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Tom Liebi Hello everyone and welcome to our latest episode of our Topical Thoughts podcast. I'm Tom Liebi, Head of US and UK market strategy at Zurich and I'm here with Ross Hutchison, Head of Eurozone market strategy and Ross just published a topical thoughts paper on green shoots in the old continent. Now Ross, tell me, you're writing about green shoots, about the European economic renaissance, so it sounds very optimistic, so what are you telling us? What's happening in the Eurozone these days.

 

Ross Hutchison Thank you very much for the kind introduction. I mean exactly as you say, this piece is, it's an optimistic piece I think more broadly, but I think we should say it's not unrealistically or unaware in its optimism, i.e. there are very clearly risks around this outlook in Europe. Nevertheless, you know, in our opinion, there are some genuine positive developments that we have seen that lead us to essentially upgrade our medium and longer term outlook for a European economic growth perspective. We've also seen some good news, I would say, by the way, more broadly on inflation coming down, the ECB is cutting rates, all of this is a little bit positive overall, but not unreservedly so as we go into.

 

Tom Liebi So, that sounds definitely quite positive because we are kind of used a little bit to have more modest news maybe from the old continent as you also pointed out in the past, but what has triggered this new optimism now? What has happened recently? What would you like to point out to our listeners?

 

Ross Hutchison So there are, I would say, two things running in parallel here right now. So the first one is, we actually released a piece last year on the Draghi report, which is incredibly kind of well-rounded, very detailed report on the fact that something fundamentally needs to change in the European Union with respect to its rather underwhelming I mean, perhaps that's an understatement, rather underwhelming economic growth, realized economic growth relative to areas such as your markets, such as the US, for example. And we have seen some progress with respect to that report, certainly in a mentality sense, but even from the European Commission's perspective on a variety of pieces of legislation that's discussed and focused on simplification, on deregulation. So there's that element of it. And then there's a secondary element, which was really a surprise and has really pushed forward to this story of optimism, which was following the German elections earlier this year, snap elections that were called, there was a surprising, essentially historic announcement of fiscal loosening in Germany. So that's come from the CDU & the CSU, the center-right party, you know, who were extremely instrumental in creating the debt break in the first place, they've now actually kind of loosened that significantly and that's a real, real positive when we look at our economic forecast going forward, something I think frankly was sorely needed in Germany, if it is spent well.

 

Tom Liebi No, absolutely. I mean, I did read your paper and you point out this is definitely a game-changer. I mean you talk about increased fiscal spending in Germany. There are obviously a few questions that pop up in my mind initially. First of all, what measures or where will the focus be of this fiscal spending? That's definitely a crucial question. Will it be a one-off or will it really help to lift longer-term growth potential? And the second question is - will it probably most likely to be focused around within Germany, but will there also be positive spill-overs to the rest of the Eurozone?

 

Ross Hutchison So, on the first question there, on the design, certainly from a holistic perspective from us, we certainly hope that the focus, and we write this in the piece, that the focus needs to really be on increasing long-term potential growth in Germany. And that, by the way, much like in most of Europe, means overcoming the drag of demographics. So essentially we need to find a way to increase what we call total factor productivity growth, essentially getting more per worker. And I think there are a variety of ways that that can be achieved in Germany. And there's kind of a two-pronged approach to this thing, the fiscal package here. So on the one hand there is this very very large number, 500 billion euros, that is specifically to be allocated to this infrastructure fund and the intention here is to spend that over 12 years. And essentially this number has come up basically with some economists, economic experts who are cross-party and party-affiliated German experts saying what is the estimates of the under-investment that has occurred, or in this case not occurred in Germany over the last many years, and what do we think we need to spend in order to make up for that. So this is all infrastructure spending in transportation links, in energy links, some eventually related to climate and the energy transition. When you look at the kind of historical classical multiplier numbers, you get that these kind of infrastructure spending, you can be fairly confident that they're going to have a pretty positive impact on the economy because we know Germany has underspent in this sense, i.e. Investment has been lower than comparative markets. The second point, and this is where there's a lot more variance around how positive this is going to be, although we do land that it will be positive, is on the defense spending piece. There is essentially an open-ended commitment here to any spending on defense that's in excess of 1% GDP is exempt from the debt break entirely in Germany. So we're looking at numbers possibly 3%, maybe even 5% is being discussed for NATO. I think the numbers that I think look realistic right now is a medium term 3.5% figure that we're going to get to in the coming years. If spent well, and we kind of talk about this in the piece, this is essentially research and development spending that can hopefully have these positive externalities with respect to civilian use that's very hard to know beforehand but hopefully you can have that then this could be a real real game changer for basically a kind of inflection higher significantly in growth because of all this technological overspill in robotics and drone technology etc etc. Just quickly to answer your second point there is boosting consumption and business investment generally in Germany, which is what I clearly think will happen on the back of this historically large fiscal package, should very clearly have a spillover to the rest of the Eurozone through that increased consumption investment, i.e. ex-German firms and businesses generally, but within the Eurozone, should expect to benefit from this level of increased activity generally. Procurement should also opportunity should come for European firms generally as well. And then there is this the second piece which is also although Germany's biggest, the single biggest you know chain that we've seen with respect to fiscal policy, there are other countries that are essentially through the defense channel talking about more fiscal spending generally, which is happening at a broader European level as well. So this is that angle both the extra defense spending and the boost from Germany spilling over that should impact the other countries, possibly.

 

Tom Liebi Obviously that just, I mean, I would like to follow up with many other questions because it's definitely a very hot topic at the moment, but maybe let's stick to just what you said in the end. What does, I means it sounds like a kind of a significant rise in fiscal deficit. Obviously, you pointed out in the beginning that Germany has some leeway, but what does that mean for the fiscal situation, for the deficit, for the debt sustainability? Is the AAA rating at risk at all or what does it mean?

 

Ross Hutchison So the one positive thing that I would start with here is that we are already seeing rating agencies take this new information into account, and they haven't changed the rating, they haven't changed the outlook on the rating. So S&P, at the time of us recording here, just last week they reaffirmed Germany's rating at AAA. That, of course, doesn't mean that there are no risks around this number, but just to kind of talk about the numbers, Germany has, debt to GDP slightly above 60%. Has generally run deficits because of its debt break that are positive in a sense. So it's structurally been close to zero, not quite close to 0. And of course, during COVID, that did widen out, but not as much as others, and it's come back more quickly than others as well. But the key point here is, when you look at projections of that number in the future, what's going to happen really, relies on what the fiscal multipliers of this actual spending is going to be. So you can paint negative scenarios where a lot of money is spent very poorly i.e. in things that don't end up leading to persistent potential growth increases, or you can even come up with scenarios where actually the spending is so powerful, but it ultimately even reduces debt even faster than it was going to anyway. Now, I would say we sit somewhere realistically in the middle of that, but I would lean more towards the positive side of it. I think you will see debt and deficits both increase in Germany in the short term, the next, let's say, few years, two, three, even further out. But ultimately, I do think that it will stabilize at a reasonable level, and I also don't think you're seeing a, shall we say, permanent shift in the fact that, I mean, German politicians and voters overall still do have an aversion to debt. I think that it's certainly higher than in other European areas, and that will be coming back down again, I would expect as well. So I would be quite positive on that, but of course there are risks.

 

Tom Liebi And of course, I mean, you mentioned it. It's a bit of a, well, it is a game changer. It's really kind of took some time, but now it seems that in Germany, they are willing to increase fiscal spending. There will be spillovers, positive spillover to the rest of the Eurozone. But what do you think, will it also help this renewed kind of, well, this openness to more fiscal stimulus? Will it also lead to kind of more broader moving together within the Eurozone, talk about the Capital Markets Union, about common debt issues, any thoughts on that topic in this direction?

 

Ross Hutchison I think that's a great question. I think it's a super complex area, so I'm not going to take about three hours to answer this now, but I'll try and do this as succinctly as possible. I mean, I think there is actually some complexity here with what Germany is doing in two regards. Firstly, Germany has historically been one of the most vocal critics of fiscal spending, historically, in the Eurozone crisis. And there's no irony lost in a few nations who perhaps look at Germany and say, well, how do you think it's appropriate to be breaking possibly the fiscal rules around this, for example, the Stability and Growth Pact doesn't allow you to have more than 3% GDP as a deficit, well Germany's plans do suggest that that is going to happen and for possibly a sustained period of time around that level as well. I think ultimately the pragmatism around the geopolitical situation outweighs those concerns. And what I mean by that, we talk about this in the piece. We have seen since the Covid crisis really an enormous but quite quiet growth in what may be becoming a new risk-free asset or kind of possible substitute in the future of a risk- free asset in the eurozone through the EU denominated bonds. We're almost getting towards and likely projections are we getting towards a trillion in those outstanding in coming years and I think that the nature of this coordinated defense push across NATO members and allies is likely to see conversations going towards some more joint risk-sharing around that kind of fiscal push there in general. So I think that the specifics of the German decision themselves have some complexity to them, but I think that's outweighed by the very, very positive sense of, I guess, kind of shared risk in the world generally that's pushing a lot of European Union and allies closer together in that sense.

