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From the library of the New York Stock Exchange at the corner of Wall and Broad Streets in New York City, you're Inside the ICE House, our podcast from Intercontinental Exchange on markets, leadership, and vision and global business, the dream drivers that have made the NYSE an indispensable institution of global growth for over 225 years.
Each week we feature stories of those who hatch plans, create jobs, and harness the engine of capitalism right here, right now at the NYSE and at ICE's exchanges and clearinghouses around the world. And now, welcome Inside the ICE House.
Jess Tatham:
I'm Jess Tatham, coming to you from ICE's headquarters in the City of London, sitting in for your regular host, Josh King, back in New York, and pleased to bring you this episode of Inside the ICE House from across the Atlantic, offering our listeners once again the reminder of how ICE operates its markets around the world, helping participants navigate across major asset classes. Newsflash, the same calendar is at work here in London, as it is in New York, and we're just past the midpoint of the year, now moving fully into the third quarter.
During the first half of 2023, market participants rode a wave of inflation and shifting monetary policy from central banks. They've also grappled with the impacts of the continued war in Ukraine, now in its 17th month, plus increased the tempo of conversations on tackling climate change, those talks revolving around what actionable solutions corporations and investors can take on the path to net-zero.
With risk management in focus and returns hanging in the balance, institutional and retail investors alike turn to asset managers to manage investment opportunities and maximize their profits. Who better then to brief us on current investor sentiment than Europe's largest asset manager, and one of the world's top 10 on that leaderboard, than Amundi. Listed on the Paris Stock Exchange with 1.9 trillion euros in assets under management, operating in 35 countries, and with more than 100 million clients, globally, Amundi's coverage includes active investment through a range of mutual funds, passive investment as an ETF issuer, plus investments spanning real estate, alternatives, and infrastructure.
To deep dive into these topics and more, in a minute, my conversation with Vincent Mortier, chief investment officer of Amundi. That's all coming up right after this.
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Jess Tatham:
Our guest today, Vincent Mortier, is the chief investment officer at Amundi, tasked with the responsibility of leading the investment teams of the asset manager globally. Hailing from Paris, Vincent has been involved in the investment community for decades, with his career kicking off at Société Générale. During his tenure at Amundi, he's established a strong risk management framework for the business and been instrumental in everything from ESG investment implementation to pursuing growth opportunities in emerging markets. Welcome, Vincent, Inside the ICE House.
Vincent Mortier:
Hello.
Jess Tatham:
So let's start by talking about inflation, the topic on everyone's mind from the Bank of England's Andrew Bailey, to the European Central Bank's Christine Legarde, to you and me, undoubtedly, when we check how much our groceries will cost each week. So consumer price inflation is running at rates not seen in four decades, even with numbers cooling in the US and UK over the last few weeks. So tell us how we reached this point and will inflation be a persistent market backdrop for some time?
Vincent Mortier:
Yes, indeed inflation has been on the mind of investors, central bankers for quite some time, and for good reasons. Inflation was coming from the extra stimulus and support coming during the COVID period, and then in Europe, the war in Ukraine, whenever you get multiple tragedies. And so all this stimulus is money pooled into the economy, naturally it's translating, when economies reopen, into some inflationary pressures. So lately, inflation has a little bit calmed down, let's say, hopefully, but still coming from very high levels.
You mentioned four decades ago, the seventies, it's a good parallel, and we are a little bit cautious on this because in the seventies we had in fact the same kind of inflation pattern, big drop, but then inflation came back, and then dropped again, and then came back, and dropped again, so we had three phases. And it is what you need to monitor because the market is not at all prepared to have a reversal in inflation trends, so we need inflation which can go back again to the upside, and it's a scenario we cannot rule out because now commodity prices are below the levels they were pre-COVID, and we've got some long-lasting forces at play which will bring back inflation.
So all the investments done on strategic infrastructures in US, typically the Inflation Reduction Act, which by the way is very badly named there because it's an inflation addition act, in a way, will bring more inflation into the system. The energy transition is by nature bringing inflation, so we have assessed that medium to long term in US and in Europe inflation will probably stabilize between 3 to 4%, so above the 2% target, and with some risks that it can be volatile around this level. So again, when you look at the market pricing, it erode to 2% quite quick. It may happen, but it's probably a little bit rosy or optimistic.
Jess Tatham:
Well, so off the back of that, in your mid-year outlook, you've noted that the path ahead remains very uncertain in terms of deceleration of growth in Europe and the US until fairly recently a pretty bad recession was being priced, particularly in the US. So what do you now see playing out in each region?
