Hello there, and thanks for joining this month's webinar update, where I plan to give a bit of a run-through of some of our investment thinking across global macro markets over the next 25 minutes or so. At the end, in doing this, for those who've joined before. Typically leaving, sort of, 5 minutes or so to try and rattle through a few of your questions towards the end of the slot.

But without further ado, let me jump straight in. I guess, looking at US Treasuries and the US economy first, I'd say that in many respects, it's been a fairly quiet period for US rates over the recent past. Effectively 10-year yields have traded in a range between 4% and 425, pretty much back to last September. Albeit we've, more recently, in the last few days, been dropping towards the bottom end of that particular range.

But ostensibly speaking, I'd say that you can kind of look at the economic data, they've been relatively robust in the US. Nothing has really been sort of changing the narrative that markets have had now for some time, that we'll probably see two rate cuts during the course of 2026, with a new Fed Chair with Chair Warsh coming into the seat at the FOMC this May, with a proclivity towards lowering interest rates in line with obviously what Donald Trump has been sort of seeking to push for.

So that thinking hasn't really changed too much I'd say in markets of late, so nothing really, sort of, too untoward there. I think, if anything, the bigger theme that has been sort of preoccupying market participants in recent days has got less to do with what's happened in payrolls or in the inflation print. It has more to do with what's happening around the dynamics within AI and the discussion around that.

And so, from that point of view, I think the way that I would articulate what's happening in terms of the AI rollout at the particular point in time is that I'd highlight that we're currently in what we've been referring to as the infrastructure phase. In this infrastructure phase, in the AI build-out, effectively it's where we're building capacity.

And in this particular period, as we build data centers, as we build power supply, if anything, in the short term, we could actually see how that money being thrown at the economy is effectively a factor that is lifting growth, but also a factor that could create some bottlenecks in terms of supply chains. If anything, it could represent a bit of an upside price risk on things like electricity. All key components, what have you.

But then, concurrently, we're also now starting to move as well as in the infrastructure phase in AI more rapidly towards the adoption phase, which is where things become interesting, as you end up with AI tools being adopted,

And this is potentially something that could have a big impact in terms of driving productivity on a forward-looking view. I think that over the last few weeks, we saw the release of some of the latest Claude Cowork tools, and on the back of that, that's created a lot of angst in terms of the idea that a lot of these tools that are being developed in AI could end up replacing some existing software tools that are being used, which are being sold by other companies. And this has been obviously something that's seen a big correction in the valuation of a lot of software firms, and something that's creating some angst.

Thereafter, there's this thought that not only will AI be replacing, perhaps, other software, it could be coming for other jobs. And actually, as you start to dig into this, and you're looking at some of the academic research, you can take yourself into a slightly dark place where it looks like AI could actually end up rendering a lot of existing employment challenged. Particularly more, sort of, junior, entry-level jobs, could more readily be replaced perhaps within the course of the next,

one to five years. And this could have a profound impact across all of professional services, and by extension those firms that then depend on those clients within the professional services sector.

So, this has seen how some of the AI angst has ended up spreading to areas like insurance, wealth management, you name it, it feels like every other week there's a new AI target at the moment. And it's kind of interesting to contrast in this phase we're moving from a period where in 2025 everything around AI seemed to be growth positive, market positive, into a world where there's clearly sort of more sort of focus on winners and losers.

And so, where we've seen equity markets more or less chopping sideways, a lot of dispersion of returns within those equity indices. All of that said, just on the macro for a moment, in terms of the macro implications for this, I'd say that, if anything, there is actually a risk in our eyes that actually the AI build-out could be the more important driver that could actually create inflation risks more to the upside this year.

Whereas longer term, those risks look more clearly to the downside. But it may be difficult for Chair Warsh to actually deliver the rate cuts that maybe some have been looking for. And certainly, we struggle to see the Fed delivering many more rate cuts than are currently being priced, largely because we think that in this build-out phase, the economy is likely to be in a relatively sort of robust situation in terms of the underlying growth dynamic. With that much money being thrown at the US economy in a way it's almost going to grow, and you put that with tax cuts, you put that with some of the other deregulation that you're seeing as well, and that's something which we think speaks to GDP this year being at an above-trend level.

But as mentioned, sort of longer term, the risks could be in the other direction. But you can see here, from a macro perspective, why you end up with a sort of stasis occurring with markets not wanting to price in more than is currently discounted. So, as said, markets have largely been moving sideways in fixed income, and actually, if anything, we've started to see the yield curve going a bit flatter in the US.