 

Tom Liebi That sounds convincing. Maybe let's briefly touch a different topic, given that I have you here, Ross, and there's a lot going on. We've talked more about long-term promises and prospects of lifting growth, but we all know near-term is relatively uncertain. I mean, there's lots of talk about tariffs, US tariffs. There are ongoing negotiations, and it seems like President Trump has a particular focus on the European Union. What's your view on that topic? I mean, it probably, there are two different topics, but still they kind of mix in because both are related to growth and uncertainty.

 

Ross Hutchison Absolutely. So, I mean, I started at the beginning by saying paragraph one is optimistic, then paragraph two sets out some kind of, you know, pours a bit of cold water from the realities. And then, I mean, the real end to that comes, a real negative shock comes I think in paragraph three, which is essentially saying the near term outlook, I mean, genuinely isn't very good. And that's primarily from an expected tariff shock that will come there. The European Union has increased its dependency on the US as an export market over the last few years. China has actually become less relevant for the EU in that sense as an export market. So inevitably there are going to be some negative consequences because of this trade war and these tariffs that are coming through. Where the view is though ultimately is that this represents more of a kind of one-off shock and actually in a sense is the kind of shock that Europe needs and a lot of these things are happening are shocks that Europe needs because it should change and we're already seeing that happening through the rhetoric and these policies generally, for example, is fiscal policy. It should be less about net export-driven growth, and it should be more about consumption, domestic investment to really rebalance that economy in a world that is genuinely turning more and more away towards, I should say, friendly general market terms for trade.

 

Tom Liebi Maybe take it one step back and putting everything in perspective looking at the bigger picture. We also know from the past that Eurozone obviously had its struggles, but it usually tended to grow together, make a step forward in times of crisis. And this seems to be, I would say, one of these times. So if you look at the geopolitical situation, the tariff situation, growth prospects, so, this seems to be a bit of a wake-up call, a chance to really improve the near-term, particularly also the long-term future. So do you think this is really a big step now or do we face the risk of, let's call it bluntly, over-promising and under-delivering?

 

Ross Hutchison I think that risk is very clear and present, but I do fundamentally think that we have seen such a significant positive change in mindset because of the realities that we're seeing now, because of essentially the untenable nature of kind of the economic underperformance and some other pressures that have been building up that there are going be persistencies to this positive pressure for change. So I guess one thing that I'd just like to touch on as well very briefly is - we are seeing at European Commission level and at some national government levels, a shift in mindset away from what I would say is a kind of regulate first ask questions later to more of a recognition of the trade-offs that regulations can bring. I don't want to kind of create the sense that it's purely deregulation is a virtue in itself, but I think often you've found that with some legislation within either the European Commission level or more broadly within across Europe the focus has been less on achieving that kind of sustainable, persistent economic growth and really the burden on firms has grown really in some cases to quite immense levels in terms of reporting requirements, in terms of uncertainty around, you know, how exactly legally you can interact with new technology such as AI, for example. And I think there is a huge mindset change there. You see that in the European Commission's Competitive Compass. For example, you've seen things like the Omnibus simplification packages, which are trying to alleviate these burdens. I think these may not be perfect, what they're doing, but I think the mindset shift is enormous, and is really night and day compared to where we were just a few years ago.

 

Tom Liebi That is very reassuring to hear. Thank you very much, Ross. And there are definitely green shoots in the old continent, as you say. And we are hoping to see a European economic renaissance here. So I think we come to an end here for the podcast. But once again, I would remind you all there's much more on this topic and our topical thoughts paper to be found on Zurich.com. Thank you very much, Ross, for joining me here. Thank you everyone for listening in, tuning in, and, definitely looking forward to the next episode of our podcasts. Goodbye, everyone.

 

Ross Hutchison Thank you very much, goodbye.

 

 

 

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Transcript

Guy Miller, Chief Market Strategist & Economist: Hello and welcome to our Mid-Year Outlook 2025, which this year we've titled Living in a Land of Confusion. Now, we're going to be doing two podcasts. One will be focusing on the macroeconomics of the year and into the year-end and we'll be doing a second podcast for those who are really interested in what this means for the financial markets, whether that be equities, bonds, credit, or anything in between. But today we're gonna kick off with the macro side of things. And It really comes down to all the T's. We've got Trump, we've got tariffs, and we're going to start with Tom Liebi to speak a little bit about the United States. Tom, let's speak about what's happened in the first six months. We have a new president who's been energized to come into office. He's certainly been living up to his election pledges and he must be making your life very easy. He even tells you when to buy equities. Has it been that easy?

 

Tom Liebi, Head of US and UK Market: Absolutely, yeah. I mean, now that you mention it, he sends out the tweets or, well, it's not a tweet, it's a social truth. But you're right. Obviously, things have started quite unpredictably. A lot of, I wouldn't call it chaos, but...

 

Guy Miller: Oh, come on, call it chaos, or at least erratic chaos.

 

Tom Liebi: Erratic chaos, absolutely. And I don't think a lot has changed since then. I mean, what we do now know that our initial assumption of Trump being mostly transactional and not maybe a fundamentalist seems to pan out. So just coming back to your example about tariffs, we did expect, I think most people did expect tariffs to be implemented, but then came Liberation Day with this really, let's call it, outrageously high levels of tariffs, which triggered a bear market in the equity market, which raised the recession fears and growth worries around the globe. Just for him then to eventually track back and postpone the tariffs, the same story when he went into a tit for tat duel with China, where he said, look, I'm willing to really lift tariffs to 145%. Just to then also postpone these tariffs for 90 days. And since then we have seen much more softer tones and much more dovish stands. And I think that made my life definitely a bit easier over the past few months.

 

Guy Miller: What do you really think President Trump wants from these tariffs? Is it really to have a zero or close to zero trade deficit or is this a much bigger bargaining lever that he's using for other nations?

 

Tom Liebi: No, look, in the end, I do think he really doesn't like trade deficits. I mean, he made that clear all over his career, not only since he became president, that started well before that. And probably it is coming from his background. He's a dealmaker. He does think that it's not a win-win situation. It's a zero-sum game. So if there's a deficit, somebody has to lose. I think that that's really what he thinks. So he wants to reduce these trade deficits, he wants manufacturing to come back to the as he wants things and stuff and goods to be produced in the U.S. again, whether that makes sense from an economic point of view or not. But I truly think that's his intention. Whether he wants to aim for zero trade deficits, maybe initially that was a desire or a wish, but probably he gave that up because he must have realized that's not realistic in the current world. But still, I do think that he wants to have what he considers to be a fairer deal with regard to trade, with regard to tariffs, with regards to taxes.

 

Guy Miller But tell me this, I mean, that sounds sensible in many ways, and you could argue that we had become too extreme with some of the deficits that we've seen. But tell me, I always say that tariffs are a tax, and they're a tax effectively in your own people, because we see spikes in terms of the revenue coming from tariffs. But it's not the Chinese or the Europeans that are paying that, it's the domestic population, whether that be consumers or companies. But what did tariffs mean from growth in terms of your own growth figures for this year? And perhaps tied to that, what does it mean for inflation in the United States at a time where we've just come back from very high levels of inflation?

 

Tom Liebi: I mean, first of all, as you say, tariffs are basically a tax. Now, it remains to be seen who eventually pays that tax. That also has a lot to do with how you can substitute for goods or services, how elastic demand is, so, is it easy as, well, Trump made an example himself with the dolls, you know, do you really need 20 dolls or are five dolls enough? Now, it really depends, and why is that important? Because... If we talk about goods or services that are highly inelastic, meaning people need them or they absolutely want them, then yes, probably in the end, prices will go up close to the amount of the tariffs, which means the consumer is going to pay. If the demand is very elastic, people can say, no, I actually don't need 20 dolls. I mean, five are enough. Then obviously nobody will eventually pay the tariffs because people would just shift the amount to other things, which  means then it will be the exporter in the foreign country who kind of takes the cost, not the tariff, but has fewer sales and less demand for its product. So yes, it is a tariff. And probably the truth is somewhere in between. As you can see already now, we look at consumer spending, we look at business spending in the U.S., and it hasn't, I mean, it did slow down, indeed, but it  hasn't kind of, it didn't fall of a cliff. So somebody is paying the tariffs, and that will mostly be the U S. consumers. And inflation.

