Peak exceptionalism ????????

Hi there folks!

We had both the boys birthdays (2 & 4) a couple of weeks back which was wonderful - all the energy and good vibes of a 4-year old dinosaur themed party and little Sacha (our youngest) adorably insisting that he’s not a baby anymore but a “tobbler”... (I'm not crying you're crying) ...

Conference season has wrapped up for me with a couple of heavy travel weeks: PLSA annual up in Liverpool and my first visit to the US for a number of years with GlobalARC in Boston. What did I take away?

UK pensions are clearly “having a moment”. New government, pensions review, scale in the UK Master Trust space (we hit ￡30bn the same week). It seemed a very relevant time to be getting together. And the coffee was excellent. Key points are: clarity needed out of the review so providers can invest effectively in their business, a maturing of the conversation around private assets and a nod to the Australian system and learning from what’s worked over there.

Hitting the US in the same week that the Economist splashed a front cover and special edition on the US economic strength, plus being just a couple weeks before the US election also seemed like a good moment. I spoke on a panel with some global CIOs one the future of asset allocation into 2030 which drew out some good reflections:

• More domestic bias: last 20y+ has been driven by globalisation in every sense including in portfolios but this may be reversing with domestic protectionism playing out in various ways eg UK
• Active to passive (and public to private) has worked well for investors but driven some real oddities in markets, might these get looked at more - mid caps, small caps.
• Opportunities in Real Estate? Bit of a theme emerging if you focus on industrials, residential and logistics and underweight retail and offices then maybe there’s a real buyers opportunity taking shape.
• Peak US exceptionalism? The global market cap has more weight in just two American stocks than entire large markets like the UK. Justified by efficient markets and the last 10 years of earnings performance but step back is it really right? Doesn’t mean that the US is about to lose in some dramatic way (the Economist piece emphasises how unlikely that is) just a slight drift back to normality.
• Will geopolitics matter this time? I’m inclined to go with the general historical trend of stock markets more or less shrugging off geopolitical events (Joe Wiggins says the same in a recent piece) but you can’t deny there are risks and they can seem scary. But do they give rise to investable actions that aren’t priced in by the market? Lots of generalised worrying about America’s place in the world and it did make me wonder if this is a curiously American trait. Main character energy.
• With all the worrying about US politics it is an odd feeling for us Brits to have a fairly stable political environment for a change. Obviously the budget next week remains a huge event but most commentators see the rise in gilt yields as being driven by rate differentials or growth expectations not the return of the bond vigilantes.
• the anecdotal hotel breakfast indicator of economic strength certainly aligns with the economic story with the bill coming in at $56 (!) at the Boston Intercontinental vs about $26 at the Pullman in Liverpool. If that’s not exceptionalism I don’t know what is. Predictably the service was a lot better in the US, although the coffee consistently worse.

I managed to connect with a few global CIOs including some Canadian folks who I look forward to staying in touch with which I counted as a win. I also reflected that comments I made last time about panels remain relevant: unfortunately many are rubbish but they can be good or even great, but it takes work. Firstly work from the chair and organisers to bring the panellists together in a coherently way, but also from the panellists: your first job is to say something funny to lighten the mood and connect with folks, and your second job is to work together with other panellists to uncover the story that needs to be told from your panel. Do those two things and you’ll be better than 90% of panels.

Markets mumble

Stocks hit new highs, they are now off slightly but look it’s still a stellar year so far up about 18%. 10-year interest rates have surged back above 4% in both the US and UK, having bottomed as low as 3.6%. Sterling has weakened a little as the expected trajectory of interest rates is now considered to be less favourable to sterling. Chinese stock markets have broken all the charts with that huge surge and then a considerable give-back.

Watch the US labour market as a guide to the economy but the broad message is things still look really pretty strong, with the Fed cutting and a recession likely avoided, the backdrop is good but priced in.

Earnings season has been pretty good with a focus on the US consumer. Earnings growth expectations for US stocks are high for 2025. As always worth remembering that the stock market is not the economy and that stocks react to higher or lower vs expectations not good or bad.

Three things I’m reading

1. 2025 Long Term return forecasts are out from Goldman’s and JP Morgan.

The Goldman’s piece got headlines because, well it’s Goldman, but also because they are forecasting an eye-catchingly low return decade for US stocks of just 3% p.a. This has happened before but pretty much only in conjunction with large scale crises like ‘08, ‘00 or the 1970s. JP Morgan (neat summary here from Stephanie Aliaga) are backing a more consensus return level of 6-7% p.a. including a bit of productivity boost from AI.

2. IFM published a blueprint for promoting infrastructure investment in the UK (link)

Lots to agree with here - bottlenecks around grid connection and planning badly need to be solved for capital to actually come into contact with viable projects. Thoughtful use of the available state vehicles including the NWF is needed to get pension funds co-investing alongside. A few commentators have picked up on the point about fiscal rules recognising assets and liabilities not just debt ought to unlock more state capacity to do investment.

3. Howard Marks is Ruminating on Asset Allocation (link)

He reckons that asset allocation wasn't even a thing when he first joined the industry (with folks aiming for a 60/40 split and leaving it at that), nowadays things are more complex but he as always does a good job of simplifying

• Fundamentally speaking, the only asset classes are ownership and debt. (Shoutout to former colleague Stuart McKinnon who used to emphasise this point all the time)
• They differ enormously in terms of their fundamental nature.
• Ownership assets and debt assets should be combined to get your portfolio to the position on the risk/return continuum that’s right for you. This is the most important decision in portfolio management or asset allocation.
• The other decisions are merely a matter of implementation.
• Of course, your asset allocation process will be informed by how you rate your ability to identify and access superior strategies and superior managers, recognizing that doing so isn’t easy.

4. Why this rate cut cycle might be different for corporate credit - PInebridge

Rates coming down without a recession is rare and could mean low default levels - that’s good for credit.

Two things I’m listening to

1. The Compound and Friends with Dr David Kelly (web | apple)

“We aren’t early or late cycle we’re post-cycle". Post WWII recessions used to occur every 6-7 years on average but now they don't - haven't really seen a recession since 2008. Could be driven by the shift from a traditionally manufacturing driven economy that is hit by the ebb and flow of inventory cycles to more of a services and intangible economy.

2. Meb Faber on the bear market in diversification and tactical asset allocation OddLots (web | apple )

Tough times for lots of liquid alts type strategies & smart dynamic allocators last decade as the US and basic global indices have dominated everything. But going forward what makes sense? Meb likes trend indicators for dynamic allocations. A worthwhile listen.

Grab bag

I spoke to my friends and former LCP colleagues at the PLSA conference podcast booth and they’ve done a great job collating speakers from the event. Worth checking out their episodes (here).

The Netflix series The Perfect Couple served me pretty well especially as airplane-watching material, slow in places but worth a watch.

Now I’m back from my global conference tour I look forward to focusing on the real things including toddler hallowe’en costumes for next week. Have you got yours sorted?

Good luck with those pumpkins ... til next time