Vincent Mortier:
What is true is in Europe and in US, growth is very, very small, it's around zero. We continue to believe a recession in the US is likely, the question mark is how deep and for how long. But in any case, recession happening or not, we're talking about an environment where a real GDP growth is minimal in Europe and US, while growth is marginally better in most emerging markets. So we need also to understand that the growth that we had in the last years in the West has been essentially driven by public money, so by support.
In US today you've got full employment, which is nice, but you've got six to 7% public deficit, which is very... it's the first time in history it happens. When you've got full employment, you don't need to have 7% public deficit. So that's why we need to take a step back and look in parallel to the GDP growth where it is coming from and what are the level of deficits, and unfortunately they are in Europe as well, they're not in a very bright position.
Jess Tatham:
Thank you for that. So we're going to pivot a little bit. Cryptocurrencies and the GameStop saga are both examples of the disconnect that can happen between market prices and investment fundamentals, a topic I know you've spoken about before. So where do you see this disconnect currently impacting markets, and what's your solution for how it could be solved?
Vincent Mortier:
So that's a complex topic, but as well a very familiar one. In history, we always add bubbles. If you go back to the tulips in the Netherlands or even before, bubbles are part of financial markets, are part of human behavior, so it's a given, bubbles exist. The issue here today is that bubbles are quicker to form because markets are more interconnected, it's much easier to disseminate information through the internet, through social media, and you add also, you need to remember it, we are exiting. But we're still in the period of ample money supply. So you have a financial conditions which have been very loose, and when you look at the metrics, they remain pretty loose compared to the situation before COVID.
So this fast money, this leverage, plus this behavior, which is... it's part of the human and mankind to the weakness to make money and to follow the herd, in a way, so you have indeed every year, almost you mentioned crypto [inaudible 00:10:56] in a way artificial intelligence partly is of the same kind. I don't say that it is a bad or useless technology, it's just the way it has been bought by market participants buying everything, whenever you've got a link to AI, the performance this year has been, if I'm right, plus 70%, so that's a lot. So we have some [inaudible 00:11:31] there.
The question mark is what is a fair price? And it's not an easy one because finally for me a fair price is what someone is ready to pay. So you can say NFTs are worthless because they don't have a use case really, but if someone is ready to pay $1 billion for a crypto bank, NFT, the market is here, someone is ready to pay. The issue is for your own risk management is to figure out when you will need to sell, when you need the cash, will you find a buyer, and at what price? And here you have this disconnect because in these markets you can have, when lots of people want to sell the same thing at the same time because of the bubble phenomenon, then between the price you think you can sell and the reality of the price you could get, you can have a big gap. And so something we are monitoring very closely, it can apply to stocks, to credit, to government bonds, to all assets.
The issue is that all this has become faster, so you can make fast money but you can make also fast losses, so all this needs to be framed, monitored, stressed in order not to be caught by surprise. Like most investors were in April and May 2020 before central banks intervene in the COVID crisis, I can tell you that they were for a couple of weeks no price in the market at all, even for very good quality credit papers, even government bonds sometimes were difficult to trade, or you had to accept a haircut of 10, 20%. So when you live through this kind of episodes, you are of course a little bit more questioning the reality of the market you have in your books.
Jess Tatham:
Well, we're going to get into AI a little bit more closely later on, but I'd like to start off talking about your career. You started in internal audit at Société Générale, and then moved into the strategy department. So what grabbed your attention about investing and ultimately making a return for clients?
Vincent Mortier:
Well indeed, and to start, this was some time ago, to start in a bank, in particular in the universal bank, so doing everything retail, investment banking, asset management it was a good training, in a way, to see all aspects of money flows and finance. Banking industries might not be the always fun, but it is a school of rigor and discipline, it's very processed, but it can also be very creative. And so that's why after I started in not the most boring part, but the serious part of the internal audit. But then after strategy I wanted to go to the capital market and I joined the equity and derivatives department where here it was very lively, very creative, and quite different from-
Jess Tatham:
Right. More entrepreneurial, kind of, right?
Vincent Mortier:
But after being on the safe side and interacting with lots of clients including Amundi, I thought it was a good moment to change horizon and to test something else, and so that's why eight years ago I resigned to join Amundi, and I'm quite happy about this move [inaudible 00:15:47].
Jess Tatham:
Yeah. Well, you're doing pretty well. In that vein, what are your thoughts on the rise of the retail investor and the democratization of the investment process of Robinhood, for example, do you think this is a good or bad thing?