 

Guy Miller: Is that really going to prevent the Fed cutting rates this year, or do you think they'll look through any kind of short-term move up?

 

Tom Liebi: Well, look, they're quite reluctant currently. We have seen that during the latest call and after the meeting, because they don't know. Nobody knows for sure. Of course, if you simply add a tariff to a price, it will be inflationary, because the price will go up by that amount. But as I just said, if demand slows, if there's less growth, that will have the contrary impact on tariffs. So the Fed wants to see which effect is strong. I still think tariffs are mostly a headwind to growth, rather than a long-term issue for inflation. Now the only problem maybe, maybe not the only but a key problem for the Fed is we do come from a period where they have consistently not reached their target with inflation being too high. So now they are kind of burnt. And there may be a bit over cautious not to let it happen again, which is why I think they are reluctant, although to answer the question, I don't think the main problem with tariffs is inflation. It's more about growth.

 

Guy Miller: So come on Tom, chips on the table, how many cuts between now and your end?

 

Tom Liebi: Two more cuts in the second half of this year.

 

Guy Miller: Great, I hope we've got that on film, because we'll come back to that later on. Tom, very good setting the scene here, but let me turn, Charlotta, to you on the global environment that we're in, because, of course, this isn't just about the US, this is having a big impact in terms of global growth, global inflation. How do you interpret kind of what Tom has been saying? What does this mean for global economies? What does it mean for a global trade?

 

Charlotta Groth, Head of Macroeconomics: Yeah, I mean, from a global point of view, trade is not a zero-sum game. That's very clear. Trade allows all countries to benefit and to prosper from exchanging ideas, goods, services with each other. And human beings have always done that. We've always been trading. It's the fact that small countries, most of the countries in the world, are not able themselves to produce goods that we need in our kind of highly complicated and technically very advanced world. So you need to trade, that's a starting point for everything. Now, if you want to reduce your trade deficits, I would argue that there are better ways to do it than to put high tariffs on some of your key trading partners. I think what we ended up now on tariffs, so the initial tariffs around liberation day tariffs, they were punitive for the global economy. It was very clear if those kind of tariffs came into place, which was basically an embargo between the US and China on trade. That was going to be recessionary. That was gonna be a recessionary, and maybe even worse than recessionary because literally these supply chains have taken decades to build up, and you can't just rip them apart. And there are many other countries that are part of that. I will speak later on about the ASEAN and how that feeds into that. So that was the starting point. Now where we have landed currently. These tariffs should be manageable through a combination of a bit of inflation pressures in the US, maybe a bit on margin hit by US companies and importers, and also downward price pressures in supply chain, but also weakness in demand more broadly. And I think this is what we're seeing outside of the US. We are seeing a kind of disinflationary pressures. Partly, well, very much capturing the lack of pricing power that these countries now have that are exporting into the U.S. Where the importers are basically pushing those tariffs back in the supply chain. From a global point of view, that's a positive thing on the margin because we are coming from a place where inflation was running too high for too long. So a bit of more deflation in the system is not necessarily a bad thing. In terms of the growth outlook, it's weaker compared to where we were in the beginning of the year. Partly reflecting the US kind of headwinds, partly what's going on in China and Europe as well.

 

Guy Miller: But could this make the global economy, perhaps, dare I say, more robust? Because does it take away some of the imbalances? Does it encourage others to do more? How do you see that?

 

Charlotta Groth: There are some countries globally that, of course, have had a persistent history of very weak demand, basically benefiting from the rest of the world buying their stuff and basically growing in line with the global economy. And clearly, that's not a sustainable kind of economic policy to just benefit from demand elsewhere. So the fact that we're seeing more domestic spending and efforts to kind of increase that domestic piece to make growth more resilient, I think that's a good thing. Yes. I think it's the way it's come through that is not a good thing, and maybe on my last point is just the level of uncertainty. Uncertainty is bad for economic activity, there's an option value to waiting. Why do something now if you can just wait and see where you're coming out.

 

Guy Miller: And from my side,  it takes, you know, years for companies to set up plant and equipment. And if you don't know what policy is going to be next week, never mind in three years' time, why would you commit today? But maybe one last question for now. Is this end?  Does this mark the end of globalization as we know it?

 

Charlotta Groth: Mark the end of globalization? No, I would clearly strongly say no, it doesn't. As I said, businesses need each other, countries need each other. I think outside of the US we have seen very strong kind of focus on making sure that companies can continue to trade. So I think definitely trade will be with us. I think what we've seen over the past few years really following the COVID period is how resilient trade has been. And for me, that kind of confirms that trade is a necessary ingredient in the world we're living right now. But it might look different. We've seen a bit of hyper-globalization over the past. We had big countries, China and others, being pulled into the global trade system. That is probably going to be less of a push factor going forward. So a bit less of growth rates, but clearly, trade is here to stay. There is no doubt about it.

 

Guy Miller: And maybe one last one to you, Tom, we're on the brink, I think, of having the big, beautiful bill passed or triple B bill. I hope it's not the credit rating on it, but we're very close, it seems, to getting that through. What does that mean for the second half of this year? Because in the first half, it was all about tariffs. You know, it's all about potential embargoes. Now there seems to be hope about potential extensions for taxes, even tax cuts coming through and perhaps even lighter regulations.

 

Tom Liebi: I mean, look, first the point you implicitly made is this time around, compared to Trump's first term, is that he went about it the opposite way. He basically came with the tariffs first and then the proposed tax cuts, which are not through yet, but which are likely to come through. Now, we should also not forget that the biggest part about the bill is not to let the initial tax cuts run out. So, I mean, it's not so much an additional stimulus, but it's just... Keeping the stimulus that we have and avoiding a massive tax cliff or a fiscal cliff. But on top of that, as you mentioned, there will be some additional tax incentives. You have a few measures like no tax on tips or maybe also in the corporate sector some beneficials. So, yes, I do expect some stimulative impact coming from this bill, which is likely to be published or passed in the coming days. However, it's I wouldn't expect too much of that. It's really just avoiding a major drag on growth rather than adding much more stimulus and we should not forget we'll talk about that in the other podcast when we talk about markets. It also comes at a price. I mean, investors do get a bit worried about the fiscal deficit, seven percent, that's clearly not sustainable. They will ask for higher risk creamer in looking at the holdings of treasury and it also, I mean, it crowds out all the government functions, so the U.S. now spends most of its money, if you look at single components, on servicing its debt. That means there's less money for other government roles, and that definitely will also be a drag on growth long-term.

 

Guy Miller: Well listen, I'm going to turn to Puneet because we want to also know about what are these higher rates that you imply mean for corporate credit and markets more generally and we'll come on to other regions as well. But let's turn to Puneet next. So Puneet, listening to what Tom and Charlotta said about the world environment, slower growth, yes rates coming down in other parts of the world, in the US too from what Tom said, but still a bit slower than you might like. We know the financial markets and particularly the corporate credit markets, are also thinking about commercial real estate, they're so tied in to interest rates and the risk of default. What do you make of all of that? Is there a possibility that we could find that even if the economy is kind of limping along or doing okay in other parts of the world, could the credit markets themselves cause a real obstacle from that growth dynamic?

 

Puneet Sharma, Head of Market Strategies: Well I would think at this point no. I would I would think that the credit markets are actually not the ones where the imbalance is the largest. This is actually perhaps the reason why there is so much demand for credit that you know there's very low risk premiums on offer. But let's remember one thing. I mean this seems to be a slow simmering problem of interest rates effectively. We've had four years.. This is the fourth year running where we've had high interest rates. That impacts everyone, whether it is consumers or whether it is corporations, whether they're small businesses, which is the reason why we are seeing delinquencies at an elevated pace in asset-backed securities and auto loans, as well as other types of consumer loans. We also see elevated bankruptcy levels as well among smaller companies.

 

Guy Miller: But isn't that just a cleansing, isn't that a lot of these companies have survived on very low interest rates who frankly they shouldn't have survived. So aren't you almost pleased to see actually there's a Darwinian element here where higher rates are forcing the weakest out?

 

Puneet Sharma: Well, you can argue to some degree, but I don't think that's the case in general. I think this is basically a problem of higher interest rates, which cleans out the weakest clearly. But many of these companies could have survived higher interest rate being 2% lower. It's not necessary that their business models are always very bad. It's just that the access to funding for the weakest is more restricted. In fact, the latest first quarter lending stands from the Fed. have, have become tighter again, which actually forbodes higher default rates. And I think it's all interlinked because, you know, the level of higher delinquencies, higher bankruptcies cause banks to actually lend less, which is then reflected in the lending standards. I think I'm not worried about the banking system as such from a systemic perspective. You know, this is not 2008 or, you know even 2023, those problems are unlikely because central banks and other policy institutions remain behind them.