I think curve steepening has been a real consensual position, but in a way, being in a curve steepener costs you carry,

and therefore, in the absence of additional catalysts to continue to drive that steepening, the curve will end up sort of flattening under its own weight, if you like. And we've contended that to see a much bigger steepening of the yield curve, you probably need to see a world where you see more aggressive Fed rate cuts, which isn't something that we can see happening just here and now, which is why that trade, I think, is going against the market consensus to some degree.

Otherwise, if that means that the backdrop for us in treasuries isn't particularly interesting, I think the next thing to cover is US policy, because obviously at the end of last week we saw Trump's IEEPA tariffs voted down. I don't think this came as a big surprise to those of us in markets who've been looking at this quite carefully, and there's a real sense here that there'll be other tariffs to replace this, both sector-based tariffs, like the 232s, where Trump has been talking about a 15% across-the-board tariff.

There's also potential for 122 tariffs, which would be attacking those countries with large current account surpluses vis-a-vis the United States. So, these are the mechanisms that present themselves to the US administration now.

Ultimately, we feel strongly that the whole use of tariffs has become very important in terms of the US budget process. It's actually been a popular form of a tax hike, if you like, and from that point of view, I'm pretty sure that the administration aren't going to want to end up with much lower tariffs leading to a big reduction in revenue, creating problems for the budget once more. They will be doing other things on tariffs to replace any tariffs that get lost. And so, from that point of view, we haven't seen a big reaction in markets on the back of this IEEPA standing.

But I do think that again we're in a bit of a world where you're seeing some policy uncertainty, some uncertainty attached to US policy credibility, which at the margin I think is weighing on stock sentiment, weighing on the dollar to a degree, and also something which arguably is taking markets in a slightly risk-off direction at the margin.

But I don't want to overdo the sense of excitement in terms of US treasuries here, because at the moment tt's a fairly dull market that I still think that's going sideways, and if yields do go materially lower in the short term, if anything, we'd probably be more inclined to go short rates as a next trade, rather than looking to get long here.

What's more interesting in the US, on the back of some of what's happening in AI, has been what's happening in credit. I've spoken on many prior calls around my own concerns and reservations in private markets and private credit.

This is being compounded by what we're seeing in terms of some of the sectoral-based dislocations. We've already got more than 20% of private debt and direct lending funds in PIK format, paying in kind because they can't be current on coupon debt, because they can't meet the funding costs.

Those default rates are ticking up. There's more pain coming. That pain has been hidden in private markets for a long time, but we do believe that it's been stored up. It's starting now to leak out into markets, and it feels like every other week now we see another headline around another private debt manager writing down some of its assets. Last week, it was some of the disposals from Blue Owl that were getting attention. The week before that, I think it was BlackRock, which was in the news, doing something of a similar nature. And if you look at where the BDCs are trading relative to their sort of stated value, you're looking at a discount of around 15-20% in terms of those stated prices where you were to see liquidity.

So, we still see more pain coming through here. Pain in software, because when it comes to software, what's happening around AI, we don't think it's going to kill the big established software firms, which are very embedded in ecosystems within a lot of organizations. It's very difficult to get rid of a Salesforce.com or something of that nature, if you adopted that throughout the language of your organization. Of course, it does potentially mean some threat to the earnings of those sorts of companies. It could mean that, therefore, instead of stocks trading 25 times, they trade 15 times, and you can see why the multiples come down.

But I'd suggest that the issue is a much more profound issue if you're looking at the smaller enterprise software sector. A lot of these smaller firms that sit in private markets, whose business model was actually to grow revenues and then look for an exit through a trade sale to another software platform buyer. Now those platform buyers aren't there. Some of these smaller firms are potentially more exposed.

And of course, when we're talking about small software companies, these are companies that are asset-light. You don't have a lot of assets in these firms. So, if you do end up with things going bad, if AI tools do render many of these smaller software enterprises effectively redundant before they're really off the launch pad, in that case, you could see material losses to creditors in this space.

All of that said, as bearish as I’ll get about private markets and private debt, I'll acknowledge we're not looking at a GFC here. There won't ever be any capitulation selling. These funds are locked up, and so you don't have that mechanism. Furthermore, there isn't the leverage in the system that we saw in terms of the banks. So, not just the market structure, but the lower leverage, the dispersion of risk throughout the financial sector is much more healthy. I just think it means a period of depressed returns for those who have been foolish enough to pile into private markets at the wrong part of the cycle.

