2025 Global Outlook

The Bid “2025 Outlook: Building The Transformation”

Episode Description:

As we look back, 2024 was marked by a delicate balance between economic recovery and ongoing challenges. Jean Boivin, Head of The BlackRock Investment Institute, joins Oscar to provide insights into the structural shifts we anticipate and explain how investors can navigate the five mega forces that the BlackRock Investment Institute identifies as key drivers of the new macro regime.

Sources: “2025 Outlook: Building The Transformation”, BlackRock Investment Institute, Dec 2024

Written disclosures in each podcast platform and each episode description:

This content is for informational purposes only and is not an offer or a solicitation. Reliance upon information in this material is at the sole discretion of the listener.

Reference to the names of each company mentioned in this communication is merely for explaining the investment strategy and should not be construed as investment advice or investment recommendation of those companies.

In the UK and Non-European Economic Area countries, this is authorised and regulated by the Financial Conduct Authority. In the European Economic Area, this is authorised and regulated by the Netherlands Authority for the Financial Markets.

For full disclosures go to Blackrock.com/corporate/compliance/bid-disclosures

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<<TRANSCRIPT>>

Oscar Pulido: 2024 has been quite a year for markets from euphoria and recession fears to central banks starting to cut rates as inflation falls. And all this against the backdrop of a major election year across the globe and an ever more fragile geopolitical landscape. Volatility and heightened uncertainty are likely to remain key features as we enter 2025, making this a highly complex and rapidly changing environment for investors to navigate.

Jean Boivin: Investors look at the information that is coming and they're not just reassessing what's going to happen over the next quarter, but they're reassessing the next five years, the next 10 years. And that speaks to, we're in the midst of a transformation along these dimension that is pretty profound.

Oscar Pulido: Welcome to The Bid, where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm your host, Oscar Pulido.

So, what can we expect in 2025? I'm pleased to welcome back Jean Boivin, Head of the BlackRock Investment Institute to help us look ahead to the New year. Jean will provide insights into the global economic transformation that he believes is now underway and explain how investors can navigate the five mega forces that the BlackRock Investment Institute identifies that key drivers of that transformation.

Jean, thank you so much for joining us on The. Bid.

Jean Boivin: It's great to be here.

Oscar Pulido: So, Jean, it's that time of year where the BlackRock Investment Institute publishes its outlook for the year ahead, and in this case, the outlook for 2025. in it, you talk about a global transformation that is underway. So, tell us a little bit more about what you mean by that and how does it change your view on economies and markets?

Jean Boivin: So, we're getting to the end of 2024 as we speak. 2024 for us has confirmed the fact that this has been, continues to be a very unusual investment environment. You can look at the fears that was around recession 2024 that materialize these, typical indicators that didn't work. The fail-safe indicator that failed in 2024 for recessions. You can look at inflation that has come down, but come down without growth, really slowing. And you can look at monetary policy that has reached peak tightness in 2024, and yet financial conditions that have been easier than average and have continued to ease.

So, these things are not lining up in a usual way. That, to us, speaks to exactly where you started, which is that we think this is not about an expansion and a recession or a cycle. We're really in the midst of real transformation. So that's the key word, transformation that are changing the makeup of economies that are changing the way markets are evolving and developing.

And that has profound implications, we think, on how we should be looking at opportunities. One example is that in this environment. We cannot rely on assuming that there's an underlying trend that the economies are evolving around, as we've done for decades before 2020 and spend more most of our time thinking about the fluctuations around that trend.

Instead, right now, it's really the trend itself that we're learning about because of this transformation. So, when you think about five years out, the range of potential outcomes we might be facing because of AI. Or because of the fragmentation of geopolitics or the energy transition, could lead us in very different kind of makeup of, economies, different trajectory.

And so that's the reason why, and maybe as a proof point of what I've tried to put on table here is that if you look in over the last two years, the reaction of the 10-year yield, the long-term rates in the US to short-term data is totally outsized compared to everything we've seen for the last two or three decades.

