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Royal London's Xu Gives Her Outlook for 2025

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Moomoo News Jan 3 12:38 · 6619 Views

Royal London Asset Management Global Equity Manager Bixuan Xu gives her outlook for 2025. She discusses the potential impact of the Fed rates and Trump Presidency in an interview with Anna Edwards and Guy Johnson on "The Opening Trade."

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Transcript

  • 00:00 When we talk to guests, a lot of people say, well, look, we know the broad strokes of Trump policy, that's the big
  • 00:05 unknown hanging over markets.
  • 00:06 But we've got a sense of where the broad strikes go.
  • 00:09 But we but beneath that there is quite a lot of uncertainty in the
  • 00:13 potential for policy to diverge quite a lot from expectations.
  • 00:16 So how are you approaching 2025?
  • 00:19 So
  • 00:20 we think that
  • 00:21 like there are a huge macro
  • 00:23 swirlwind as you mentioned that driving global equities in 2025 and
  • 00:28 that's going to drive wider range of outcome for performance.
  • 00:33 We
  • 00:34 like I said, so they're like certain uncertainties.
  • 00:37 We know what those forces are, but we don't know exactly what outcomes are.
  • 00:41 So those I think the most important one is still the Fed rate
  • 00:46 that's going to drive the performance and and the rotation not only in US but also global market
  • 00:51 and the other forces are the Trump presidency.
  • 00:54 That's also means wider range of outcome what
  • 00:57 it's not not much as priced in for tariff in the US and other regions.
  • 01:02 And what does it mean for the Treasury U.S.
  • 01:04 Treasury.
  • 01:05 We had a really interesting conversation about geopolitics earlier on and guy put this question to our guest about tariffs and about how they'll be implemented.
  • 01:12 And he reminded
  • 01:14 us of of the of the purpose of tariffs in Trump's view, which is to
  • 01:18 try and get other participants to change course and to do things that he wants them to do, which means that the threat of tariff might come pretty soon.
  • 01:25 But actually the actioning of a tariff might take quite a long time.
  • 01:28 I mean, is that something that the market is thinking about?
  • 01:30 Is that why we don't see more pricing in of that tariff threat?
  • 01:35 I think the market assumes that Trump just uses as a negotiation tactics.
  • 01:40 But as we saw in the First Presidency, some of the tariffs did come through in the
  • 01:45 for China and and that's just never got removed.
  • 01:47 So there is some
  • 01:48 degree of complacency there.
  • 01:50 And you, you see none of that is priced in for for Europe and and none of that is
  • 01:55 pricing for the US.
  • 01:57 If that's going through that might have a negative impact for the small and medium business in the US as well.
  • 02:03 Good morning.
  • 02:05 You talked about a wider range of outcomes.
  • 02:07 If I'm seeing a wider range of outcomes, do I take less risk?
  • 02:10 No, I think the answer is always diversification.
  • 02:13 I think in the global market practice, diversification is still undervalued practice.
  • 02:19 And at Royal London we really
  • 02:22 not only focus on pick really highly this in credit stocks, but the way how we put into the portfolio,
  • 02:28 not only diversify between the cyclic and defensive, but also across the corporate life cycle.
  • 02:33 And with that, you minimise the impact of macroeconomic volatility in your portfolio.
  • 02:39 So I think that diversification is the answer.
  • 02:41 It's not, it's not risk off, it's risk on, but diversify.
  • 02:45 The, the problem with diversification is that you've underperformed
  • 02:48 is because the, the, the cost of that is that I'm that I'm not in the concentrated areas of the market which have been outperforming tech stocks, etcetera, in the United States.
  • 02:57 Do you do
  • 02:59 do those areas those that, that narrowness that we see in the markets that concentration into tech, does that continue?
  • 03:05 Because if it does,
  • 03:06 then that undermines my arguments around diversification.
  • 03:09 Diversification is a nice insurance policy to to have because it allows me to deal with the with the
  • 03:14 sort of geopolitical risk.
  • 03:15 But if, if the concentration risk remains,
  • 03:18 then I'm underperforming.
  • 03:19 Yeah.
  • 03:20 So what we mean with diversification is not taking smaller weights.
  • 03:24 What we mean is
  • 03:27 you, you try to eliminate
  • 03:30 the, the systematic risk, the beta in your portfolio and let the stock picking
  • 03:35 to do the heavy, heavy work.
  • 03:37 And and that has worked in in the past like years since the global equity was established at Royal London.
  • 03:42 It's when, when you have varying environment, you have stocks in
  • 03:47 accelerating turn around and compound part of the life cycle.
