Good afternoon, and welcome to this month's podcast. Great for you to be able to join and participate. As I have done in prior calls, I'll be speaking for about 25 minutes, and then leaving five minutes at the end for some Q and A.

Okay, so looking at markets, I mean, over the course of the past week, we've obviously seen quite a bit of volatility, in equity markets around the AI theme. And that's obviously been sort of a focus of interest and investor questions, and maybe I'll come back to that in a moment, but I'd say that in fixed income markets, things have been relatively quiet.

Treasuries have been largely range-bound, partly because we've had, sort of, absence of economic data, but look our contention is still that the US economy continues to perform relatively well. And looking into 2026, as we move ahead, we think that tax cuts, rate cuts, and deregulation are all factors that will end up sort of sustaining growth into the course of the year ahead.

And also, with AI spend accelerating from $75 billion in 2025 towards $300 billion in 2026, this is just a heck of a lot of money to be throwing at the economy, and on the back of this, we actually think that the economy could well be speeding up next year, not slowing down, as some have been projecting over recent months. And you could well see a growth outcome, we think, the year ahead of as rapid as 3.5%.

So, from that point of view with the US outpacing other major economies some of the talk that we've had in the past may be about, sort of, the end of US growth exceptionalism coming to an end, that doesn't seem to be the case at the moment. And that's a factor that is helping support the outlook for the dollar for the time being.

But otherwise in terms of Treasury yields, our contention is that you may end up with one more rate cut from the Federal Reserve in December, but if Powell does cut rates in December, we think that that will sort of herald a point at which monetary policy is likely to go on hold.

In fact over the first sort of nine months or so of 2026, I doubt that we'll see any rate cuts whatsoever. So, actually that's discounting less than the market expects. Partly because we're also looking for inflation to be a bit higher as we go through the course of next year.

Certainly in the first six months of 2026, partly on the back of inflationary pass-through from the tariffs, which still hasn't been, sort of, fully felt to this particular point. Partly with things like electricity prices going up in the wake of the AI boom, some of these data centres come online, but the power plants aren't yet completed.

And so, from that perspective, we could be looking at 3.5% real GDP, 3.5% on inflation. So 7% sort of nominal sort of growth in the US economy. And against that backdrop, I contend the, the US economy doesn't need, doesn't want, lower rates.

And from that point of view, some people will turn to me and say, well, but hang on a minute, Donald Trump's gonna announce a new Fed chair next year, he'll find a guy who's going to be delivering what he wants to see in his agenda, and he wants to see lower interest rates. But whether it is Kevin Walsh, Kevin Hassett, Chris Waller or Scott Bessent, who I continue to think is the most likely candidate of all, I'd say each of these gentlemen, they're individuals who know their own mind. I don't think they'll be too easily pushed around and swayed by Trump, particularly noting that if you take the job of Fed Chair, you've got that job for seven years.

If you've got that job for seven years, Trump's only going to be around for two of those years, so the last thing you're gonna really want to do is blow up your mandate just to release the commander-in-Chief, just in the very short term.

Moreover, when I was last year in Washington D.C, around a month ago, one of the things that was really sort of impressed upon me is, of course the president, of course Donald Trump wants lower interest rates, he's a real estate guy. What real estate guy doesn't want lower interest rates? It’s kind of almost in his DNA.

But then the gubernatorial elections that took place a few weeks ago, we saw widespread gains for the Democrats. Again, were a very stark reminder that the number one issue in the US politically right now is for affordability. And this really was coming through loud and clear in the same way that it did at the last presidential election.

And so those around Trump are certainly saying, look, you might want to have lower interest rates, but the thing that you cannot risk is even higher inflation, because voters are going to be blaming us for this come the midterm elections next year. So, it's from that point of view, I'd sort of push back on the idea of rate cuts in terms of the period ahead of us beyond the end of the year.

And from that perspective, I think that sort of, Treasury yields where they are at the moment, frankly just above 4% on the 10-year, this probably makes sense. You're probably not a long way away from fair value, so I struggle to get too excited in terms of the directionality of the US yield curve.

This being true, without sort of the impetus of a lot of rate cuts, you probably aren't going to see much of a dramatic yield curve steepening from here. Earlier in the year we may have hoped to see a bigger steepening, because we thought that there could be a path into which more rate cuts would actually happen.