That to us means that investors look at the information that is coming and they're not just reassessing what's going to happen over the next quarter, but they're reassessing the next five years, the next 10 years. And again, that speaks to, we're in the midst of a transformation along these dimension that is pretty profound.

Oscar Pulido: And you mentioned a few things that, part of what's driving this transformation is you mentioned ai, you talked about, geopolitical instability, the energy transition. These are some of the mega forces that the BlackRock Investment Institute has highlighted as structural drivers of return.

Let's talk about the geopolitical instability one because we've recently talked with Catherine Kress, here on The Bid about what a historic year it was for elections around the world. An election cycle where a lot of incumbents did not fare well. And so that's going to bring. some, new policies perhaps as we go into the year ahead, we're also seeing geopolitical instability in Ukraine and the Middle East. So how does this impact your view on markets and economies as well?

Jean Boivin: Yeah, there's a lot of to unpack here, but there are two main things maybe I would highlight.

The first is, yeah, 2024 has been a very bad year for incumbents. You don't want to be in that situation, where you don't have much room to maneuver with typical levers of fiscal policy or even monetary policy inflation is still an issue, and a lot of desire for change. That has been the backdrop. I think that has led to a lot of promise for change.

We'll see how much change is really happening, but this is really a promise for change coming everywhere around the world in these elections, the US included. And that leads to two big implications when we think about the investment landscape.

The first one is that this continues to push towards a more fragmented world. the protectionist, momentum is reflected in all of these elections, and in the US certainly, this is throwing sand in the mechanics of the global trade engine, makes it harder to transact internationally, makes it more costly.

And so that contributes to a world where trade will be less efficient going forward and more costly. So, there’s an inflation kind of implication coming from there. So that's a big theme, one of the mega forces we talked about. The second big implication is the same one I was describing before wherein the investment landscape for decades before 2020, you could assume a steady underlying trend and then you could obsess about the fluctuations. You could also count on government that had an objective of macro stability. They didn't always succeed, but they were trying to achieve some stability, either through monetary policy or through fiscal frameworks that were meant to provide confidence and trust. I believe that one of the implications of 20 24 election cycle is that we cannot count on this.

I don't think the primary objective of government will be necessarily to provide macro stability. There's a bit of disruption coming from the political side that is more real. There's going to be action that will not, that will have achieved a dollar objective but will not necessarily be in the aim of having a stable growth environment.

And that opens the questions of where will the guardrails of stability come from? And we can frame this as a. A shift away from government providing stability to maybe markets having a bigger role in providing some of the stability. And when it comes to fiscal policy, we might be testing markets appetite for deficits more instead of the government trying not to get close to that testing limit. We might test it and at some point, the market would provide some restraint.

And when we think about measures on the tariff side, protectionist side, that could be disruptive to growth. Maybe again, this is the market that's going to restrain those instincts if we see market reacting strongly. So, it might be a rockier road that we're going to be facing, but one that ultimately gained some stability through the market, forces instead of government policies.

One place where the restraint might not be expected in this environment is if it's on the upside. So, a lot of animal spirit could be generated in this environment. We've seen it. It's not clear who's going to be taking away the punch bowl here. And so, I think one thing down the road to guard against because of this election, outcomes and so on is the fact that we might see some fraught building up. We don't think this is the case for now to worry about, but a year down the road maybe we'll have to think about this.

Oscar Pulido: And since you talk about animal spirits, I can't help but think about the amounts of money that we hear that are being spent in areas like artificial intelligence, the capital expenditures that we've seen from corporations, from the private sector of the economy.

So, let's talk a little bit about the investment needs that the mega forces create. AI being one of them but of course there are many others. Can you give us a sense for just how much are we talking about, when we think about the broader mega forces, what is the size of that investment need and how is it going to get funded?

Jean Boivin: So, we put out a publication on the AI landscape and the analysis we did there, plus if you add the energy transition needs in terms of investment that is required, the two together, if you look over the next six years by 2030, the quantum of what we're talking about is on par with the scale of the CapEx that was deployed in the aftermath of the Industrial Revolution. So, we're talking huge numbers. This is based on what the industry, the companies, are forecasting their CapEx deployment to be.