Vincent Mortier:
I am a split on it because on one hand I think it's good that retail investors can access to all kind of investment propositions in a cheap manner. So when Vanguard had democratized ETF, it was plus for the savings for retail investors. The platforms like the online brokers who are offering cheap access, it's very nice. The issue is that in parallel you need to have some education and also some regulation. So what we have seen in the famous meme stocks experience is exactly what we don't want to see, so meaning gamification, people manipulating in a way through social medias, stock prices, regulators being totally clueless or difficult to intervene.
Big bubble, you remember the names, GameStop is only one of them, but if you take all the names of this period, they all went bankrupt more or less. So is it a good thing for long-term investors? For me it's not good because if you want to play, again, it's like if you go to a casino, so I think we need to continue to favor this widening of the offering to retail, including some private assets, but with some strong education, diversification, and some sound regulatory environment.
Jess Tatham:
So it's July 2023, and it's generally accepted wisdom that bonds are back, given where interest rates are globally. So where do we go from here? Is your game plan to continue to park money in high quality credits like treasuries and avoid riskier high yield bonds?
Vincent Mortier:
Yes, indeed bonds are back, is a good motto, something we started to implement, actually, in our portfolios one year ago. Now, we are still convinced that bonds are a good investment call but with some nuances. And in first half what has really performed is in fact low quality bonds, and the higher you go in quality, the lower the performance has been [inaudible 00:19:03], which was not what we were expecting, to be fair. So today we are much more interested by government bonds, in particular US treasuries, some emerging market bonds as well. Good high quality investment grade credit.
High yield is a big... we have some issues because it's very expensive, it has narrowed a lot in terms of spread, and we were questioning how come given the environment, what you expect from the economic growth, all the refinancing that will come in the next years as higher rates, normally it should have mechanical impact on the bankruptcies. And in fact for the [inaudible 00:20:06] market, what is very striking is the size of the global [inaudible 00:20:13] market has shrunk actually by $200 billion, so there is no real new issuances, primary market is very low, and there are still some reimbursements.
So the overall size has shrunk. The banking activity to land to high yield corporates have also shrunk by the same magnitude. And in parallel the private debt has grown by $500 billion. So you have a kind of mechanical effect where private debt players have replaced, in a way, primary markets and banks and doing so because we're active as well on some private debt strategies. Of course, we've got some very professional, very good people. You've got some newcomers who are not always very serious. But to lend money is a serious job, you cannot become banker or you cannot replace the decent market in a garage with three people. So that is what is concerning is that you've got this competition from some new players in the private debt which are much more laxed in terms of covenants which are accepting lower yields, and as a result they put pressure on the [inaudible 00:21:59] market.
So you've got, and you still have some demand for the [inaudible 00:22:04] markets coming from some investors. So you've got no offer because you don't have any more primary issuances, you're still demand, so spreads are narrowing, narrowing, narrowing, narrowing to levels which are, when you do the mass, we don't understand, actually. So our principle is that when we don't understand, we don't buy. But we need to watch for the coming years, which is the next 3, 4, 5 years, what will be the real performance of some of these private debt funds because when you underwrite bad credit with light covenants, and if the economy is like we think it'll be, so meaning zero or recessionary, I think there will be some casualties.
Jess Tatham:
So we're seeing an outsized weight in mega cap tech stocks like Tesla, Apple, Meta on major indices with the potential for massive rallies and crashes. Do you think that this poses a structural market risk?
Vincent Mortier:
For sure, it is very striking to see these seven, 10 stocks, it depends the way you group them, that have been the only names attracting real strong interests with kind of self-fulfilling pattern, so meaning you if you are a portfolio manager, if you don't own these names, you look bad to your clients because you're a loser, you don't have the good names. Retail, when you look at a typical portfolio of a retail client in US, they have only these names, actually, because it's high volumes, it's good performances. People they look at past performance to invest, which is stupid, but it's how it works. So they will see that all these names have had, except for one of two of them, very strong performances on one month, six months, five years, 10 years, so they will go for it.
And what is also very interesting is these names have also become the ultimate quality defensive names, it's a bit tricky because they are tech, high growth, normally high risk. But if you talk to clients, the research show we are reassured by these names because they're so big, so profitable that if there is a big market shrink or a big recession, they will fetch better, which might be true, but it depends also, first, at which price you buy them because when you've got price earning ratios of 30, 40, 50, 200 times for one name, you need to be hopeful that the gross rate of these companies will be sustained at 15, 20% per year.
Secondly, you need to be convinced that their business model will not be disrupted by the regulator for antitrust matters. By the technology, you mentioned AI, AI is a good opportunity, for sure there will be winners, but there will be also losers.