Furthermore, there were these concerns around the US fiscal deficit. But I think that the sort of fiscal deficit is a much bigger concern if you ended up with slow growth and slow inflation, with the deficit materially higher than nominal GDP growth.

But now, if we had nominal GDP at seven, we've actually got a budget deficit next year, which is likely to go below six. $400 billion of tariffs represents 1.3 on GDP. And on the back of that revenue, we actually see, sort of, the fiscal deficit going from a smidge above 7% to a little bit below 6% in the course of the year ahead.

And even if they vote down the IEEPA tariffs at the Supreme Court, we're pretty confident that Trump will replace these with other sectoral tariffs and a universal tariff notwithstanding in order to ensure that the revenue that's being collected in terms of these taxes continues to be un-impinged by anything that might actually happen in the courts there.

And so, from that point of view I'd actually say the US economy right now is the one economy where, yes, the deficit is still way too high, but at least it's one economy where the deficit is actually now on a downward trajectory, it's moving the right way for the first time in a long time. So that maybe takes away some of the impetus for the long end of the curve to sell off.

And so, from that point of view, I think the outlook for the US yield curve is probably likely to be more stable. And from that point of view over the course of the past month, we have been taking back our positions on a US yield curve steepening trade that we'd implemented earlier in the year, booking some profits on the back of that.

Otherwise, I'd say that this landscape for growth in the US, it continues to be relatively constructive for credit. If you end up with a relatively robust economy, credit should outperform. Credit does badly if recession risk is high or rising, but at the moment, I see recession risk as relatively low. So, credit to us looks okay, though with spreads already very tight.

I largely think that we are now in the territory where as credit investors as much as anything you're investing for carry. On the margin, we see more value in euro credit than we see in dollar credit. We still like European banks, they still look cheap. We might look at other areas in multi-asset portfolios, like AAA CLO assets that look a bit cheap compared to other parts of the market, because that's an area where, if you're getting paid cash plus 130 for AAA assets, we think that that can represent safe carry.

But otherwise, this idea of investing for carry is one that means that we can see credit outperforming government bonds. But obviously, it's not an environment where you really want to be taking too much risk unless a market correction offers a more attractive entry opportunity.

At the same time, the one area that we've been highlighting for some time, where we've been expressing more concern and risk in terms of credit more thematically has been around private markets. And we're starting to see, sort of, more of the stories come to the fore here.

I'd be pushing back against the narrative that Jamie Dimon used around cockroaches at the credit market as a harbinger of upcoming, sort of, credit market disaster. Some of what we've seen have actually been more examples of corporate fraud that have reminders to me of what we were seeing in 2003 with Enron, WorldCom, or Parmalat rather than what I was seeing at the end of 2007 as the credit cycle started to roll over.

At the moment, consumer balance sheets, corporate balance sheets, are in relatively healthy shape. You don't have the same build-up of leverage that you had at the end of a credit cycle.

But then again, this metaphor around cockroaches, I do think, could be something that we're applying maybe a bit more in terms of some of the stretches of the private credit markets. Here, I am quite concerned that for a long time you've ended up with leveraged entities, effectively sort of paying a lot in terms of borrowing costs, more than they were in the last decade. And against that a lot of these companies don't deliver a lot of profitability because their free cash flow is being eaten up in debt servicing cost.

Consequently, there's no IPO exit for a lot of these private assets. And with those private markets getting stuck in that way, when it comes to the credit side, you don't need too much go wrong in terms of a credit impairment when you're running a lot of leverage on your balance sheet.

So, we've started to see a bit of negative news flow in private credit. I think there's going to be more ahead of us. I think there's potentially more pain here, because the other thing that you see in this world is obviously assets are not marked to market, they're marked at the discretion of the fund managers. And oftentimes, you'll see prices of underlying assets trading at par, and then you come in one day, you're down at nothing. It's almost a bimodal sort of price distribution, and from that point of view, I think we've seen some pain building in private markets for some time. It's only now really starting to come to the surface, so this is the one part of the credit market we would continue to flag a bit more caution.

I continue to see more value in public market credit than private market credit. In private market credit, I don't think you're paid enough liquidity premium. If you are going to have illiquid credit, you want to be in niches that are more interesting, like what we're doing in, in emerging market illiquid credit, or what we're doing in terms of European stressed and distressed special situations. These are areas where you're actually paid, you should be able to deliver material double-digit returns. But plain vanilla sort of private debt, for me I think is something that doesn't look particularly appealing at this particular juncture.