So, these are things that are seen as being realistic by each of these companies. If you add them up, this is what it comes out to. Now, we were talking about this a year ago, and you could say, well, this is aspirational. And to be clear, it's the same quantum of the industrial revolution in terms of CapEx, but we're talking about six years from now.

The industrial revolution happened over like a century. So, it's not only the scale, but the speed at which this is supposed to be happening is unprecedented. So, you could question whether this is realistic or too much optimism, but the reality is expectations were for about 200 billion to be deployed in 2024, and we are now tracking $240 billion, so 20% more. So even though that was seen as ambitious, it's happening even faster. That build out story is transformational and as transformational potentially as like the biggest revolution we've seen.

Oscar Pulido: I think whenever you take a hundred-year period of capital expenditures and an economy evolving and now say it's going to happen over a six-year window, I think that starts to qualify as a global transformation. I think now I see why you're using that term. When you talk about this transformation, it sounds like it's going to create plenty of investment opportunities. What does it look like practically the investment opportunity set when you're talking about these economic shifts?

Jean Boivin: One thing that is at the heart of all of these mega forces is that they all, and this is the title of our outlook, building the transformation they all require building, building the infrastructure, building the capacity to do it.

Right now, we're in a build-out phase. Adoption is beginning, we are not quite there yet. And eventually we're going to see a transformation. But we need to build it out first. We talked about the quantum that this means. This is true for ai. You think about the political fragmentation, globally, which means rewiring of trade patterns means investment in ports and harbor to adapt to these patterns.

So, I guess a common theme I'm building to is this infrastructure opportunity that is massive globally. That's something that is not in one region. This is in many places of the world, so that has a global aspect to it. and it's something also that is requiring a lot of funding from the private sector.

So, we're not in a situation where infrastructure will be mainly finance funded by the government anymore because we are in this kind of landscape, which we have high debt everywhere, much more constrained. So, that transformation combined with these financing needs together, I think create a big opportunity for infrastructure. So that's one.

If you then go to AI per se itself, we think this is first and foremost about the build out right now. The build out, requires scale to be able to have the balance sheet to finance the type of scale of investment needed that favors, bigger players, that leads to concentration as a result in the outcome we've seen in 2024.

So, you know, we look at the US equity market, it's extremely concentrated. If you compare historically, but at the same time, we think it's concentrated for a reason. There's a logic, it's big players that can, build this out. So, for now, concentration is a feature, not a bug of this environment. And so, another investment implication is not necessarily to be too afraid of the market being concentrated, or even the valuation in this environment. Because if you believe in that transformation, this is what you should expect. Being invested in US equities with, even in the tech more specifically, is part of what we would recommend going into 2025.

And then more broadly, we think this environment when inflation is not resolved, we'll come back maybe to that. But that leads to favoring, short-term credit over long-term duration or long-term bonds as a place where we would balance the portfolio as well.

So, to summarize all of this, the main lens to apply and where do you have to find the opportunities is maybe to step a bit away from the broad asset class and regions and think more about these thematics, these mega force and where they play out. And this is where we see where to take risk in 2025.

Oscar Pulido: Jean, you talked earlier about one of the interesting observations of 2024 was that maybe economies didn't follow the historical textbook that they tend to follow. And you mentioned interest rates were high, but financial conditionings were loose. And so, it has been interesting to just see how the macro environment plays out.

One of the things that you follow very closely is central bank policy, and one of the big questions throughout the year was, when and will central banks start to cut interest rates? They finally started to cut interest rates in the second half of the year. Can you talk a little bit about are those rate cuts going to continue or how are central banks going to navigate what appear to be persistent inflationary pressures?

Jean Boivin: So, one of the big challenges of talking about central bank's outlook, is that this is at the heart of the issue where we are, where we think is we're going through right now, which is that we're not going to recycle. It's a transformation. It's about structural change and trends. immediately, if you talk about central banks, then you adopt a frame around a cycle, central banks are about cycle. We think, in fact, this is part of the reason why we've seen very significant shift in narratives in 2024 because the temptation to apply a cyclical lens to what is not a cycle is very high.