 

Guy Miller: But you imply that the banks might be less willing to lend. So that's a break on economic activity.

 

Puneet Sharma: Yes, indeed. It is. And I think that is what will happen. From a credit creation perspective, banks will remain more and more reluctant because I think interest rates are higher and not everybody can afford the same mortgage, for example, that they could afford or same consumer loan or same corporate loan. So that's why banks will be more restrictive. I think which should act as a drag for...

 

Guy Miller: Puneet, one thing that's, of course, that's been discussed recently, of course, is the regulation around banks and there's an easing taking place. I mean, how do you interpret that? Will that offset some of these concerns that you have?

 

Puneet Sharma: I think the main offset will be more in the treasury market where some of the regulations which are being eased actually around the leverage ratio and so on and so forth will allow banks to do better disintermediation as primary dealers in the Treasury markets. From a longer term health perspective I think reducing and some of this deregulation is negative in my opinion because you know for creditors, you would actually be happier if the banks have stronger balance sheets rather than weaker balance sheets. I think banks will return more and more capital to shareholders at the cost of creditors. And so to me, in the short term, this is positive for markets, positive for investors who are investing in these institutions in the long term from a systemic health perspective, you know, from a stability perspective, even from a creditor perspective. I don't consider that to be necessarily a positive.

 

Guy Miller: Now, we'll be speaking a lot in the next podcast about the markets and spreads more generally. But I guess what you're saying is that there are concerns, bankruptcies are running at a reasonably high level for smaller companies, but you don't see that morphing into something worse. You don't the bigger companies getting into trouble. And more importantly, it doesn't sound like, although there's risks out there, you don't that part of the financial markets pulling down economies towards recession.

 

Puneet Sharma: Not at the moment. And I think the composition of the defaults and the bankruptcies within themselves has been unusual over the last three years, where small companies have been defaulting and large companies have better off. This is changing at the margin and we do see some evidence and some recent examples. We're not necessarily reading too much into it, but we think that if this trend changes without even a pickup in aggregate default rates, that's quite negative for credit markets. Go that way.

 

Guy Miller: So let's keep an eye on that and we'll, as I say, we'll come back to the market implications. But I want to turn to you, Ross, because you must be very happy covering Europe and it's not often you say that to an economist or strategist who covers Europe. But tell me, my feeling is that President Trump should be given a big bear hug by all Europe. Because it sounds like actually Europe, they knew what to do, they know what needed to be done and Draghi made it very clear in his reports. But President Trump has forced Europe to step up, and more importantly, they've forced Germany to spend money. What am I missing?

 

Ross Hutchinson, Head of Eurozone Market Strategy & Economics: No, I think that's an optimistic but fair, but fair, in some respects, interpretation, but I will caveat one small bit of that. In the shorter term, there are still some risks, specifically around what we were just talking about before with Tom and Charlotta and the tariff policy as well. So it's not all positive.

 

Guy Miller: I should say to our viewers, by the way, that Ross has put out a very good topical going into a great deal of detail about Germany in particular. But maybe just summarizing a little bit, it's broadly good news. There's big numbers being spent.

 

Ross Hutchinson: It is. And as you say, look, this doesn't come lightly, especially if you're an economist or an investor following Europe, you know, I mean, it has paid to be fairly pessimistic on the growth outlook over the last many, many years because the realized growth outlook has been very underwhelming. Germany, for example, has not grown in real terms really since 2018. There have been some positive stories within Europe, Spain, for example. But the whole euro area has really significantly underperformed the US. As you say, look, we were kind of aware of that. The Draghi report talks about the untenable nature of that, something fundamentally needs to be done about that. And to the point to your question, we do see genuine reasons for optimism about that in the medium to longer term. So, we have big fiscal policy changes coming through. Germany has for years run, I mean, effectively, very conservative fiscal policy. Often for ideological reasons, have an extremely strong balance sheet from a government perspective, and they are now using that. There is more broadly, at a European level, commitment for additional fiscal stimulus, primarily, yes, coming from the defense side of things. There's cooperation around that, though, which has the potential, not guaranteed. Oh, the potential word again. Has the potential to be extremely positive, particularly if it's all research and development and so on. So that's one real positive.

 

Guy Miller: But one thing I would say, I mean, the potential I feel a little better about is that Germany has brought forward or front-loaded some of their mixed budget. Is that proof that this time it's really different?

 

Ross Hutchinson: I think we have seen genuine good news on that front. There has been a surprise relative to, let's just say, broad market expectations, because the history of German fiscal policy is that it tends to, in a sense, over-promise and under-deliver, insofar as the projects that are identified are maybe a little bit or require less cash than expected. There's under-spending generally. We're at the point now, and that was factored into most people's assumptions, that it would really be 26, 27, where we really the big ramp up in spending. If you look at the budget that just came out last week after we were recording it right now, the beginning of July, there was a really significant intention there already to raise the cash for that. Again, though, that is still potential versus actual reality. We don't know, for example, a lot of this is pre-funding. However, it's really genuinely good news, I think, on that front. So the German fiscal policy, their single largest, most positive driver and big change relative to.

 

Guy Miller: Now, where I get stuck is, yes, I can see how the big numbers work, lots of zeros, one trillion of spending, it's a lot of money, but that's for Germany. What does that mean for the rest of the eurozone, the EU? Do you see a lot spillover? Does this catalyze them to do other things? Because they're much more constrained in terms of the debt load that they have.

 

Ross Hutchinson: So I see two things. The first one, I do see reason to believe there will be spillover with respect to this one. So the idea generally that an increase in aggregate demand within Germany in the consumer area, in the business investment area and business activity generally should have a natural spillover to some degree to business activity within Europe, outside of Germany. German consumer spending, spending more on that business is investing more in the common single market. Do not get me wrong, Germany is clearly going to be the biggest beneficiary, or specifically that German fiscal spending. But I think there are real reasons to believe that it will have positive implications through procurement of non-German funds, bidding for some of this activity, and generally the idea that consumption activity will be higher overall in Germany. There is the second point, which is there is also some fiscal stimulus going on more broadly for the defense piece as well. There have been exemptions given to to nations within Europe that allow them to basically exempt defense spending. Now, we can talk about markets, not all of them are going to fully use that because they realize there are market forces that act on them, but they have that ability there. They have these big commitments from NATO, 5%, yes it's really 3.5 plus 1.5 on infrastructure, that particular piece is very, very positive I think for growth. And then of course you just have the safe mechanisms, so 150 billion joint European funding that's available for every country. Likely will be used by others who are more constrained than Germany.

 

Guy Miller: Well, let's hope so, because, look, this is the window, the window of opportunity for Europe. But listen, let us go back to the here and now. Are your numbers for the remainder this year in Europe going up or down? Down. And will interest rates in Europe go down further than the market is expecting? I think the market's probably pricing in more. Is that your base?

 

Ross Hutchinson: The market is currently pricing at about 50% chance of a rate cut by September, I think given the data that we're seeing and what I'm expecting that rate cut will be delivered. I think the data, the latter half of this year, the second half of the year will come in generally weak. I think we had a lot of front loading with respect to this US Prebuying before the tariffs. Prebuy, exactly. And I think more broadly, when I look at a range of indicators, there's reason to suspect that uncertainty is still very high. The tariffs will have an impact, even though, yes, Europe may be impacted 10%, 20%, not China 145%. Still, these are numbers, if you look back to a year before, were really, really potentially negative. I think they will be. So, light at the end of the tunnel, but I think there will be a bit of a weaker period in the immediate future.

 

Guy Miller: So a little bit lower growth into the year end. Prospects 26 and 27 looking better. Inflation continuing to come coming down. That should allow the ECB then to cut rates. Easy peasy.

 

Ross Hutchinson: So I think, again, this is in the look. We have some genuinely good news coming out with respect to the inflation front. So the ECB, I think will cut rates further. However, I do not think we are going back to the world we were in previously. The rate ranges that we are in now, two percent. This estimate of where they have is neutral. Yes, I think they're going to go a little bit below that. But I think we're seeing even just, for example, in the volatility of oil prices, the ECB are concerned about that. There is a two sided risk in the longer term. And I think a lot of the big fiscal, the big investments coming through will kind of keep a kind of, you know, a level that will keep ECB rates higher than they were previously. But so like I said, growth is going to be kind of weak in the near term. I think the pressure will be there in inflation to also be a bit lower in the year.

 

Guy Miller: The one thing we haven't spoken about, the T-word for Europe, tariffs. Will we be surprised positively or negatively on the 9th of July?