Anyway, I'll stop ranting about that, return to the global macro. Perhaps I should move next to Europe. I'd say in Europe there's not so much going on relatively speaking. It's been a quieter period. On the one hand, I think that, sort of, visits with policymakers has given us a sense that there's quite a depressed malaise in Europe. I think the tone of meetings is pretty downbeat.

Yes, we have this sort of planned fiscal spending in Germany likely to lift growth in the course of the year ahead. It hasn't really benefited growth in 2025, but more of that spending should come to it in the course of the next year.

That's all well and good, but away from that sort of fiscal story, European businesses are depressed. Europe can't compete with elevated energy costs where we're paying 3 or 4 times the amount for our energy than trading competitors. It means there's an existential threat to entire sectors which are energy intensive, like chemicals. Meanwhile, we have German autos, a big, important industry, also facing a very severe, sort of loss of market share and competition coming from Chinese EVs.

So, I think the whole mood across the continent seems to be quite depressed. Against that backdrop. Consumers don't want to spend, businesses don't want to invest. You have a bit of a malaise. You half talk about Europe turning itself into a museum. That is, somewhere that's nice to look at, nice to visit, perhaps, but a place where nothing's really going on, of any use or interest. And so that's, that's quite a concerning narrative.

And you might argue, therefore, that more policy easing is required, but when it comes to the ECB, I think they'll be quite wary about the idea of delivering further rate cuts in the year ahead, at the same time as you're actually seeing fiscal policy being eased more.

So, from that point of view, I think that the front end of the curve kind of stays where it is in the context of the eurozone. As for the backend, I think this probably struggles to rally, partly because we're seeing structurally less demand for duration. This is being compounded by some of the changes in Europe, for example, around Dutch pension funds. But this sort of declining demand for duration means that there is need for more of a term premium to actually encourage investors to venture further out the curve, and from that point of view, I think the backend probably stays where it is as well.

So, from that perspective you could argue that both the core European market, as well as Treasuries, we're not too excited about in terms of looking at particular opportunities. But turning to a couple of markets where I do think there are some more interesting things going on.

Firstly, I'd move to the UK. We've got a budget this week on Thursday. Good luck to Rachel Reeves on that. I think that everything we've been hearing thus far, it certainly isn't inspiring too much confidence.

Look, as bond investors, we'd contend that the real issue in the UK is welfare spending. You're on an unsustainable trajectory, and one of the reasons why a lot of risk premium is being built into gilts is largely the fact that we're concerned that there's an inability for the government, for society, to get itself away from this culture of benefit dependency that really seems to be building and building in the UK society. Consequently, the fact that welfare keeps on increasing, it keeps on putting pressure on government finances, this is being addressed by further and further tax increases.

But as we saw last year, you can end up hiking taxes, but if you end up hiking taxes, that can end up, A, generating more inflation, as we saw in terms of the hikes to national insurance that got passed back into consumer prices. Also, it's something that ends up impacting growth, and if it impacts growth, it weakens revenues, and you end up with a fiscal position that is no better than the one that you're actually starting with.

In a way, this is almost the reverse of the Laffer Curve economics that you actually see deployed in the US. In the US, they'll talk about cutting tax rates, but additional growth, meaning those tax cuts are self-funding. In the UK, we're almost doing the reverse of this. We keep on sticking taxes up, but to no benefit in terms of the government’s net financial position.

So, from that point of view, I think there is this scepticism in the UK market. I would say that when it comes to gilts, it's a complicated trade, because yes, more tax hikes could mean weaker growth, that could mean scope for rate cuts, that could bring yields down, and that could benefit certainly shorter-dated yields, but it may benefit longer-dated yields as well.

However, if this narrative of tax hikes is hurting the economy, is damaging growth, this could be weakening the credibility of Rachel Reeves and Keir Starmer. If we see political change, then I think that any sort of deviation is likely to send Labour in a more left-leaning direction, even more spending, even more tax hikes, and markets won't like that one little bit.

So, there is this sort of concern around the political risk premium, almost the policy credibility premium when it comes to long-dated guilts, which means that the directionality there is much more open to question.