So that's the context in which I'm approaching the outlook for central banks in 2025. Yes, they've started to ease, monetary policy, but they eased when financial conditions were already easy. Inflation has fallen, but for reason that to our mind have little to do with, the classical cycle- we haven't seen growth slowing. We haven't seen financial condition tightening, which is the mechanism by which inflation would fall, typically if it was due to monetary policy. So, I think this inflation falling that we've seen that has prompted central bank to ease monetary policy was not the result of an evolution of the cycle.

Underneath all of this, we think that there are these ongoing forces that will keep inflation sticky. And I think we're seeing even more of that over the last few months. we see inflation start to tick up again, that was our expectation. We have been at the view, and I guess we continue to be very much of the view that even though the Fed has started to cut rates in September, no matter what their expectation was, we don't think this is the beginning of a typical easing cycle. So, this is a recalibration, we might get some more cuts, but the bigger story is that I think we won't go very far in terms of cutting and inflation will reappear not in a massive way, but re reappear, constrain them in their ability to cut rates.

And that's going to contribute to more rates that are, structurally higher than they have been for, Since 2000. and also, long-term rates that I think will continue to drift up as a result. So central banks at the end of the day may be cutting a bit more, but this is not an easing cycle story. and inflation is not, resolved in our review. so that's going to be what's going to play out through 2025.

Oscar Pulido: So, what does this mean for investors who maybe can't look at the past as the playbook that they would've used if in fact we're going through structural changes, and you can't apply the cyclical lens that you've applied.

What does this mean portfolios? You've touched on US equities being an area that you still find compelling. And you talked about thinking about themes as opposed to asset classes and maybe that being a way to think about portfolios, but what else would you add to that?

Jean Boivin: In this environment, we need to be ready. And again, with 2024 illustrated that we need to be ready for a temptation to apply a cyclical lens to other phenomenon that we eventually learn are not about the cycle. Central banks, like all of us will be pushed in the direction they will have to course correct. This is something we need to be, gearing up for in 2025. And the way to deal with that is, we unfortunately are not in a world where we can like. build a portfolio, think about an asset allocation, setting it and forgetting it. Certainly not for five years, but even for the course of 2025, we need to be more active. We need to be more nimble.

And I think whenever we see markets going far in the direction of adopting a recession lens or cyclical lens. We would take the other side of this, try to temper those, temptation. That has worked well in 2024, and we think that's going to continue to be a story for 2025, but on top of being more granular, not look at asset class, look more about thematic, I think the dynamism aspect is crucial. You can do that in different ways in portfolios, but, reassessing, will be key.

Oscar Pulido: Well, Jean, now you've done the hard work of setting out the outlook for 2025 and I guess now comes the fun part, which is to see, how accurate it is-

Jean Boivin: -Or not!

Oscar Pulido: Or not! We will definitely, check in periodically over the course of 2025 with you and other members of your team at the BlackRock Investment Institute to see how it's going. Thank you for sharing, your views on the outlook here, and thank you for doing it on The Bid.

Jean Boivin: Thanks a lot.

Oscar Pulido: Thanks for listening to this episode of The Bid. Next week, mark Weidman, head of BlackRock's Global client Business, will guest host a miniseries on the investment opportunities in the infrastructure landscape. Make sure you hit follow and don't miss this exciting miniseries.

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Spoken disclosures at end of each episode:

This content is for informational purposes only and is not an offer or a solicitation. Reliance upon information in this material is at the sole discretion of the listener.

In the UK and Non-European Economic Area countries, this is authorised and regulated by the Financial Conduct Authority. In the European Economic Area, this is authorised and regulated by the Netherlands Authority for the Financial Markets.