Jess Tatham:
Well, you brought up AI, let's talk about that a little bit more. So last week the US Federal Trade Commission officially launched an investigation into ChatGPT-maker, OpenAI, regarding data security and potential harm to users. In April, Italy banned ChatGPT citing privacy concerns, the service has since been restored there. But is Amundi using AI to build your investment strategies?
Vincent Mortier:
AI is a tool in a toolbox, and for us it's an interesting tool, but we don't think it could be considered as anything else than a tool. It's not a revolution, it's just an interesting and powerful tool to be more efficient, to better analyze data, information, and as a result there will be some jobs which will be disrupted, but we don't believe it'll become as disruptive as some are thinking. At the same time, it's a powerful tool. And I think governments have reasons to question it because it can be manipulated.
So I don't know if you know, but the first ChatGPT to name, it was trained on the internet, and the first outcome of this training was ChatGPT, which was very sexist and racist because the internet is like this. So it's as always, garbage in, garbage out, so what matters actually is data that you will put in it. The way the intelligence is working, I think it's a process which is... it's the making, and it's already quite good. But do you believe, and I discussed something with, actually, Oxford professor specializing in this kind of topics, and he told me, the web search engine of Google and the algorithm behind is so efficient, so powerful that it cannot be replaced by artificial intelligence.
There is no another field, there is no case where thanks to AI you can create a new medicine. So you can analyze things, summarize proposing, but never create a new thing from... So it's not a creative tool, it's a tool which will reassemble things, which analyze, but I know there are a lot of things where people say, "Oh my god, you've got a new better song thanks to AI." But it's not a creation, it's just-
Jess Tatham:
Aggregation.
Vincent Mortier:
... aggregation, exactly. So pure creation, which is finally what should matter for mankind, when you create new things and new tools, new ideas, it won't come from AI.
Jess Tatham:
Human power, yeah.
Vincent Mortier:
And to answer the question, we use AI more and more not to invest meaning but more to ease the workload in terms of client reporting, in terms of trade reconciliations. We are also working on the use cases for research, but it's more a help to avoid very cumbersome tasks. But at the end of the day there is always a value added of human being that will work on this material. So it's more way to be more efficient, let's say.
Jess Tatham:
Right, sort of an operational tool.
Vincent Mortier:
Yes. Yeah.
Jess Tatham:
Super interesting about your conversation with Oxford. So we talked about this a little bit already, but there's a lot of chatter about the AI rally conjuring up memories of the dot-com bubble in the 2000s. A little before my time in business, but where do you see similarities and divergences, particularly regarding valuations?
Vincent Mortier:
Well, what is striking for me, I'm a little bit older than you, I think, so I've known the '99, 2000 episode, I was working at the time. And what is striking is at the time stocks were performing a lot when they had dot-com in their name or in their financial communication. So all what was around dot-com was... Today, AI is the same. And we were told at the time that, "Forget about the traditional valuation metrics, so don't think about price earning, don't think about even price to sell, you need to think about price to number of effective user or price... and to justify the valuation and the market caps of some names which were totally impossible to justify through traditional techniques. You must put all this in the garbage because you don't understand what is happening, now you need to change your referential."
AI is a bit the same. People are saying, "Okay, AI, it's a revolution, you'll understand the limits of it. Don't reason in price earning ratios," that's why you've got names at 200 times. And there is a big hype, so if you make a historical chart and you put the internet names in '98, '99, 2000, and you put tech names, and in particular AI names, in fact you've got the same charts. The main concern is that we're not yet at all at the high level of '99. So meaning, I think in terms of momentum or vertically, it may have some leg, again, some meaning. We may be not at the end of the bubble, but the fact we are in a bubble is pretty sure, but it can last for some months, maybe six months, and I think it'll come back to earth maybe next year. So that's what is difficult with bubbles because lots of people are aware, very aware, they have a conscience that bubble is here but it's difficult to act on it because a bubble can take years to explode.
Jess Tatham:
What kind of questions are institutional investors asking you now that they weren't five or 10 years ago, it could be in any asset class? Kind of a big question.
Vincent Mortier:
Well there are, they're questioning whether the traditional capital allocation model is broken or not. So do they need to continue to invest in a diversified way between bonds, equities? What kind of price assets they should have, to which magnitude? And generally, large investors, they have some traditional way to invest, and now they are scratching their heads after last year, actually in particular, that maybe they should change dramatically the way they look at their portfolio.
Another question which is more and more coming is regarding geopolitics, which is a topic which has been forgotten for some years, but now it's India, China, US, Middle East, Russia, Ukraine, of course. So what is the endgame, and what are the risks and opportunities sometimes behind? A third question which is new, which I think was also present in the seventies but I was not really... I was very, very young, is really commodities. So are we on the verge, or are we in the middle of a super cycle of commodities on energy, on metals, on soft metals because of the energy transition, and which metals? And it is driving some strategic asset location for the long term.