 

Ross Hutchinson So I guess it depends on how stunning your disposition is beforehand, whether you'll be surprised, positive or negative. I suspect the market will be negatively surprised by the numbers that come in. I say that primarily because what is being mooted right now is Europe is willing to accept the 10% minimum level, which I think is a realistic level to kind of aim for. However, and we haven't talked about the UK, I know Tom covers that. The UK doesn't really have a trade deficit with the US, and certainly doesn't feature...

 

Guy Miller: And we still have about 9.3% tariffs.

 

Ross Hutchinson: Exactly, so my simple point there is because as we talked about previously, Trump cares very deeply about these bilateral deficits, Europe features extremely highly there, I would find it very hard to believe that they will get a similar deal with countries that screen simplistically better on his metric of bilateral deficit.

 

Guy Miller: Great. Well, thank you for that, Ross. Now listen, you know, we've heard some positives from Europe, actually a lot of positive from Europe partly courtesy of President Trump. Now I want to find out about China. So turning to you Ha, I mean, you're smiling there. Is it as good a prospect for China as it is for Europe? We saw China match the US tit for tat, getting up to 145% tariffs. And then it seemed that the US kind of backed off a little bit. Why did the U.S. back off and why was it not China who came to the table in Washington offering all goods up?

 

Ha Nguyen, Asia Market Strategist and Economist: Yeah, so I guess the first half of the year, the whole headlines about US and China trade, the tensions, after that the trade deals. And China take it very, in a way, that slowly, because I think at the beginning, the US is somewhat underestimated the cards that China has to play. At the end of the day, we have the US as the biggest consumer in the global economy, and China is the biggest producer, and they need each other. And I think only when President Trump actually put 145 percent tariff on China and they realized that Americans just buy a lot of consumer products from China, including electronics, including dolls. We were talking about that. And more than that, they're also, from the supply side, rare earth is one of the areas that China almost have a global monopoly. So the latest trade agreement between US and China on a framework basis that they are exchanging the relaxation of rare earth export control in exchange for electronics or cheap export from the U.S. Just to highlight the fact that the two countries, even though they are not in love, but definitely they are very dependent on each other.

 

Guy Miller: I mean this must really hurt because they're clearly not in love and in fact you can imagine how the conversations are going. I mean it certainly sounds like they desperately want to separate but they can't. I mean that symbiotic relationship, they're joined at the hip. How long can this last? How long do you think it will be that the agreement between what is it, rare arts and batteries versus high end chips before one of them says thank you very much you know we have enough high end chip or we have a enough rare arts now to go separate ways and have an un- An unhappy decoupling, perhaps.

 

Ha Nguyen: I would think it will take quite a bit of time, especially from the U.S. side, because at the end of the day, if we cut off China completely from the world, I think China can cover quite a big part of the supply chain from A to Z, and it's kind of self-sufficient. But the U .S. still need materials, still need batteries from China, and I think from rare earths, for example, rare earths is called rare earths but it's not so rare, however, The difficult part of that is basically the whole process of producing ah this kind of materials and China have a significant advantage of that. I think a lot of producers has or a lot of importers has stocked up rares in the last few years can last for a couple of years and I think to have a whole mining process going on it can take I mean fast five years longer ten years and take decades to develop such kind of supply chain so I think even we will see the diversification outside of China from the production point of view. But the complete decoupling is quite unlikely.

 

Guy Miller: But it sounds like actually there's a bit of an asymmetry here, because what you implied is going to be hard for the US to replace these rare earths from China. China seems to be going all out to really beef up its AI, its technology production. Of course, we saw the example with DeepSeek. President Xi is saying that they're in that race as fast as they can to develop these high-end chips, high- end applications. We know there's, what is it, 12 million graduates coming from China's universities every year. They have the talent. It looks like they may have the capital. They certainly have the will given what's happening in the United States. So would you put China kind of a nose ahead here in terms of becoming more self-sufficient quicker perhaps?

 

Ha Nguyen: I mean this will be a quite complex topic I would say so because definitely even though China running ahead in some of the technologies especially you see the evolutions of EVs of solar panel from the energy side as well and also the breakthrough of Deepseek but basically from the cheap point of view China is still one generation behind the US and that's why you see that the US is really intensifying the whole measures from blocking China to access to some of the equipment to produce this kind of chip, but at the same time put a lot of pressures on China to develop its own supply chain. So far they have not done that breakthrough yet. We don't know what is the future. But definitely I think the U.S. Is quite aware of that race. And I mean simply China is doubling down on its strength. I mean in the last two decades China is always a production hub. It's very good. At the whole industrial complex, and that is basically doubling down on the strength that China currently has, but the future, let's see how it's going to be.

 

Guy Miller: You speak about the strength China has. I mean, Chalotta earlier implied that there's an inherent weakness in China. There's goods are being dumped. Goods prices are falling. We're seeing CPI, PPI, negative territory in China, so how is that domestic economy? You know, we've spoken on podcasts in the past about the fact that China has real structural issues, particularly around the housing market. It did appear that things were beginning to stabilize there. How is that looking now?

 

Ha Nguyen: I think it's one part that people are quite disappointed actually from the domestic front. Definitely we still have a property market, it's not a crisis, it has been stabilizing in the last couple of months, but in recent months pricing is down again. So definitely there is not yet a floor from that front and given the fact that Chinese households having a lot of their wealth stored in the property market that is timely linked to the whole consumer confidence, and without consumer confidence you don't see consumption. And weak demand and overcapacity definitely make deflation become quite a trouble some and I think it will continue. I mean it's a very interesting kind of strategy coming from China because in a way, for example, in the EV sectors they have so many companies producing cars and recently you have BYD cutting prices by... Up more than 30% for many models so create such a hefty competition in China.

 

Guy Miller: And they were already very competitive and that's another 30% and that is just for domestic purchases.

 

Ha Nguyen: Yes, it's for domestic purchases. But in a way, the way the government looking at that is they need competitions to see who is the survivor after the whole competition to kind of move the whole company to the supply chain. But in the short term, it creates so much waste and so much overcapacity in the world. And that at the same time put a lot of pressures on overseas because a lot countries, including Asia and Europe, people complaining about China dumping goods into the market.

 

Guy Miller: Now that kind of survival of the fittest, we mentioned sort of Darwinian practices in the credit markets. Does that mean that president Xi has embraced financial markets and the allocation of capital that the private sector gives them? In other words, is he going to need the private sector to be driving the innovation, to be driving tech companies, to be driving AI.

 

Ha Nguyen: I would say yes in a way because definitely President Xi has met with the tech executives earlier this year and that is high like the realization that the state-owned companies of themselves cannot really lead the innovations. We need tech company, we need innovations within the private sector, however the whole economy is still very state driven kind of business model from the banks, from the many other industry and even from the private sectors they also under quite a bit of guidance from the government what sector they need to focus on. So I think big picture still very state driven but on a small scale especially on the tech and innovations definitely private companies are much faster in terms of you know moving up.

 

Guy Miller: And maybe for our audience here. So the remainder of this year for China, how realistic is their 5% target for growth? It doesn't sound like it's going to be easily achievable.

 

Ha Nguyen: I mean I revised the growth significantly after the first tariff tension between US and China and after that I revised up because definitely exports still account for about 40% of growth in China, but 5% sounds like a bit of target to hit until the second half of the year. I think there might be a little bit of policy loosening from monetary policy point view and some fiscal space for that. But hitting of 5% is still a hard job.

 

Guy Miller: Well, listen, we're going to be coming back in the podcast on the markets about the potential that we may or may not see in the Chinese financial markets. But now I want to turn to the southern hemisphere with Gustavo, who's online. I hope you're there, Gustavo. In the Chile part of the world right now, we are sweltering in Europe. You're in Chile. So, thank you for joining us today. But Gustavo, I mean, you're part of the world. We're speaking about the volatility, the uncertainty, the political gyrations that we're seeing. I mean, that's everyday occurrences for you, right? But tell me a little bit about how Latin America is impacted, first of all, by what Tom and Charlotta have been talking about in terms of the tariffs that we're seeing from the US. Obviously, Mexico was in the front line of that right at the beginning with the executive orders coming from President Trump. Ah, let's start there. How do we see that? Is that settling down? I haven't heard too much, actually, in recent days about what's happening in terms of US-Mexico tariffs.