  • 03:51 And, and they will, they will, they will,
  • 03:54 the, the idiosyncratic stock picking will come through and and carry the performance forward.
  • 03:59 Is that going to be more important this year
  • 04:01 than it has been over the last couple of years?
  • 04:03 I think this is always important.
  • 04:05 But because there we had 10 / 10 years QE and the valuation simply goes up.
  • 04:10 So that gets deemphasized in the market.
  • 04:13 I think this year
  • 04:14 is going to be very important
  • 04:16 and that strategy then beat around relies less on the Fed continuing to deliver rate cuts than than than you might expect, I suppose.
  • 04:23 Exactly.
  • 04:24 So that's what we try to achieve.
  • 04:26 So whether the interest rates are going up or going down, you have the stocks in every copper of life cycle and they're
  • 04:33 highly idiosyncratic.
  • 04:34 So you don't you don't worry so much about interest rate.
  • 04:37 We really try to minimise the interest rate
  • 04:40 impact in our portfolio and deliver the performance in a very balanced way.
  • 04:44 What is your expectation then of this year and interest rates because it does seem that conversation is really in flux.
  • 04:49 We looked at the the the claims data yesterday.
  • 04:51 I mean, it's just one piece of data, but we looked at that yesterday and some in the market were saying, well, this could be another reason why the Fed doesn't deliver on the rate cuts that the market.
  • 05:00 Is assuming, but there do seems to be quite a range of expectations as to how many cuts we get.
  • 05:04 Yeah, so, so we we we try not to predict the macro.
  • 05:08 So last year when we started, I think the market looked for five times cut and
  • 05:12 actually 2 times happened.
  • 05:13 So just
  • 05:15 just just tells us how
  • 05:17 unreliable prediction is.
  • 05:18 So what we try to do is, is really to to have enough stocks that would benefit from the high rate environment.
  • 05:25 Yeah, yeah, Have enough stock that would benefit from this is this is nice guy.
  • 05:29 This is a world where we don't need to predict the macro.
  • 05:30 And if a macro seems very unpredictable,
  • 05:33 perfect.
  • 05:33 Well,
  • 05:33 I live in this world.
  • 05:35 Yeah.
  • 05:35 That it, it
  • 05:36 the,
  • 05:36 the that that's in theory what should happen.
  • 05:38 Yeah.
  • 05:39 Correlations are important though.
  • 05:40 So how correlated do you think assets are going to be
  • 05:44 in the kind of scenario that we're talking about?
  • 05:46 Because in theory, if one side, if the boat tilt what tilts one way, you can compensate it with the other side and and kind of vice versa.
  • 05:53 Therefore you end up on an even keel that that's the basic idea.
  • 05:56 But what we've learned in past incidences where we've seen turbulence is that correlations are actually surprisingly high between asset classes.
  • 06:02 Do you think that will be the case again?
  • 06:05 So that that really depends on the inflation.
  • 06:07 So where the inflation will settle and how strong the US economy is.
  • 06:11 So if, if you, I think the, the, the downside risk that investor is acute aware is if the
  • 06:17 inflation is sticky for 2025 and
  • 06:20 and fast hand is, is time to cut forward.
  • 06:23 And then that's surely going to be negative for, for both equity and and bond market.
  • 06:29 If if US equities sell off hard, say there was a downdraft in US equities, would European equities sell off more or less
  • 06:36 than European equities in that scenario?
  • 06:38 I'm just kind of wondering how
  • 06:40 does the rest of the world acts as a diversifier against the US or actually would you see an almost greater amplitude the the US catches a cold,
  • 06:47 the US needs as the rest of the world catches a cold.
  • 06:50 So we think,
  • 06:51 we think in a very long run, the US has much more attractive fundamentals like attributes for shareholder wealth creation.
  • 06:59 But in the short run, there is a,
  • 07:01 there is a low bar to clear for European equities.
  • 07:04 So, so the valuation is is very low.
  • 07:07 That valuation divergent is very high and you have some
  • 07:10 white Swans, right?
  • 07:12 So
  • 07:13 the, the, the end of
  • 07:15 Ukraine war could mean the energy
  • 07:17 prices finally stabilized.
  • 07:19 And that's hugely important for Germany and for the sentiment of Germany.
  • 07:23 And the election might finally bring the policy and the reforms that Germany needs to boost the productivity.
  • 07:29 So it's a low bar to clear for Europe.
  • 07:31 But we think long term this divergent
  • 07:33 between European equity and U.S.
  • 07:35 equity will persist.
  • 07:36 But for this year,
  • 07:38 given where we are with the valuation
  • 07:40 divergent, given where we are with the
  • 07:43 the sentiment and external environment, we think European equity could definitely be
  • 07:48 be the place for positive surprise.