And lastly, I hear also sometimes questions regarding the financial stability currencies, and shall an investor have some gold, potentially some crypto as well, which I always find a little bit awkward, but even some big sophisticated investors are asking the question which is new. So in a way a view that so far so good, but there is a small probability scenario that the financial system collapses and if it happens, what can they do? Which is not very a bit, but it's a small probability, they're putting 5% probability. But what is new is that now they think about it.
Jess Tatham:
Right, which they wouldn't have necessarily before, right?
Vincent Mortier:
No.
Jess Tatham:
I'd love to pivot to ESG. You've been instrumental in bringing ESG to the heart of Amundi's investment strategy, a topic that we've talked on this podcast about before, and one that your CEO, Valérie Baudson, calls Amundi's primary growth lever around the world. 42% of Amundi's assets under management are classed as responsible investments.
Vincent Mortier:
Yes.
Jess Tatham:
Is this statistic driven by investor demand or regulatory pressures, or both?
Vincent Mortier:
No, it has been, first and foremost, driven by our own willingness to incorporate quite some time ago ESG in our processes because for us, ESG, the way we do it, meaning we don't exclude entire sector, so it's a best-in-class approach [inaudible 00:37:58] with lots of engagement with companies. So we really believe that ESG well done create performances, and is enabling to avoid some big terror risks, so big controversies or big frauds or fines. So for us it's a risk management tool as well as a way to create performance because usually companies which are in a good path on ESG are ordinarily companies which are well run and there is a correlation between the two.
And there is also something we have seen in the last years, a kind of mechanical effect of on demand, so meaning as there are more and more people interested into buying ESG type assets, these assets are performing better just because they're more in demand, so that's very mechanical, I would say it's a cherry on the cake it's because of this that we have integrated ESG in our processes, but it's also something to consider. So indeed, I would say whenever we can, we have this standard ESG integration with our own ratings actually of companies that we are doing for 12 years, so now [inaudible 00:39:27], so it's quite a long time.
And if clients wants we can go deeper. So we've got, of course, clients are asking for some exclusion for more climate impact, for social impact or whatever, and so, of course, we accommodate these requests. So it comes on top of the standard ESG integration.
Jess Tatham:
So just in talking about Europe specifically, how has your ESG strategy changed in light of Europe's energy crisis last year?
Vincent Mortier:
For us it was a very defining moment because it was a kind of wake up call, not for us, but for the industry, that sovereignty is a part of the ESG landscape. As a result, energy is naturally something that we need to integrate into a strategy. When I say that we are best-in-class sector neutral, so it means in our rating system we have overall the same weight on all companies than the weight of all companies and benchmarks, so meaning we don't underweight by nature, oil, we want to overweight the best in class in this sector and underweight the worst. But we consider that to make the energy transition, typically we need to have the involvement of all companies and we need to accompany them to guide them towards this objective.
So that's very important because our performances during the COVID crisis have been pretty good because we were not at all excluding energy companies, while competitors had ESG, I would say, built differently, they were underweight by nature for them oil energy, and therefore underperformed a lot. Same for defense, we always had some defense companies in our portfolios, we never considered we should exclude defense companies. So that's a difference in philosophy, and I think the COVID episode has been a good example to exclude entire sectors is bad for the performance, and is also probably not the right approach to make a real change on the way the economy can be better behaving on ESG.
Jess Tatham:
So I know that Amundi has an ESG ambition 2025 plan where you set out social and climate action goals for the next two years. Tell us what this plan includes and what you hope to achieve by 2025?
Vincent Mortier:
So the plan is a combination of different objectives which are very concrete, and with some... We want things to be that you can measure, actually. So just to mention a few things, we have set an objective to manage a portion of our assets on the net-zero framework objective. So naturally it's the clients, where they will decide whether he wants or not to apply net zero to its own portfolio that you match for him. So to achieve this objective, which is 18% of our assets, what we need to do is to engage and to teach all our institutional clients hands. So it's underway, and I cannot disclose yet where we are, but on every month we are progressing, or you can say 18% is not very big, but it's quite sizeable because it means all the portfolio of the clients is on the net-zero framework, and it's a client by clients that we are trying to convince.
We have also set an ambition on engagement with companies on climate related. So we have as an objective to have a specific engage engagement with 1,000 new companies on a very deep and specific climate agenda. So 1,000 is quite a lot, we need to... and so it's on the way as well. We'll also take into account in our personal construction the energy condition score. So it's a score we have put together ourselves to measure, and again, independently from the sector, so meaning for each company in its own sector, how it is behaving in terms energy transition compared to its peers.