What we do think is more obvious, however, is the pound. I'd say that it's very difficult to imagine Rachel Reeves doing anything this week which is actually going to be good for the UK economy, which is going to benefit growth, and so it's hard to really build a very positive sterling narrative on the back of this. However, if we do end up with an outcome

which is either A, sort of growth negative, leads to rate cuts, this is likely to push the pound weaker. And B, if something is delivered which shows a lack of credibility or leads to political change, again, this will also be sterling negative.

So, we think that the risks are very much skewed towards a weaker pound, both against the euro and the dollar at this particular moment in time. And so that would probably be the one area that we're probably expressing the most conviction from an FX perspective at this particular moment in time.

Otherwise, further overseas, the other market that's got our interest very much is in Japan. In Japan, we had the election of Sanae Takaichi, and she's following a reflationist agenda, modeling what we saw under Prime Minister Abe.

However, the difference to when Prime Minister Abe took office was he delivered easy fiscal policy, easy monetary policy, but he was dealing with a situation at the time where inflation was too low, and he wanted to see inflation moving higher. But in Japan today, the economy's been doing fine, and actually inflation has averaged 3% for the last 3 years.

So, if you deliver an inflationary agenda with this inflation starting point, what are you doing? Are you driving inflation up towards 5%? This looks like a policy mistake, I think, in the eyes of us, in terms of the eyes of many market participants.

Also, there's this idea, this plan, that you'd like to see nominal growth outrun bond yields, which is a nice objective if it happens and that brings down debt-to-GDP ratios. However, I'd say that if this is being made an overt policy objective, it will lead bond market participants like myself to fear that here's a government whose plan is to actually inflate away the value of the Japanese government debt, and bond investors won't like that one little bit.

So, from that perspective over the course of the past month, where Takaichi took office, we actually moved to an outright short position on JGBs, looking for yields to rise. We're targeting, as the first target on the 10-year yield, a move to 2%. We're currently sitting at 185 today. Yields are pushing higher, we believe on the back of her policies.

We also have moved to a weak yen position. Look, the yen is really cheap. I was just there last week and shopping in Tokyo, eating in Tokyo, very cheap. This is a fundamentally undervalued currency. However, if we're in a situation where the Prime Minister is effectively pushing against the Bank of Japan, undermining their ability to raise rates, and meaning that you have this persistence of a rate differential relative to the US and elsewhere, this is not going to be an environment where the yen can actually recapture its performance.

And actually, it's a narrative and a backdrop against which carry trades can end up being added to. Lots of talk of in the last week for example, about Japanese retail wanting to buy products denominated in Turkish lira, there’s the vivid expression of that carry trade. So, when you see that, that's perhaps a bit of a concern.

Otherwise, just closing some comments back on AI. All of this talk of bubbles has certainly got me thinking back to 1999. I remember at the time, in the dot-com boom, you'd see companies come to market and change their name from, like, being a pet store to Pets.com, and that would, cause their stock price to jump. and you'd say, look this is entirely irrational. How can this be sensible investment markets?

You want to be intrinsically shorting the NASDAQ here, but then again you learn that when you're in a bubble moment between the start of 99 and the peak of the market in early 2000, we saw a further rally of 130%. Anyone who went short early was destroyed. They were wiped out, and many lost their jobs. And it kind of tells you that if you're in a bubble, it's hard to take risk on the long side. It's hard to risk, take risk on the short side as well. It argues for actually having risk budgets moreclose to home, and actually sort of hunkering down to a degree, and waiting for a clearer opportunity.

I think the one other thing that I'd also voice here is around, sort of, timing the end of any bubble. Of course, we don't know if there is a bubble when one comes to an end, but I would offer the observation to you that in the past, when I've looked at bubbles and bubbles bursts, it often comes with an accumulation of leverage, and we haven't seen an accumulation of leverage in this cycle.

The second thing that often accompanies an end of a bubble is a capitulation on the part of the bears. But for the time being, active managers continue to underperform the benchmark. That tends to suggest to me that a lot of active managers who are looking at things like valuation metrics that retail investors just don't look at.

These sorts of institutional investors have been sceptical in the rally. Maybe they have yet to capitulate. So, I wouldn't be surprised myself if we don't see the current move in AI stocks as more of a correction in what is still a bull market, and this could run further before ultimately having a much bigger correction further down the line, because there will be a moment where this pace of investment spend will have to slow.