For full disclosures go to Blackrock.com/corporate/compliance/bid-disclosures

The Bid: “2024 Midyear Stock Market Outlook: Waves of Transformation”

Episode Description:

Vivek Paul, UK Chief Investment Strategist for the BlackRock Investment Institute joins host Oscar Pulido to discuss the rise of AI and its potential to deliver a productivity boom, the role of private markets in infrastructure, and how geopolitical dynamics are influencing investment strategies, and ultimately answer the question of how investors can position themselves in this unprecedented era of change.

Written Disclosures

This content is for informational purposes only and is not an offer or a solicitation. Reliance upon information in this material is at the sole discretion of the listener.

For full disclosures go to Blackrock.com/corporate/compliance/bid-disclosures

TRANSCRIPT

<<THEME MUSIC>>

Oscar Pulido: The BlackRock Investment Institute recently published their 2024, Midyear Outlook where they consider the macro and market outlook for the remainder of the year. They highlight the potential for an economic transformation on par with past technological revolutions driven by five mega forces, three in particular, could drive a surge in investment in the coming years. The rise of AI, the low carbon transition, and the rewiring of supply chains. Yet this unfolds against a backdrop of high inflation rising interest rates and record government debt levels presenting a complex landscape for investors.

Welcome to The Bid, where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm Oscar Pulido. Joining me is Vivek Paul, UK Chief Investment Strategist for the BlackRock Investment Institute.

We'll discuss the rise of AI and its potential to deliver a productivity boom, the role of private markets in infrastructure, how geopolitical dynamics are influencing investment strategies. And finally, how investors can position themselves in this unprecedented era of change.

Vivek, thank you so much for joining us on The Bid.

Vivek Paul: Thanks, Oscar, for having me.

Oscar Pulido: So, Vivek, I know that the BlackRock Investment Institute has recently published the mid-year outlook, and there are three major themes that, have been outlined. So perhaps you can tell us what those themes are and how you think they will play out.

Vivek Paul: Absolutely Oscar, so that this is a really exciting moment in investing right now because we are on the edge, potentially of some huge transformations when it comes to AI, when it comes to moving towards the low carbon economy, when it comes to geopolitical dynamics and mega forces that you and I have talked about in the past. And all of those are uncertain. This is an environment where plausibly a bunch of different scenarios could play out. So that's the background, that's the backdrop against which we have formulated these three themes.

And the first one is about getting real. It's about this idea that there is a transformation occurring when it comes to the real economy. And if you think back over the last 10, 15 years, a lot of it's to do with the financial economy. It's to do with the path of interest rates, seemingly ever lower or central banks coming to the rescue. What are they going to do next? This is an environment now where it's about the real economy. It's about incredible cash flows being generated by some companies because of some of the transformations that are occurring. It's about being able to spot the winners and the losers, which maybe be are even more outsized in their difference than before, because those who can really ride these transformational waves can have phenomenal returns. Those who can't, those that get left behind, don't have the safety net of those central banks in quite the way that they used to in the past. So, this idea of getting real is that first key theme, which I think really sets the scene. The second one is about leaning into risk, and that's really important because I mentioned the idea that the potential future outcomes can be very different and there could be a bit of a temptation to sit on the sidelines and wait to see what plays out. That's not what we think we should be doing right now. We think we should be leaning deliberately into risk. Being deliberate about time horizons. What do we know? Even if the future's uncertain, there are things that we know about the coming six to 12 months. We lean into the idea of a concentrated AI scenario where we see some benefits from some of those big names who have done really well. We think that can continue and, potentially because of the idea of a productivity boom later on, we can continue to have a lot of interest from investors in terms of some of those key names. So, the idea of leaning into risk in terms of time horizon in terms of the type of exposures we're talking about.

So, we have been playing this environment in a deliberately concentrated manner. So even though some of those core indices are really concentrated now, we'd be even more concentrated still because that's where some of the opportunities are. And then being really deliberate when it comes to the idea of where the opportunities are across public and private market assets and the type of exposure we want to get. So, this is an environment which rewards being a little bit more dynamic and active in terms of getting some of those exposures. So, this is, again, another thing that we need to lean into that risk.