So it's always a relative game. The idea is to enter a company, and to push companies to behave better and to have some objectives. Of course,, we are totally aware that a cement company or will always pollute more than, I would say, a service company, so that's a given. So we need a company in a given sector, companies to behave better, so that's also a objective, very concretely, that we have. And by the way, we have submitted this plan to our annual general meeting for our shareholders to vote on it. So it's a commitment, and it's very transparent.
Jess Tatham:
Last year you spoke on a panel where you noted that the reaction to ESG differs in each country, then someone in the US told you that the term ESG is too woke. When he was at the New York Stock Exchange last June, Larry Fink echoed this saying that the term has become overtly politicized. So how does this play into your investor outlook given how the Europe and the US view things so differently?
Vincent Mortier:
It's an important question because for sure we have some convictions and we have invested a lot actually on the framework, on the analysts, on the ratings to be serious and to have things to show. At the end of the day, what we want is of course to... we are managing money for our clients and we're not managing our own money, so naturally as all our competitors, in particular the one you mentioned, we do what our clients want. So if they want no ESG, which is sometimes happening, in particular in the US, we can do it. If they want very, very, very deep ESG, very tailor-made, we can do it. The only difference is on our flagships, meaning on the funds we are selling to the public at large, we always want to have ESG integrated in it.
So the only cases where you have between markets and no ESG is only dedicated mandates, it's not open funds. And there are a few cases as well where we apply exclusion policies that we want to continue to apply on very specific cases. So I would say we try to convince and our clients to embrace this approach. Of course we will never impose it. And also it's hard to say that each country or each future can have its own approach, its own criteria. When you go to Japan, to China, to Middle East, to France, Germany and US, the reference of value is not the same, so something we need to understand and to respect.
Jess Tatham:
So at ICE we believe that bringing together science and economics is integral to solving climate change, but there's a lack of standardization when it comes to sustainable investing. So how should investors assess how sustainable a fund is?
Vincent Mortier:
That's a critical point because unfortunately this topic has been badly handled by authorities because they were thinking while making, and they were probably also under multiple influences. So at the end of the day we have a regulation in Europe which has been very volatile, not very precise sometimes, so giving lots of leeways to players to define themselves what is sustainable. So typically today in Europe it is each asset manager will define what is sustainable investment. And as you may know, regulation is asking now for us to put for each one a minimal percentage of sustainable investment.
The issue is that when you compare what is sustainable at Amundi to what is sustainable at others, you can have very big discrepancies. So you cannot compare, in fact, funds between each of them, which is... so clients are lost because they don't understand when one fund I fund 80% sustainable investment, if I apply in the same portfolio, your methodology I have 40, so because that's-
Jess Tatham:
What's the right answer then? Yeah, I think that-
Vincent Mortier:
Exactly. And the same for almost every parts of the regulation, so really our clients are lost, articulate, Article 9 the same, it has been very volatile. Taxonomy is very limited in terms of universe. So at the end of the day, what we believe is that there needs to be high level transparency on reporting to the clients in order for them to understand the process, the universities, and the approach, and regulators should be much more prescriptive in the definitions. We cannot live with the definitions which are open bar where each player will do whatever he wants, it's not good for the customer, it's not good for the ESG cause, I would say,
So at least in Europe there has been efforts to design something which is [inaudible 00:52:07], but at least in other parts of the world there is no real framework. So we are not yet there, the only area where I have seen some very nice progresses is, in fact, Asia association, in particular, Singapore, typically, where they have learned from the mistakes. Here in Europe and they have designed something which I find much smarter
Jess Tatham:
After the break. Vincent Mortier, chief investment officer at Amundi, and I will discuss Amundi's investment strategy, honing in on emerging markets. That's coming up after this commercial break.
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Jess Tatham:
Welcome back. Before the break I was talking to Vincent Mortier, chief investment officer at Amundi. Now, we're going to dive into some of the issues that are shaping the investment landscape today, particularly in emerging markets, and get Vincent's opinion on what's in store for the rest of this year and beyond.
So you played a big role in setting up a joint venture with the Bank of China. Since this JV, you've maintained per your recent outlook piece that 70% of global growth is expected to come from Asia this year. What asset classes are you particularly keeping an eye on?