 

Gustavo Yana, Market Strategist & Economist LatAm, Zurich Chile Asset Management: Yes, well overall for the region I think that has been relatively immune. Of course the exception is Mexico. One of the reasons is the key dependence on the US trade. About 80% of exports from Mexico are headed to US and as you mentioned a lot of noise was heard in the first part but it seems that it's kind of the shift of the US in terms of trade policy has shifted to the rest of the world. So far, no advancements have been made in terms of renegotiating the USMCA trade agreement. However, it's expected to be resumed, at least during the second part of the year, as is key essential. Of course, for the Mexican economy, but also to the US economy, given the high interlinked structure in terms industrial production.

 

Guy Miller: In terms of Brazil as well, because we've spoken about interest rates globally coming down by large, and that's been a function of inflation coming down. If we look at an economy like Brazil, and we often use that as almost a leading indicator a few years back during the times of COVID when we saw inflation picking up, coming down because of the moving rates, I mean, it is interesting that Brazil only a week or so ago hiked rates again to 15 percent. I mean fifteen percent. That sounds remarkable. They have clearly not wavered in their desire to get inflation back down to target. I mean, I guess that's the importance of having independent central banks. So where are we in this cycle? I mean is this the end of an old cycle, the middle of a medium cycle? What cycle are we on in Brazil?

 

Gustavo Yana: Yeah, I just don't agree on that. I think the market overall was a little bit surprised that this drastic hike of the central bank. I think that they are paying the cost that maybe they anticipated cut far in advance that maybe the economy didn't need such amount of the cutting we see over the last, since the 2023 and onwards. So it's like the center has to make a statement of the commitment towards inflation containment. I think right now, in terms of the cycle, I clearly think that we are on the terminal rate. Hitting 15% is a record high, two decades high, and a real contractive instance. Going forward, I think that through by the end of the year, we can start to be seeing a little bit of a cap. As inflation expectation has drastically go down since the beginning of the year.

 

Guy Miller: And Gustavo, where does Brazil fit with all this tariff talk that we're having? I mean, you can see them sitting somewhere in the middle, of course, between China and the United States. Are they net beneficiaries from what we're seeing in a kind of a roundabout way?

 

Gustavo Yana: I think so. I think that the reason why Brazilian economy has been relatively immune is because firstly, it's a relatively closed economy. It's not so dependent on export. And in fact, if export are more reliant on destination towards China. So maybe overall, as no specific target resolution in terms of target from the U.S. to Brazil as in May, I think Brazil can emerge as a relative winner, perhaps more increasing their market share within the Chinese market, as it could be a shift in trade going from Brazil to China and replacing maybe U.S. shipments to China in terms of agricultural exports.

 

Guy Miller: And maybe just to kind of finish the tour de force of the region, ah ah,  Argentina, we've seen chainsaws wielded there as well in terms of the established political environment that we're in. Tell me what's going on there with Milei as well. Is there some real winds being had here? Is the population still behind them? How does the economy look given what we've been seeing? It's been pretty drastic and we've seen... A lot of shift, I guess, certainly on the inflation front.

 

Gustavo Yana: Yeah, I totally agree on that guy. I think that the shift that has been made by the administration is clearly extraordinary in Argentina, at least with his history. A drastic technical adjustment, 5% of GDP spanning over just 12 months or so, and inflation coming down really drastically. I think May's CPI trend hit the lowest in five years. Print and coming from wave about 25% on a monthly basis to just 1.5%. So even though this imply a really adjustment on the economy of COVID, lots of pain for the population, still this is more the more remarkably of the Milei administration rate takes a lot of popularity. This is a clear important point that markets follows closely because Argentina space in It's a key midterm election in October. And it's a key test for the Milei administration to regain governability going to the second part of his administration. So we've had to pay a close attention on that.

 

Guy Miller: And how close run do you think it is? I've been asking people to stick their neck out because of course it's all recorded. So it was only fair I ask you, how do you the election looks like? And we probably won't hold you to this one because who really knows? It's still a few months out yet.

 

Gustavo Yana: Yes, I think that all odds point out that the Mileis party will have a good performance. I think all put out that Peronists right now is facing, there is no clear leader to make a strong opposition and Milei as I mentioned before retains a lot of popularity in spite of this kind of harsh adjustment that has been made towards economy and on the population. So good luck for the Milei, but we'll see in October, but I am confident that the Milei administration will be positive on that election.

 

Guy Miller: Very good. And now just to finally to round off on your new home, sitting there in sunny or as you would say, chilly, Chile. Sorry about the bad jokes here. But Chile also, you know, is in an election mode right now as well. Just a couple of words on Chile for the remainder of this year from an economic perspective.

 

Gustavo Yana: Yes. Well, overall, the region is facing a busy political calendar. In terms of Chile, in November, Chile will face a presidential election. This is a key, well, of course, every election is important, but for Chile is the possibility to regain, to shift to a more market-friendly administration. We are coming from a left-sided administration. That haven't performed so good. So I think Olot's market expectation as well pointed out that could be made this shift, but we'll have to see going forward. We just have a prime election on the left coalition, the ruling coalition, and a little bit of a tail risk has emerged because the left representative is coming from the Communist Party. Turnout has been low so I think the market has rapidly even possibly because I... The market has interpreted and we are also compliant with that interpretation is that the odds for the market fairly more their center right or even right candidates  have improved given this polarization toward the far left candidate. But of course, every election is volatile. So even though odds is playing to the market-friendly gamble, I think volatility could emerge going onwards to the November election.

 

Guy Miller: Great. Well, thank you, Gustavo, to run out our around-the-world quick trip. As always, thank-you to all the team of experts. We've just covered the macroeconomic parts. As you can tell, so much to speak about. I mean, the first half of this year has been crazy in terms of some of the policies, the shifting policies, the situation on the geopolitical front. I mean we haven't got into the implications of of war still raging in many parts of the world, the impact that's had initially on oil prices although oil prices have continued to fall by and large. But this is a world, as we say, that is confused. We are living in a land of confusion. I don't suspect the second half is going to be much easier, but we've seen a few things that I think we can hang our hat on to determine where we're going. It is important that inflation is coming down. That is allowing these central banks to cut interest rates. We suspect we've probably seen the high in bond yields. That's important from what Puneet said because it means that funding costs at the margin could well be getting a little bit better going forward. And importantly, because we've seen a move away from the worst of these tariffs, there's a clear desire not to have a recession in the United States, which means that that lessens the chance of recessions globally. So a world where growth will be a bit slower, Interest rates will also be a bit lower. Inflation is likely to be at or around central bank targets in most cases, with the blip up in the United States because of tariffs we suspect relatively short-lived. So remember, as always, you can read the full report. You can listen to all our webcasts on Zurich.com forward slash MSME. And I do hope you all listen into our second podcast for the year, which will be looking at the financial markets and how they're likely to fare between now and year end. Thank you all again for joining us today and thank you to the MSME team for joining me. We'll see you again very soon.

Transcript

Guy Miller, Chief Market Strategist & Economist: So welcome to our Mid-Year Outlook 2025, which we have titled Living in a Land of Confusion. Now, just in case you're getting confused, this is our second podcast. Hopefully you've tuned into our first one where we looked at the global economies and what was happening in terms of growth, interest rates and inflation. Well, this is turning our attention now to the financial markets, where once again, I'm joined by the experts from the MSME team. Now to kick off we want to kind of pick up where we left off, thinking about the economies and thinking about interest rates. And I can turn to you, Charlotta, in terms of the global interest rate cycle. We've been seeing inflation be positive, coming down, and we've seen central banks respond to that. So what is your take on this going into the remainder of this year and perhaps a little bit into next year as well?

Charlotta Groth, Head of Macroeconomics: Yes, so the starting point is one where inflation is almost back to target. It's not quite back to the target. There is a bit of stickiness still in the economies. I think there is a lot of focus on pricing. We have consumers that are extremely sensitive to, we saw tariff news in the US, you see inflation expectations being almost unhinged. So I think central banks are very happy. The inflation is kind of back towards that to handle in most most regions, large part of the world. But they're also very cautious because they know that the economy has changed compared to pre-COVID. They know we have a lot of domestic spending in economies where we didn't used to have it. So they are a little bit cautious coming from this inflationary period. So we're continuing to see the same kind of cautiousness, gradual rate cuts in large parts of the world. On a positive note where we also seen actually a dollar weakening, has opened up for particularly emerging markets to move forward with their rate-cutting cycle, particularly in Asia. That's important. These countries didn't have an inflation problem, but you had a very strong dollar, so this opens up for the global rate- cutting cycle that was actually disrupted around the US election because the dollar back then strengthened very sharply. That's coming off, so that should be supportive for the global economy over the next next half a year.

Guy Miller: And tell me about the bond markets, because that implies the front end is coming down. How do you see the shape broadly of curves? I mean, we've seen the duration side, we have seen the long end struggling most. We see fears about deficits, debt levels. So which way is driving the curves right now?