You can't sustain this rapid growth rate that we're seeing, and when you end up with the second differential starting to roll over, again, this could be a point where that loss of momentum, that turn of momentum, could actually be the thing that actually is a catalyst for things to turn and roll over.

Then again, who really knows? This is a bit of a guessing game, and obviously we don't get paid to try and guess outcomes. We're being paid to make more informed decisions around alpha sources that we can really get a clearer insight and an edge in our understanding. And so, from that point of view, as mentioned, running strategies fairly low risk for now, I think is a place where it makes sense to be.

With that, I have spoken for 25 minutes, bang on. I'm going to pick up my phone now and turn to any questions, if there are any questions.

And we have one coming through on, thoughts on, Trump's escalating pressure on Maduro's government in Venezuela. So, this is interesting. So, the first thing I'd say here that we'd pick up is, effectively speaking to the US administration, they regard South America as their backyard. The way that the US administration is really thinking is, we want to own the Western Hemisphere. And this is kind of an interesting sort of mindset, and it speaks to the idea that long term, we're sort of dividing into a Chinese bloc and a US bloc.

But there is very much this US intent. And you saw this ever so clearly, I think, in terms of the recent assistance the US administration offered to the Milei government in Argentina. There is a sense that in the same way in Europe, the EU will help out countries in Central and Eastern Europe. That is their backyard. Southern Latin America now is the backyard of the United States.

And you've got a number of countries, either with more right-wing-leaning populist governments, or countries who are likely to have elections that go more towards Trump-friendly, right-leaning sort of governments going forward.

From that point of view, going back to Venezuela, I think there is a real desire in the US administration to see change in Venny, and so pressure is certainly on the Maduro government. And it's kind of been interesting actually seeing Venezuelan assets actually rallying in prices. This is an area that we think is kind of quite interesting as a longer-term restructuring play in some of our EM strategies, for example. So, something to watch, but something that I think is geopolitically interesting.

With that, in fact that was the last question, so I'm going to say thank you very much. Oh, actually, there's another one come through. I'll give it one more. Any level that we think on, dollar yen, where it becomes attractive to be long of the yen.

Look, good question, but the problem here is it's hard to get too bullish of the yen if there's a policy mistake. It's hard to get bullish of the yen and ignore the trajectory of policy just purely investing on valuation.

I think that when it comes to things like interest rates or credit, I'll often think about these are asset classes that have got a valuation anchor. There's only so far you can diverge from a valuation anchor, but in FX, you can diverge from what is fair long-term value in purchasing power parity for long periods of time. And you can have massive overshoots. And so, from that point of view, 160 on USDJPY, 170 on USDJPY, who knows? At some point, this is, this seems too extreme. But in the same token all the while, you're effectively being paid to short the yen because you've got negative carry.

I think the, rather than trying to pick a level on the yen, the thing that I really want to see is the idea that Takaichi is moderating her agenda. She’s allowing the BOJ to raise interest rates, to normalize monetary policy, because monetary policy in Japan should be on the way back towards a policy-neutral rate, which we think that should take cash rates to 1.5% by the start of fiscal 27.

That's what should be happening. If we can be confident that that is going to occur again, that is the catalyst to buy the yen, rather than picking a level. That said, there will be some people trying to bet on short-term gains around intervention. Some talk in Tokyo last week that this could happen ahead of a 160 level. Certainly, the 160 level is a bit of a line in the sand, so expect, sort of, price action to slow up here.

I think markets will be wary of taking that on, but if there is intervention, and that isn't backed up by a policy change, then I do think that the way the markets will look at such intervention is that actually gives you an opportunity to add risk in yen on the short side, so that's something that we would be considering at the minute.

With that, I'm going to wrap up my comments there. Thank you for joining this podcast. I think this may well be the last one of the year. I think it is. I'm getting a bit of a thumbs up, a bit of one of those. But if you've been joining these calls over the last year. I hope they've been informative to you, and thanks very much for dialling in.

Got any questions, got any feedback, please, get in touch with your contact point here, RBC BlueBay, but thank you very much for joining, hope you've had a successful year, and wishing you all the best for the holiday season to come.

With that, thank you very much.