Vincent Mortier:
Well, for sure it's a matter of fact, we see that growth is happening in Asia, and it's something that will last. So if you want to catch or to follow the growth, clearly you need to keep an eye on Asia, not only China, actually, Asia at large. And what's interesting is that the nature of this growth is changing. Historically in Asia, growth was coming from cheap exports, cheap labor costs, and it was a kind of catch up with the West. Now, the nature of growth has changed quite a lot, we're talking about higher quality growth, more services, more domestic demand, and in a way a better quality growth, and more infrastructure as well, in [inaudible 00:55:03] in India.
So for us it's a more sustainable growth that will benefit mainly the local economies, so in a way it's a gross in Asia for Asia. That's why actually the spillover effect in the West is quite limited, so we should not expect some massive positive effects in Europe and US to difference of the period before. So higher gross, better gross, and when you get markets cheaper, gross. So today, if you buy your Asian assets, except India, which has already been always been a bit expensive, but always, so to time India is very difficult, so it is better not to time it, actually, better to be invested. But if you look at the rest of Asia, it's 20, 25% cheaper than Europe, which is itself, 20, 25% cheaper than US. So you've got better prospects, cheaper on equities.
We are also positive on almost all the Asian currencies. So if you invest into debt, in particular local debt, in local currencies, you've got a higher rate than what you get for the same rating in a way in developed countries, and in our mind with less risks because these countries have evolved a lot and are much [inaudible 00:56:53] today in terms of finances. And you can have a pickup as well on the currency, so for debt in local currency, debt in hard currency, equities, really you can invest in the full spectrum. From a medium, long term we think it'll outperform the rest of the markets. Of course, it can be volatile short term, we have seen it in China in the last weeks. So here it's more for a medium term perspective.
Ideally in these markets it's better to invest not in once but several times, so to install the investment in order to average the entry price because, again, it's difficult to time these markets. But if you are a medium or long-term investor, really it's a region where you need to be.
Jess Tatham:
Let's talk about how bullish you are in India. India recently tipped the scales on China as the most populated country on earth. Does population size factor into your growth trajectory, and which sectors do you think will be boosted by this increase?
Vincent Mortier:
Demography needs to be taken into account, and India is of course much better than China on this count. What's interesting in India is all the development plans which has been under underway, which is at last taking seriously the issue of infrastructures. In India, it has been the biggest issue. So in India the issue was the lack of infrastructure, and the fact that the country was very scattered in multiple regions not coordinated. So now the state is more active. The administration, which used to be a pain as well, is let's say, more constructive. And there are some well thought, long-term infrastructure projects on multiple topics, actually, not only roads [inaudible 00:59:26], all the infrastructure agenda including energy transition. So we think India will benefit from it.
India as well is smart in its geopolitical positioning, so being a neutral country, and exist so they can navigate periods of tension between countries in a nice way. And actually it's what they did since the start of the war in Ukraine, they have benefited, actually, on the economical front from this situation, which is the case of Europe, of course.
Jess Tatham:
So back in May, you were interviewed by the FT or Financial Times, where you expressed your optimism at China's reopening post-COVID, saying that you predict the Chinese economy to grow 5-6% next year. Has your outlook changed at all given the economy only grew 0.8% in the second quarter? And what do you think is contributing to this sluggishness?
Vincent Mortier:
Yes. So to be very clear, we have been disappointed by the latest data in China. We have been surprised by the bad figures, in particular, on real estate that we thought would've stabilized, but it has worsened a little bit. What is striking is that in fact the level of savings in China has not diminished, so there are lots of excess savings, while in other countries it has been partly or totally spent, it's not the case in China. And so far, the fiscal policy has been not at all accommodative, but has been more [inaudible 01:01:26] actually.
So people of China has been a little bit [inaudible 01:01:31], a little bit. So given the huge unemployment, which is a very big issue, more than 20% of the youth are unemployed, which for a communist society is absolutely incredible. So that's a big issue. The real estate that they really need to solve. So they need some laws. It's a strategic, even a question of survival for the party. So what we think is that soon later this summer, probably in August, they will act to have some fiscal stimuluses, and in order to support the economy, we think they have no another choice.
So what we need to understand is that they have ammunitions, they can do it. So what might be surprising is that they did not yet act, but in China, it's a country where time is different, so it's a long-term thinking and the reaction function is usually, and we have seen it in the COVID, actually can take much more time than in US or Europe. We have changed our outlook for this year, naturally, but not for next year. So we'll see, we cross our fingers, but normally... and given all what we see on the ground because we've got staff as well on the ground, there is a level of investment and innovation by thousands of companies, which are actually most of them are listed on the Asia market, which will bring additional growth in the coming quarters.
