersion across sector performance than this broad market duration part of it is already the price but not as much as we would have expected and then more in the long term and this is one takeaway that I have from the meeting in DC is that the macro consequence of a potential sell-off of US assets is not in the price. It's seen still as a very tail risk, but if a disorderly repricing of US assets might materialise. This will definitely have an impact on financial conditions, on confidence, on growth, having in mind that US assets and notably the Treasury are still a key central in many, if not all, global portfolio allocation.

• Swaha Pattanaik

  So you're talking US assets, bonds, equities, everything? Yes. Okay. Well, I mean, you've brought us to the topic. So let me ask you, what are you expecting on fixed income, starting with perhaps treasuries and US credit?

• Monica Defend

  Well, I think that over the last month, really, the fixed income in particular in the US has been quite interesting. The value, if you want, has been improving, but it is not really a blunt call on duration, where we are reducing the short. on the US front and maintain the long on the U curve while we maintain in place the steepeners in both the US and in the euro area. We see the front end that is highly sensitive to hawkish repricing of the central bank forward guidance if inflation persists while weaker growth is limiting the value. on the long end. So this is why, for example, on the US curve, we prefer the medium term buckets. And again, this kind of balance of risks prevent us from long directional conviction. On credit, and in general, then we will discuss later on risk assets, Cary remain supportive, in particular on the IG, in particular on the EU market, but the balance is less forgiving than a few months ago. And therefore, it is really critical to put emphasis on quality sector and spread discipline.

• Swaha Pattanaik

  Okay. Well, you were mentioning equities. What are your views on, say, the US markets? It's been amazing that they've managed to hit new highs given the backdrop and all the other news flow. It's like they're on reading separate newspapers. What is your view? Well,

• Monica Defend

  first of all, liquidity is still supportive and notwithstanding, we might have downgraded somewhat the base scenario and the case for staying invested in equities remains. Probably the premium on selectivity, diversification has really materially increased. they still stay in Japan and emerging market in particular in LATAM, but we are really selective and positioning more than on beta on sectors such as financials, healthcare and industrial just to take the next leg of the artificial intelligence wave. We are in an interesting time because it's earnings season time and Still, it's kind of wait and see, because CEOs are uncertain on the guidance to provide, and they really want to see the first quarter results before moving forward. So usually, you know, the earnings system is something that sheds some light, but it's just adding on uncertainty.

• Swaha Pattanaik

  It's interesting you talk about the next sort of AI wave. It could be so crucial they won't even release it to us at the moment. So it's quite terrifying how quickly we're moving. You were talking just now about diversification. Can we just quickly touch on the dollar and also on gold? There will be some interesting shifts in both and gold particularly you have been mentioning over a long period of time as a really useful diversification tool. What's going on with gold and related on the dollar, your views?

• Monica Defend

  Well, you know, gold, again, what is happening, it really confirms that it is the most robust diversifier you can have in a portfolio, in particular when you are uncertain about the inflation prints where growth is going to land and the central bank forward guidance amd wait-and-see posture. So all confirmed on the gold side. On the US dollar, in particular, again, back from the IMF, I see more and more investors talking about alternatives to the US dollar that are not there, simply because markets are less deeper, less liquid or too small. Think about the Euro or also the Chinese Yuan. But still, there is this growing concern and erosion of confidence and policy ambiguity out of the US. So there is this need to think. outside the US dollar. So it's more de-centering the US dollar and possibly the US assets, rather than a proper de-dollarization trend that is not there yet.

• Swaha Pattanaik

  Okay. So I'm going to put you on the spot, Monica, on Washington, and just say if all of the things, one takeaway that you sort of had in your mind as you walked away from the spring meetings, what would you leave our listeners with?

• Monica Defend

  It's really think about diversification in the broad sense, because we are really entering a new world with some unknowns, like what if something happened to US assets? That was really something that is keeping me awake at night. Maybe it's just a jet lag. But this is something that definitely within the Institute will deep dive in light of the outlook for the second half of the year that we will be working on in the coming weeks.

• Swaha Pattanaik

  We're really looking forward to hearing more about that, Monica. Thank you very much for joining us and great to talk to you as always.

• Monica Defend

  Thank you.

• Swaha Pattanaik

  And thank you for tuning in to this podcast. Find more of our research on the Research Centre at Amundi. Thank you very much.

• Speaker #0

  This podcast is only for the attention of professional investors as defined in Directive 2014-65-EU dated 15 May 2014 as amended from time to time on markets and financial instruments called MIFID II. Views are those of the author and not necessarily Amundi Asset Management SAS. They are subject to change and should not be relied upon. as investment advice, as a security recommendation, or as an indication of trading for any Amundi products or any other security, fund units, or services. Past performance is not a guarantee or indicative of future results.