And from that point of view, that's going to be something that may be challenging in investors' portfolios for the next several years to come. That said, private markets aren't going away, private markets will come back. I just think that we're going to be in a world eventually where the differential between private markets and public markets is less clear, a much more blurred distinction than it currently has been in more recent times.

But maybe more on that on another call, but if the problem is prevalent in private markets, it's something that is also impacting the bank loan market, where you have 30% exposure in software, in private direct lending funds, it's around 15% in terms of the bank loan market. That's the reason why structurally we're underweight bank loans, we want to be overweight cash, high-yield bonds.

Relatively speaking we like high yield because it's more old economy issuers that don't have so much leverage, that are delivering more profitable growth, and so we think that's a better part of the market to be invested in. Within the high-yielding space, we continue to like banks, we continue like the bank CoCos. The reality here is that banks are less exposed to some of this AI disruption than some other parts of the economy.

Moreover, banks are trading on such low multiples and they're benefiting from steep yield curves. Actually, you see strong bank earnings growth at a time when actually if you're looking at a company that has got sort of a PE of 30, you're trying to predict where earnings are going to be 30 years in the future. If the PE is less than 10, obviously it's a shorter-term time horizon, so you have less uncertainty in terms of that future trajectory and what companies may look like.

So, we continue to like fins, and otherwise in IG the worry is less to do with credit impairment. The worry that we have is all to do with supply. Supply after supply after supply. The latest earnings we saw were suggesting that the deployment of cash from the hyperscalers is being revised up again. We'd already been penciling in IG issuance in the US jumping from a typical 4 to 500 billion of issuance, $600 billion last year. We already had it at trillion dollars. It looks like that number continues to nudge higher, and that is becoming a strong headwind on spreads.

It's why spreads have been moving a bit wider since the middle of January. In mid-Jan, in one of the last calls, we spoke about how we had been reducing our overall credit beta exposure. We have been sort of trading to the long side, but we just feel like we've reached a moment where there's just not a lot to be done here in spreads. And although intrinsically we think that credit does okay against a backdrop that the economy's doing okay and recession is low, we just thought that you're largely investing for carry, and therefore picking your spots where you own the carry, I think will be very important, particularly because some of these big hyperscalers, they'll be issuing debt in the market and they're not particularly price sensitive.

So, they may issue one week, they may come back again in a month or two and may issue more at a wider spread. And so that sort of move is going to end up repricing spreads more generally if we're not careful. So, we want to be a little bit cautious in terms of owning credit on the long side, through those different rationales.

Otherwise now moving quickly to Europe. Not a lot to say. Europe is pretty boring. Has been boring for some time, actually. I think the one topic that we continue to look at is the plans around defense spending and what this means in terms of fiscal deficits. I would say from a macro point of view we're more inclined to think that inflation risks this year are more to the downside in Europe. They're probably to the upside in the US; they're to the downside in Europe.

Ordinarily, that might mean that the ECB might be moving more in the direction of looking at sort of cutting rates maybe in the course of the year ahead, but with fiscal policy being eased as it is, we think the bar to actually delivering a rate cut is relatively steep. So, not a lot to say in Euro fixed income. It feels to us like bunds are going sideways.

The story in the UK is a bit more constructive, we're a bit more bullish. We have been seeing data suggesting that the labour market continues to weaken, and as it weakens unemployment is going up, wages are softening, and that's removing one of the threats that the Bank of England has been concerned about in terms of the threat to CPI.

Within CPI inflation, we see goods prices coming down, service inflation coming off the boil. On the back of this, we're expecting the Bank of England to deliver a rate cut in March, and I think that the Bank of England might cut rates three times in 2026 in totality, taking cash rates down to 3%.

Against that backdrop, we think that gilts have been relatively cheap. Obviously, they have lagged during the course of last year. And also on the back of the fact that as yields come down and inflation comes down, the UK deficit is very sensitive to the level of inflation and yields, partly because of the abundance of supply of inflation-linked bonds.

So, if you are trending lower, it's almost like a positive convexity effect. As yields come down, that actually makes the deficit better. And on the back of that, we could actually see a somewhat better backdrop, and with the UK shortening the duration of its debt quite materially this year, again that creates another fairly constructive technical. So, we find ourselves to be positively inclined towards gilts.