Charlotta Groth: Yeah, I mean, first of all, bond markets have been extremely volatile. They have been uncertain. No one really knew what was going to happen around inflation, exactly how far central banks had to go in hiking, hiking the rates. And that has driven huge volatility in the bond market. The good news is that I would say the most important part, which is the inflation part that has come down, has largely normalized. We see inflation expectations and market pricing around inflation actually being very benign. And that helps to kind of anchor the global bond yields more broadly. The short end is quite well anchored as well because central banks are cutting rates. There is much less fear now that maybe interest rates have to go even higher. That is kind of out of the picture. There is some kind of conviction that we are back in a more normal rates environment, not going back to pre-COVID, but also not seeing very high rates like we saw in Brazil, for example. So that means the volatility we're seeing in the bond market is driven by the long end, which central banks is more difficult for them to contain it, obviously. And there are a number of factors there, and I would point particularly to the kind of fiscal concerns and risk premia around that piece. That has already been priced. We've already seen a sharp repricing there. So going forward, we do expect yields to come down.

Guy Miller: So you think we've seen the highs in long bonds for the year?

Charlotta Groth: We think we have seen the highs. But we cannot rule out volatility in these markets. Right now, financial markets are not focused on the fiscal deficits, for example. But clearly, it hasn't gone away. And I think we need to be prepared that volatility will be high.

Guy Miller: And I certainly feel that even with its volatility that's driving this, that where are we to break out and where are to see new highs, then it becomes almost self-correcting because that is going to have quite a material impact, I would have thought, in the global growth

Charlotta Groth: Absolutely, I think that's one of the kind of key convictions we have that there is a level and here we're really talking about the kind developed economies where bond yields kind of become self-correcting because they drive growth in these economies but the other piece of that thing and I have to say it is that the fact the central banks remain focused on inflation that I would say it's very important they keep doing that because that's exactly the kind anchor you need in a global economy where everything is changing and everyone is being confused of where we are moving going forward. The fact that they are still focused on inflation is very important.

Guy Miller: And maybe turning to you, Tom, because as Charlotta pointed out, we did see the move higher in terms of bond yields, treasury yields in particular, thinking back to the April time and the Liberation Day tariffs. Was it the bond market that forced the hand of President Trump to say that he had no intention of removing the chair of the Federal Reserve?

Tom Liebi, Head of US and UK Market: Yeah, absolutely. I think we heard a lot about bond market volatility and I think most of us would agree it's not necessarily a good thing because everybody likes, or most people like planability, certainty. But in this case, I do think that this volatility wall also had kind of beneficial sides because it is, as you mentioned, I think the high volatility, particularly the steep rise in treasury yields that we have seen occurring in April, May have put constraints and quite significant constraints on what the Trump administration is able, maybe less willing, but particularly able to do. And I think you mentioned the example above all it was about undermining the Fed's independence because Trump, President Trump made it clear many, many times that he would prefer yields to be much lower and he even, well, kind of thought about removing Chair Powell from the Fed. Now the Supreme Court then eventually also helped us, but it was initially the bond market who made it quite clear that it didn't like the idea. And it took about 48 hours for President Trump to tweet again and come out and say he does not intend to fire Chair Powell.

Guy Miller: Now we can speak a lot about levels for bond markets, but what is clearly a concern for investors and they want a higher risk premia is debt and deficits. And we've got our triple B, our big beautiful budget going through it seems. We spoke a lot of that in terms of the economic side of things. But from a bond market perspective, are we getting to the point where we think it's all in the price? I mean, I was feeling when we get up to these maybe 20, 30 basis points ago that... It was well known, it was in every newspaper, every report on TV was speaking about the deficits and the debt levels. And actually I thought, you know, risk-free rate, I still believe the US is a risk- free asset, you can tell me if you disagree. But to me, you now, whether it's a sort of a three, three and a half percent real yield, risk-free, that's quite attractive.

Tom Liebi: No, absolutely. I fully agree. I mean, it's always a bold statement to claim that everything is in the price because, yes, exactly we have seen that in the past many, many times that the investors should have known about something only to realize, maybe should have, but it wasn't in price. But no, in this case here also, I do think that most of the worries of the information is actually in the prices. And you mentioned the real yields, which I think is really the figure, the number to look at. And whether it's the 10 year, it's the 30 year. All longer-term real yields are at the highest in decades. And that tells me that, yes, it is attractive. Yes, it does already take into account many of the risks that we do see about fiscal sustainability, about the growth impact, about inflation, inflation on certain inflation levels. And I think we have reached a point where for real yields in particular to rise much further from current levels, it definitely would be visible in growth. And that's also what the market is telling us. So yes, I do think you asked the question, I do think we have seen the highs for this cycle for this year. And yes, actually treasuries or more broadly probably longer term bonds do look attractive at these levels.

Guy Miller: Tom, you have the unenviable position of having to forecast or predict or guess, where bond yields are likely to be at the end of the year, not an easy task by any means. But given what you said, I mean getting a landing point is virtually impossible. But broadly, you think there's a little bit further downside for, let's use 10-year Treasury as an example, you think they can go a little bit lower than we are today.

Tom Liebi: I do think so. I mean, we have long been of the view that interest rates are attractive and I think that inflation worries have been overstated particularly longer term with regard to the impact of tariffs. We have seen growth basically being impacted by, well, tariffs but global factors as well. And taking all of that into account, I still think, yes, that the treasury yields can move a bit lower from current levels, however, we also have to say they already did move quite a bit over the past few days and weeks, but yes, the answer is I think yields can move a bit lower from current levels.

Guy Miller: Now maybe turning to you, Ross, Mr. Duration, I think, as you're now termed in the team So you like Duration here. You think that there's a plague to be had, which, I guess, ties in what Tom and Charlotta said. But you particularly like bunds, and yet in the last podcast, you were telling us about how much issuance Germany was going to have, so can you square that circle for us?

Ross Hutchison, Head of Eurozone Market Strategy & Economics: Absolutely. So if you listened to the previous podcast, I hope you did, I would recommend you do, we talk a little bit about Europe, how there is the longer term super positive view or at least reasons to believe that's going to be the case. But remember, we're in the business of making tactical investment opportunities as well and looking for opportunities that are out there to benefit from. I think in the shorter term, that is that the outlook towards the end of this year, we are in a sweet spot for European fixed income and for bund duration generally. That is because a lot of the reasons that my colleagues alluded to before. I think the growth numbers will be disappointing within Europe because of a lot of the tariff risks, the activity data will be weaker than the market is pricing or anticipating. I also think the inflationary pressure also has, will tend to come in lower as the year goes on as well. This is to do with energy prices generally. some of the finally data we're seeing with wage growth being lower, you know, coming off considerably, service price inflation finally falling, and the euro strengthening, which is this additional unexpected kicker as well, I mean, 10% plus. You know, that's going to have a meaningful impact as well. It could be in the relatively short term. So my view is that the ECB will be cutting interest rates once further. And I think even though there is a longer term view, the bond market does tend to be slightly short-termist in its own pricing as well. So I wouldn't be surprised if we saw lower bund yields. I also think that if you look at the bunds versus the German bonds versus the comparative bonds across Europe, they actually look quite attractive because they are, yes, still more expensive than Italian, French and Spanish bonds, for example. But the spread between them is the lowest it has been, I mean, in years, even potentially since the sovereign debt crisis, the great financial crisis to begin with. If there is, let's say, a risk-off event, obviously we're not thinking about it necessarily in the base case, I can see bunds doing particularly well in that environment because they do screen cheap versus history. The fiscal stimulus is definitely, definitely coming, but I think in the short term the markets can see some real positives.

Guy Miller: Well, you're a real believer. Let's hope you're right. But listen, you touched on something very interesting about just the tightness of these peripheral spreads. I mean, it seems clearly Europe is getting its act together. Thank you, President Trump. You touched again on that in the previous physical. But tell me, French spreads are now above Spanish spreads.

Ross Hutchison: Yes, yes it is right. I think in this sense the market gets it, the market understands what's going on in the relative pecking order. So first point overall, spreads in Europe are reflecting a good story in Europe, broadly. So Italy for example, which still has a very high debt of GDP, its growth hasn't been phenomenal, but there has been some really good incremental progress on getting its finances on an improving trajectory as well. Obviously inflation and the nominal growth has helped. So the overall environment is positive there overall. As you said, the relative ranking has changed. Spain, which has had very, very strong growth, has been rewarded by the market for doing that. France is in the unfortunate situation where its growth hasn't been phenomenal. It's been better than Germany, yes, but it's not been phenomenal, it also has a rather more unstable financial overall backdrop. And because of the snap election that was called and a make-up of the National Assembly, a particularly uncertain political outlook right now which is highly linked to having to basically try and reduce the deficit in this sense. So the risks are high within France that current Prime Minister Bayrou for example may face some difficulties when it comes to setting a budget for next year. They need to, the market's going to them to lower the deficit further. And there's a lot of pushback on that front. So I think the market is sensibly repricing that. And if anything, I would say, I think this trend can actually continue. I suspect France will still be kind of in the eyes of investors as demanding some risk premium.