And the final point, I guess the final, the third theme is this idea of spotting the next wave. And this is all to do with those scenarios I was talking about at the start. There could be a bunch of really materially different world outcomes that could occur and being understanding, you know what they are.

What are the catalysts? When do we need to shift portfolios? That really could be a huge source of future potential benefit. We need to be able to potentially transform our portfolios depending upon what we learn over the course of the coming months and the coming years. So that idea of leaning into those scenarios, not just being afraid of sitting on the sidelines, leaning into risk, and getting real, they are the three themes that we think really matter today.

Oscar Pulido: Now, you didn't mention AI, but you did talk about the real economy, which leads me to believe that maybe that's where we can start and maybe talk about AI within that first theme because this is a trend that over the past year and a half has really capture a lot of headlines and companies that are associated with AI are seeing their stock market valuations surge. Perhaps the question is, do you see the potential for AI to continue to bring on these productivity gains that the market seems to indicate are happening?

Vivek Paul: So, I think the real key point here is that firstly, this AI transformation is a real thing. This is happening now; we're seeing outsized earnings already. So, this is not just something that could happen in the future, this is transforming the real economy now. But I think. A really key point is that there is uncertainty. We need to acknowledge this, so there is a world out there, as you suggest, where there are real broad productivity gains across the entire economy, and maybe that has transformational impacts on. The idea is that's the reason why growth is higher relative to what we've seen in the past. It might be a reason why inflation is lower relative to what we've seen in recent years. So that is a possibility, but it's not a certainty. And I think that is really crucial right now. So, the point is that could occur and the fact that could occur is part of the reason why we are seeing such phenomenal performance from some key names, in the course of the last 12 to 18 months, as you suggested Oscar.

And in terms of where we are right now, we would lean into the notion of that for the next six to 12 months. This concentrated AI story really could continue that we could really continue to see some outsized performance by some key names, and whether or not that then broadens out into broad productivity again, is a possibility. But it's not a certainty. The fact though, that it's a possibility is part of the reason why we have that conviction over the next six to 12 months.

And I just want to pick up on something you said with regards to, the amount of outperformance and the size of those valuations. We wouldn't see this as bubble territory now. This is an environment where the earnings have kept pace with those fantastic gains in stock prices for many of those big names. So, this is an environment where earnings have delivered, that means we're not in a bubble, that means we continue to see a strong runway for some of these companies ahead. And there is that possibility that it broadens out across the overall or the overall economy.

Oscar Pulido: Right. So, what you're saying is that a lot of these AI names, these companies have seen their stock prices go up a lot, but so have their earnings. So, the valuations are, still very reasonable and it's still a theme that you're recommending within portfolios.

Vivek Paul: So, Vivek, what are some of the implications of the advancement of AI on investor portfolios and perhaps thinking outside of technology, are there ways to invest in the theme of AI in a more diversified manner as well?

It's a great question, and I think when you're thinking about AI, one of the things we talk about in the outlook is the idea that there are going to be some distinct phases when it comes to the AI investment opportunity set. There's going to be this build out phase, but then the idea of the expansionary phase where it potentially goes beyond just the names who have benefited so far. I think it's exactly what you're talking about, Oscar. I think there are potentially future huge implications for the likes of healthcare, for the likes of financials. This is stuff that goes beyond just a few limited names.

More broadly, when you're thinking about a potentially transformative impact like AI, you need to be thinking about the potential, the stack of where the opportunities might lie. So, if you imagine, thus far it's really been those names who have been able to provide the sort of hardware sort of solutions, the idea of chips that are needed in order to see that sort of spurt of activity. But what about the next phase? What about the next phase when it comes to the software, what, when it comes to the apps that we're going to all have on our devices, on our phones, and that can be transformative across a whole number of different sectors.

This is part of the point that we were making earlier when we were talking about the idea that there could be a productivity boom, it could have economy wide effects, and that's something that will be priced into market sooner than we actually fundamentally see those things transpire.