Our one concern of course is the politics. It looks like Starmer is going to be done for at some point this year. The question is when, not if, almost in our eyes. This week, it looks like the Greens are going to win the Gorton by-election. Reform might sneak it, but it looks like the Greens are in the poll position there. That'll play very badly for Labour. The council elections in May will go very badly for Labour. And also you'll have all of the news flow around Mandelson also damaging some of the senior leadership within the Labour Party.

So, eventually, there'll be a point this year where we wouldn't be surprised to see Labour lurching to the left, but the most likely candidate as next PM would suggest would be Angela Rayner, but she's not really quite in a position to mount a leadership run just at the moment, so we still think that this happens a bit later, rather than sooner.

That said, the fact that we've got the presence of political risks means that we think that running a long in UK rates, but hedging by being short the pound to us seems like a quite good sort of trade to put together in terms of the way in which we're thinking about the UK.

Otherwise in Japan, I'd note that we've been more constructive. I covered last time that we'd gone bullish for the first time in JGBs for more than 20 years, on the back of the fact that we thought yields had gone too high on some of the exaggerated fears around Japan's fiscal position. The reality is that Takaichi is going to deliver fiscal easing, but the deficit last year in Japan was 2.4. We still see the deficit staying below 3.5% of GDP, which is much lower than it is in most other markets that we'd actually look at.

Moreover, in Japan, it's got a high level of debt to GDP, but because you've got positive nominal GDP growth, that debt-to-GDP is on a declining trajectory.

Also, I'd point to the fact that if you look at Japan, it has a lot of debt but has a lot of savings. Net debt levels are relatively modest compared to some other countries, and furthermore a lot of that debt is in the hands of the Bank of Japan. You don't have a seller like the LDI industry in the UK who is suddenly going to capitulate, so some of these fears around a debt sustainability crisis in Japan, I think, have been misstated, misrepresented. The weakness at the long end of the bond market is all about a mismatch of supply and demand. I'm confident that that will be addressed. Moreover, I do think in the coming fiscal year, you're going to see more Japanese investors buying more domestic assets.

So, we like being overweight in Japan still from a duration perspective. We also see value in those very long-dated bonds, and we think that eventually that 10s30s curve is going to be flattening.

Turning to FX. In terms of looking at things from a growth point of view, obviously we're still in a world where we're seeing US growth exceptionalism, and that ordinarily would be a factor that would be benefiting the US, as would its leadership in everything to do with AI.

But set against that, you've got capital flows going in the other direction. You've got these ongoing question marks around US policy credibility, and if anything, that's pushing money away from the dollar. So, these two forces are counteracting, but generally speaking, our investment conclusion here is although we're not prepared to really sort of put our weight behind a really bearish dollar view, it strikes us that a strong dollar seems to be quite unlikely at the moment, based on what we're hearing.

And if that means that the dollar is kind of going sideways at best, or a bit weaker at worst, that pushes you towards wanting to own higher-yielding currencies, particularly those currencies in emerging markets. In particular, we've loved a lot of the frontier currencies, whether it is the Turkish lira, the Kazakh tenge, the Egyptian pound, the Nigerian naira, the Brazilian real. All of these are stories that are offering very attractive yields and generally speaking we see a lot of yield attraction in terms of real rates in EM at the moment.

And at a time when there's not a lot of assets in other parts of the market that offer a real value opportunity, we do think that EM in a local context is looking interesting. We continue to light some of the more distressed plays in EM sovereign credit. So, for us EM is an area where we're happier to take a bit more risk at the moment, even where we're a bit more on the cautious side when it comes to corporate credit risk. So, this kind of embeds how we're sort of structurally thinking and how we're set up at the current point in time.

Just lastly, to finish on geopolitics, on Russia-Ukraine, still seems like negotiations are going nowhere. Speaking to Ukrainians last week, it looks like a sad reflection that they may need to have a contingency to prepare for another three years of war at this point, which is very depressing, but that feels like it's very much a conflict going nowhere.

Then we've got the Middle East, US and Iran. It's a big build-up of troops that the US is amassing in the Gulf, obviously putting pressure on Iran, and that's been pushing up oil prices, as investors are concerned that a spillover there could actually end up with counterattacks on oil infrastructure that could actually create sort of oil shortages.

Oddly, this sort of narrative of a higher oil price is exactly what the US administration does not want. It wants lower oil prices, so I think that Trump won't want to see oil elevated for too long. And I think, if anything, if there is a strike against Iran, we're more inclined to think it's going to be a limited attack. I don't think the US is in the position to push for regime change. Certainly, it doesn't want to end up with boots on the ground. That's what US voters would like to avoid.

