Inflation, Energy and Market Volatility - Perspectives on Global Equities

Transcript

On inflation and interest rates…

So I do think there are many parts of inflation that are sticky. And I think we can talk about why I think some of those things are sticky. But I really thought that Chinese growth would have made inflation a worse problem in the last year. And so, you know, I think Xi Jinping has been, you know, he's my favourite Fed governor, right, because he's been able to really soft land the US economy. And I really think that's what's happened. The headline inflation in the US is now, you know, in the 2% range and it's really driven by commodities and food and goods and that's really been driven by China.

You want some inflation. I think that's healthy for earnings growth. But you, you, you haven't had the kind of inflation that required high, sustainably high rates. And basically it has enabled the Fed to do kind of a policy adjustment, which is effectively what they're doing, right. They're saying, yeah, we see unemployment's rising a little bit. Inflation's now within our zone, you know, rates are too high. So we're going to lower rates a little bit. I mean, what, what could be really interesting about that looking ahead the next year or so is that, you know, we may not get a big cutting cycle. We may get a relatively shallow cutting cycle because there's no, there's no crisis they're reacting to, right? So the economy is likely to stabilize from these cuts.

On energy…

I think energy is really interesting, especially the US majors. And I think what's happening in energy – so we talked about how the world is a more dangerous place – but what's really happening in energy, and I would add in there that AI consumes massive amounts of electricity, right? Just incredible amounts of electricity. So the whole area of power secularly is really interesting.

The other thing that's happening is US shale production is slowing. So if you think about it, think about it simply like this. They drilled all the good stuff first and in fact, they drilled it too close together, right? So you're starting to see slowing productivity across U.S. oil. They're still improving productivity. It's still an interesting place. But what's happening is a lot of assets and acreage is becoming stranded and it's being rolled up. So if you look at Exxon buying Pioneer or Chevron bought Marathon and you're, you're seeing a bunch of different M&A activity. And what's happening is these bigger companies are coming in and controlling more parts of the Permian Basin, the Bakken Basin. So it's going from being a wildcatting exercise, zero interest rates, borrow some money, go drill a well, sell yourself to private equity. That was really happening between the GFC and COVID, and it's turning into more of a mature kind of business. And that industry structure combined with what Saudi needs, the Saudi needs oil prices to be a certain level to manage, to balance their budget right, and to do the things they want to do. And so that industry structure starts to look really attractive.

On market volatility…

There's a lot of stimulus set up to sort of reaccelerate the economy once we get past this election period. And one of the things I think we all focus on doing well is having a fundamental view about which companies are creating value and then taking advantage of periods of volatility. So when things are selling off, when there's a lot of concern, when defensives are overvalued and being able to look sort of out further. So I would encourage everyone to kind of the next, the last two months, the next two months can be volatile, but when you're looking out past the US election, right, and you're looking out into 2025, you know, really don't focus so much on defense, focus on this too will pass. And the fundamentals in the world are, are, are pretty stable.