Oscar Pulido: So, Vivek, when we talk about AI, I think we all believe it to be this big productivity enhancer over the long term, and I, think you would agree we're going there. But in the near term, and I know this was discussed in the mid-year outlook, is that it could actually be inflationary in the near term because there's just so much infrastructure that you need to build out in order to support it. In fact, Will Su who we recently had on the podcast, from our fundamental equities team talked about just the raw demand for energy that is required. So, can you elaborate on that a little bit more?

Vivek Paul: I think it's a great point, and I think that is something that really, as we are learning more about what this could be, I think it's something that's coming to the forefront of our minds. So, I agree with the point that, the conventional narrative has been that eventually that could be this huge productivity benefit, which maybe is a deflationary force, but in order to get there. We need to see spending; we need to see real money being put to work. And if historical guys are anything to go by, there is a lag between spending that money and then seeing those productivity benefits come through.

So that means that in the nearer, maybe this is actually an inflationary force before it is deflationary to the point you made. And I think, that could work in just the lagged effect way that I talked about, but also imagine bottlenecks that could occur, the amount of power that we might need to kind of service.

This huge transformation might mean that maybe the areas where actually there are bottlenecks that occur in terms of those data centers, the ability to produce the amount of energy that we need and that could contribute to, to contribute to those inflationary forces too.

Oscar Pulido: So, AI as a theme seems to be, at least in today's markets concentrated to a few names, but what you're saying is that going forward, there could be a lot of different ways and a lot more diversified ways to invest in this theme across sectors and geographies. Vivek, we recently spoke to David Giordano, on the importance of infrastructure in helping the world economy in the low carbon transition. He also talked about the role that private capital will play in helping fund this infrastructure. You talked a little bit about private markets in, one of your opening comments, but how should investors be thinking about private markets in their portfolios?

Vivek Paul: Private markets are crucial to understanding the opportunities here, and you can think about the opportunities in the private markets, maybe as an advanced preview of the huge companies that could enter the public markets later on. Maybe they don't, maybe they do, but to limit ourselves only to the public markets, to capture some of these transformations, I think would be missing a trick.

We would explicitly lean into private market assets. When we build portfolios over the long run, we typically have a sizable allocation to private assets. And within the growth private market space, we particularly like infrastructure opportunities. They cut across several mega forces that are, playing out across the broader economy. You mentioned, I think the transition, the amount of energy that is going to be driven from renewable sources is likely to go up over the course of the coming years, is something that is central to our transition scenario that we have that is going to need a lot of infrastructure spending.

The idea of demographics. Demographic headwinds and tailwinds exist across the globe, and typically we find, and we write about this in the outlook, that as those demographics, point in a certain direction, you end up seeing more need for infrastructure in those regions. And another mega force that we've been talking about, the idea of geopolitical dynamics, the idea of reshoring dynamics that are going on. Again, that's going to lead to the need for infrastructure spending. And this is all against a backdrop where many developed market economies don't necessarily have a huge amount of headwind for governments to fund some of that infrastructure need.

So there's a real opportunity here for private capital to play a role in reshaping the future economy. So, the headline answer to your question is, if we only limit ourselves to the public markets, there are great opportunities there, but we are not seeing the full picture and I believe in the portfolios we design, we'd have a greater allocation to private assets that many see is typical.

Oscar Pulido: And as you talked about, private markets, you actually, you mentioned mega forces and we've talked about ai, which is one of the mega forces that the BlackRock Investment Institute has highlighted. you talked about demographics. you also talked about the transition to a low carbon economy. Let's talk about geopolitical fragmentation. Which is another one of these mega forces, and it is causing a rewiring of supply chains around the world. So, what does that mean for investors when we see this rewiring of supply chains that's going on globally?

Vivek Paul: So, I think it means that we need to be a little bit more granular in terms of the opportunity set that we are going to lean into,

For instance, we look at the US and China, we look at the EU and China, and there is a structural dynamic that exists that didn't exist before. This is an environment whereby the typical supply chains we came to rely upon for so long are being questioned because of reasons to do with national security to do with competition, you name it. That's happening. So, what's happening is the economy is dealing with that. Supply chains are rewiring, and you look at countries such as India, such as Mexico, who stand to benefit from being a node in the middle between two of those great superpowers to actually profit from the ability to sell into local markets, between the US and China. So, there are some geographical dynamics that directly occur as a result of this. And this is part of the broader thinking around geopolitical tensions and dynamics.