And Donald Trump's approval rating has been sliding. It's down at 40, it's down at the lows that we've seen now. If you look at the average approval rating he's had in this term of presidency, it's averaged around 45. That compares to 42, I think, in the first term he was in office and a number of 41 that we saw on average over the tenure of Joe Biden. So, you can see those approval ratings are moving lower.

And certainly, I don't think getting embroiled in international conflict ending up with higher oil prices, ending up with a mess on tariffs, all of these things could actually end up taking away further from that approval rating, which is going to be significant as we move towards the midterms obviously in November this year.

With that I've tried to go as quickly as I can, around the world. How am I doing for time? I'm 26 minutes past. My word, I've only got a few minutes left for questions, but jumping quickly onto my phone.

So I've got a question saying, “If the dollar weakens over the medium term, does that create asymmetric upside for gold prices?” Well, I'd say that if you end up with a weaker dollar, you're likely to see a stronger gold price. In a way, gold almost operates in the context of being like a currency, like an FX.

The other thing that we've also seen really is a big driver for gold is ongoing reserve buying of gold by central banks, who tend to be not price sensitive. They continue to build those reserves, that's a trend that is still intact, and that's creating demand for gold.

I'd also say that there are other structural drivers for the gold price, such as when Asian consumers are becoming more wealthy. In Asia there tends to be a greater desire to actually hold gold as a financial asset, as a store of wealth is more embedded from a more cultural point of view. So, the outlook for gold structurally seems to be quite robust. It's just, in the short term you'll have bouts of speculation, as we have seen particularly with the silver price as well. And when things get overbought, they'll obviously go the other way.

But certainly gold seems to be in fashion at the moment, which is the opposite of crypto, which is badly out of fashion, and I think part of the story in crypto has been around the idea that when quantum computing gets its act together, effectively you could end up annihilating all of those tokens to near next to nothing. But again, that's another emergent story.

“Low vol in treasuries, are we undergoing, are we underpricing macro risk?” Well, we might be underpricing macro risk, but again, you have to look at things from the lens of what it means in terms of interest rates. And as I said today, there's nothing that's really happening that's actually changing the backdrop for the trajectory in interest rates at the moment.

So, in a way, you can kind of see that you're going sideways. Yes, you may have some fat tails. But in some respects, I think if you're asking for areas where there's complacency, it could actually be in credit spreads, it could be in equity valuations. I don't really look at treasuries and say they're ridiculously cheap or ridiculously expensive. They look to be somewhere not too far from fairly valued.

“How would you comment, the recently published US productivity for 2025, which nearly doubled from 1.4 to 2.7?” So here, productivity, so you understand it's a residual in the GDP equations. And in the GDP data last year, there were a lot of distortions, a lot of things messed up. In particular, in Q4, the shutdown ended up making growth weaker, for example. So, in a way, I think it can be difficult looking at short-term productivity stats. I don't think anyone is saying there's been a big surge in productivity growth already. Certainly in 2025, I don't think there was an abundance of AI adoption at that particular moment. It may come, but it wasn't there yet.

I think that when I look at productivity, I'd be inclined to say at this point in time that on a forward-looking view, it looks like you could end up adding somewhere between half and 1% onto US GDP from a productivity point of view.

At the same time, clamping down on immigration has actually taken off about half to 1% of potential GDP, so in a sense, I'd still have potential GDP in the US around about 2.5, but yes, productivity is an interesting story, but obviously a difficult thing to capture and measure on a forward-looking basis.

It’s half past, I'm going to do one more question. “Do you believe in 5 years, it'll be difficult in private markets, but what are the asset classes will suffer the most? And what do I see as most resilient?” So, I think that where there's a real tough time at the moment is in private equity. It's almost like a desert for deal-making. It's like 2008 in PE. Anyone who I know who works in that space is feeling the pinch.

I also think that in private markets, direct lending a lot of the traditional funds there, that's where you're going to be exposed, particularly if there are big losses on software, because you've got 30% exposure.

If you're in private markets, if you've got illiquidity that you can take, do it in distressed debt. Do it in something like illiquid emerging markets, where there isn't the leverage, there isn't the sectoral issues. These would be ideas that I'd be pushing towards investors.

With that, I'm going to leave my comments. Thank you for joining today. Sorry if I've been speaking too fast, too much ground to cover as always. But thanks very much for your participation and dialing in. Let us know what you think. If you've got any comments, please do share back with your BlueBay representatives. But for now, thanks very much. Bye.