The growth in China is not only about real estate and the very large big names or tech names, it's mainly about this small [inaudible 01:03:52] companies which are innovating a lot and investing a lot into research. And when you see the electrical vehicles, for example, BYD in China, in a matter of few years, they have put together a maker of electrical vehicles, which is at par with Tesla in terms of efficiency and quality. So that's why we should not underestimate the capacity of China to catch up.
Jess Tatham:
Well, off the back of that, US treasury secretary, Janet Yellen's four-day trip with top officials in Beijing took place a couple of weekends ago. Do you think this effort is going to help at all to defuse tensions between the US and China in terms of boosting trade and investments? And to follow from that, just yesterday, China's ambassador to Washington warned that Beijing will retaliate on US sanctions and export controls that'll make it harder for China to source advanced technology like chips.
Vincent Mortier:
We are exactly in the middle of kind of a Cold War, but an economic Cold War between two countries which are too big to ignore themselves. So China reminds regularly the US that China is China, so they can retaliate, indeed they can hurt the US economy, the US rates market for forex. And so it puts a kind of limit or boundary to the extent of what US can sanction, and the other way around. So it's kind of... Of course, there are some tensions, we don't think the situation will improve fast. I think both countries have a clear understanding that it is not in their interest that it goes too far.
But nevertheless, in particular for their internal politics, they will of course continue to make noise. Don't forget that US elections are coming next year, and that Xi Jinping in China is also domestic agenda to master. So they will continue to agitate some potential sanctions, et cetera. I don't believe it'll go too far because, again, it's not in the interest of these two countries. So to monitor after you can have them... it's a question of company by company, sector by sector. Of course, there are some sectors, some companies that can be targeted, it should be very important for them. But globally speaking, it'll remain under control, most probably.
Jess Tatham:
What's your best case outlook for the global economy, and what you see as the biggest risk?
Vincent Mortier:
Well, the best case is to have a combination of no more war, the war in Ukraine, in particular, being over in a good manner, meaning with no [inaudible 01:07:26]. To have energy and food prices staying or going back to pre-COVID levels for a little period of time because it's a big issue for most households. So if inflation is stabilizing at a level, that will be fine. And as a result of this, if you can have more confidence by various economic players, so corporate individuals to invest in the future and as a result being to have again some GDP growth, and then you can have a situation which is very nice, which is much better than what we think.
But a bad scenario, so I put aside the geopolitics and because, of course, if Putin is using nuclear weapons, that's a bad scenario, naturally. But on the economic front, the bad scenario could be if you have some credit events, unexpected, that are becoming bigger and wider and where there will be a loss of confidence or some forced panic selling, the markets are so interconnected and become so trendy that you can have some quite bad effects. And we should not underestimate the potential for credit events. And by experience, most crises are coming from credit issues, so it's something we need to monitor in the world, which is very high on debt levels.
Jess Tatham:
What is your favorite non-investment book that's helped you with investing, if you have one, or your favorite investment book?
Vincent Mortier:
I have been offered recently a book which, just to come back on what I said before, which is very interesting and easy reading, which is called A Boom and Bust, and this is by two authors called Quinn and Turner. And I encourage you to read it because it is a history of bubbles.
Jess Tatham:
Okay, nice.
Vincent Mortier:
But very nicely explained, very easy reading. If you go to the beach, you can take it. And it's very interesting, actually, it's a combination of history, consideration, human behaviors, financial history, so really on culture. Another one which is called... it's more classical, from John Train, it's the Money Masters, which is also very interesting, very practical, one of the best portfolio manager in history. So it's always good to take some advice from people who have established track record.
Jess Tatham:
Well thank you so much, Vincent, for joining us today-
Vincent Mortier:
Thank you.
Jess Tatham:
... Inside the Ice House.
Vincent Mortier:
Thank you very much.
Jess Tatham:
That's our conversation for this week. Our guest was Vincent Mortier, chief investment officer at Amundi. If you like what you heard, please rate us on iTunes so other people know where to find us. If you've got a comment or question you'd like one of our experts to tackle on a future show, email us at [email protected] or tweet us @icehousepodcast. Our show was produced by Pete Asch with production assistance from Ian Wolff. I'm Jess Tatham, your host, signing off from the City of London. Thanks for listening, and Josh King will be back next week.
Audio:
Information contained in this podcast was obtained in part from publicly available sources, and not independently verified. Neither ICE nor its affiliates make any representations or warranties, express or implied as to the accuracy or completeness of the information, and do not sponsor, approve or endorse any of the content herein, all of which is presented solely for informational and educational purposes. Nothing herein constitutes an offer to sell, a solicitation of an offer to buy any security, or a recommendation of any security or trading practice. Some portions of the proceeding conversation may have been edited for the purpose of length or clarity.