And more broadly, if you think about this and the influence over geopolitical dynamics on the broader macro, this is a force that kind of contributes to inflationary pressures. This is part of the reason why many of the scenarios we have, have interest rates a little bit higher than we've been used to. This occurs at a macro wide level. This has an impact there. It also means that there are particular opportunities we can lean into at a regional and geographical level as well.

Oscar Pulido: Right, on that last point, the reason it has implications for interest rates and inflation is that reshoring has been this trend that, means companies are a little less focused on putting their production in the lowest cost location and perhaps putting their production in a, more, politically friendly and perhaps closer geographical, location. And that can have inflationary. consequences though to the end goods that they produce.

The other, topic when we talk about geopolitics that we have to discuss this year is elections. It's one of the biggest election years on record in terms of the number of countries that have elections. We've already seen this year, Mexico, France, India, the UK, where you are, Vivek, and of course we have the US election later this year. So, how are investors preparing for the potential policy shifts that come when we see changes in government.

Vivek Paul: The first point is that some of these policy shifts that could occur are really sizable, right? And that this contributes to this environment of huge uncertainties, contributes to this world where there are multiple different potential ending zones for the way in which the global economy looks.

And just taking a couple of those, examples. we are recording this Oscar in the week where we've just had the UK election. We've just had the second round of the France selections, and these are big, sizable moves and they have potentially really meaningful impacts in terms of the policy here domestically, but also more broadly globally.

But what's interesting, I think when we're thinking about these policy shifts, is as much as what is not being said, as is what is being said. I'm coming come back to the point we were making earlier when we were talking about the geopolitical dynamics, the potential impact on inflation, some of the policies that are being touted in the American election, lead to potentially really meaningful inflationary pressures if some of the tariffs that are being talked about actually were enacted.

Now that is sizable and that is in the public domain, and that's being debated, but what's not really being debated, particularly in the United States, is the fiscal dynamic. The fiscal pressures, both of the leading parties are actually pursuing policies, which is likely to not necessarily place any brakes on terms of the size of government spending relative to the income it gets in. And what does that mean? That means that there could be subsequent pressure in the long run-on bond deals in those regions. So again, that directly translates into an investment view. So, understanding what the dynamics are, understanding what the policy shifts could be, trying to think about the long run positioning that you take is critical to understanding the investment outlook right now.

Oscar Pulido: And it speaks to one of the themes you talked about, which is the world economy has a lot of different scenarios and. And pathways that it could take. and some of that is just due to elections and the potential policy changes that come as a result of that. Vivek, when you're an investor and you're hearing about these three themes, what should they be thinking about? what is that message to investors who now want to think about what to do in their portfolios?

Vivek Paul: I, think the really crucial one is there is a lot of potential outcomes out there. there, there is uncertainty. But this is an exciting time to be investing because leaning into risk mean there are potentially huge opportunities that we can capture. Maybe we need to do things in a little bit of a different way. Maybe we need to be a bit more dynamic. Maybe we need to think about building blocks that aren't the ones that we used in the past, but this is an exciting time. This is a time to lean into risk. This is a time when the real economy is being transformed. and I think it's exciting. it's not easy, but it's exciting.

Oscar Pulido: Well, Vivek, I know you've been busy, working with your colleagues on developing the midyear outlook and now getting the message out. So I hope you find some time to relax this summer and see how the outlook plays out. And I'm sure we'll have you back to talk about the end of 2024 and then looking ahead to 2025. But as always, thank you for joining us on The Bid.

Vivek Paul: Thanks, Oscar. Thanks for having me.

Thanks for listening to this episode of The Bid. Next week I'll be speaking with author Darius Foroux about the stoic principles of investing as we consider how investors can get ahold of their emotions to build more wealth and become better at investing. Subscribe to The Bid and don't miss the episode.

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