Guy Miller: Sure, so still clearly preferring bunds over the rest of Europe. Now, I want to turn to you, Puneet, because I've just heard from my learned colleagues about how great government debt is and thinking about the kind of yields that are on offer here, risk-free rates that are pretty attractive to me. Why would I buy credit? And yet, everybody's buying credit, spreads are getting tighter and tighter.

Puneet Sharma, Head of Market Strategies: Well, credit investors as you know are not necessarily the most cheerful bunch out there.

Guy Miller: I think that is always shining in the credit guard, you tell me. But anyway, carry on.

Puneet Sharma: I think there's a very good reason. I mean, so if you're a credit investor, what is the best which can happen for you? What can happen when things go right? You get your money back. I'll be it a little bit more than government bonds, but that's it. So credit investors tend to be highly sensitive to downside risks. And typically you don't find that risk premiums are as low as they are today, which is, you know, one of the reasons why we don't necessarily prefer credit. US investment grid credit spreads are almost the tightest they've been in 30 years. US high yield spreads not a bit far from that as well. There are segments within credit which are a little bit more attractive. I mean, municipal is one, asset-backed securities is another one. European credit actually is another as well, which is more preferable in a way in terms of valuations, in terms the fundamentals. But all in all, I think overall, if you think about credit markets, you don't have a lot of juice there. So there is very low risk premium, which is in there. And the reason for that is simply because these valuations are being driven tighter by investors who are yield focused. So the overall yield that you get in a corporate bond today is higher than it has historically been, which is bringing a lot of yield focused investors back into the market, which keeps the spreads quite tight.

Guy Miller: You speak about history quite a lot, and when you look at the chart, spreads are very tight. But aren't the credit markets better today than they were 10, 20 years ago? And shouldn't they therefore be trading at a tighter spread?

Puneet Sharma: Not necessarily. I mean I think you know today 50% of the market is triple B for example in the US investment grade. So it's not the and even if we think about spreads as a unit of leverage which we do tend to look at from time to time it's actually at the tightest it has been in a very long time. So I think from from a number of these perspectives either I mean it's it's not that you're pricing in a good outcome by any means. I think spreads are low and risk premiums are low, which actually makes them quite vulnerable to a downside scenario. I mean the current spread environment actually reminds me a lot of the pre-financial crisis 2006-2007 environment where spreads were similarly low as well. Now what is the difference is we are not expecting spreads to actually balloon out from here in the absence of a crisis, that will not happen. But were there to be any downside which comes through, for example, if there's a U.S. recession or for example the tariff policy actually really backfires on economic growth, et cetera, then you will have so much more disproportionate downside on credit, as opposed to potential upside, which can be spread tightening of a few basis points, for example in U. S. investment grid.

Guy Miller: So it's not that you're so negative in the short term, it's just you think there's better opportunities to have and there's an asymmetry to that risk profile.

Puneet Sharma: There definitely is an asymmetry, and I think, for example, equities is a more favorable asset from a risk-reward point of view, which is why I would prefer equities over credit on a hedge basis. I think those kind of opportunities or those kind strategies allow you to actually benefit from the asymmetry in credit during downturns or rough patches in the market. While during bull market returns, it's not so much of a drag. So within a multi-asset portfolio, it does make sense to reallocate firm credit into it.

Guy Miller: So it sounds like, you know, guvvies give you the yield part, which is quite attractive on a real basis particularly. Equities gives you the risk part or the upside part for the risk that you're prepared to take and the kind of credit is you're not going to get much on the upside if things go well, but you are exposed to the downside if, you know, we're wrong and we do have a recession, for example, in the United States. That's how you would see it. Very good. Now you mentioned equity markets. Let me go back to Tom and the United States because at the end of last year, everybody was talking about U.S. exceptionalism. Everybody was overweight. U. S. equities, they represented, what was it, 70% of the MSCI World Index. Have we seen the end that? Has that died, U.S. exceptionalism? And is the U. S. equity market ever going to fall back in favor again?

Tom Liebi: Look, the market or investors, they need narratives and you mentioned the last two probably. One was that you absolutely have to own or not even own, overweight the US because the US is exceptionally strong and there is no other place to be. Then came kind of the doom days where the opposite seems to be true and the investor tried to sell US assets and that was after liberation day when everybody thought like, oh I know this is a game changer, but I think the truth is somewhere in between. So the US, in my view, is still exceptional. I mean, look at the business models. Look at the death of the equity market. Look at innovation hubs that exist. And you have a hard time looking for these, such an equity environment in many regions of the world. So I still think absolutely you have to own US equities, but you also need to be more balanced. There are other regions, and we'll talk about those, that definitely are interesting. And also, you mentioned the upside of equity versus credit. But currently, if you look at, for example, the earnings yield, so valuation-wise relative to the bond yield, you get more if you basically simply buy treasuries, longer-term treasuries. But still, I mean, you have to believe in this upside potential that you mentioned in order to pile in on equity. And probably eventually it will pay out, but near term, you just have to make the balance. You really have to look at that. And I know valuation can remain high, can remain excessive for a long time, but it's a fact if you buy US equities as of today, you are entering the market at relatively high levels.

Guy Miller: Now Ross, the US had been the darling, Europe was the new darling, is it still a darling or is it now overvalued?

Ross Hutchison: I think Europe has the potential to be, potential to be, we talk about US exceptionalism, there is potential for European equity exceptionalism and honestly in the long run I think we are seeing the ground really being laid to that and let's be fair, we have seen strong equity market performance in Europe, not just this year, I mean also last year as well. So, I would put it in this sense, in the shorter term, similar to the views on bunds, we like bunds because we are basically saying that we think growth is going to be a little bit disappointing. The near future is a little bit more difficult. I think it's a very similar story that's going to impact the equity market for the remainder of this year, which is, you know, we'll probably have a little bit of a headwind coming against equities because we have had a really big repricing. And when we look at the constituents, so kind of all of that repricing, it has really been in expectations of the future, profitability of future earnings, etc. When you actually look at underlying pure earnings growth or true earnings growth in Europe, I mean, it goes quite a good way to explain why the US has tended to outperform in general, which is because US earnings growth has just been a lot higher. For the last two years, for example, we've seen very, very limited actual EPS growth at a European level. We need to see that come through. As I said, the potential is being there, the ground is being laid, but I think in the shorter term the proof will increasingly be on firms to prove that that earning growth is actually coming through and not just on the expectation component.

Guy Miller: Very good. So let's go to the rest of the world, Ha. China. Is there a story to be had? Only about a year ago, people were saying China's uninvestable, we didn't have that view. We thought there was potential there. Is that potential going to be realized?

Ha Nguyen, Asia Market Strategist and Economist: Well, I mean, after the story about domestic economy is still very weak, a lot of people get disappointed. It's uninvestable or not uninvestible, it depends on the time horizon you're looking at. Definitely from a long-term perspective there are a lot holders there, like you invest money there, can you get it out, how the currency and what is the growth outlook over the long term, whether China will have a middle income trap and all kind of that story. But on a tactical basis, I find China is a very, very interesting story. Especially if you want to play tech and it's still cheap, definitely not go to the U.S. You go to China and especially the shares that listed in Hong Kong is still very light positioning. We are starting to see steady inflow especially from mainland China where the investment options are very limited. You know people cannot put money in the property market anymore. Bank deposit rate is so low so that is where the money go to I think . Over the second half of the year, Chinese equity, especially the age share, would give quite a compelling story.

Guy Miller: And we were speaking about darlings there. Japan was a darling of investors last year. Come off the boil a bit this year. What do you think? Is Japan going to struggle for the remainder of this year? And how would you see it relative to China, for example?

Ha Nguyen: What I quite like about what Thomas has mentioned is like market need a narrative, right? So a couple of years ago is about Japan have a new dynamism, have a kind of corporate governance improvement. It has been like that for a decade, not just about last year, but definitely the currency plays such a big role in the whole things because a lot of companies in Japan seeking overseas a significant source of their revenue coming from overseas. So definitely the currency movement has such a big impact on the corporate profitability and we see that the central bank in Japan is raising rates since last year and that kind of monetary policy normalization will continue. Now it's on pause a little bit but definitely the yen has been strengthening and that is not good for corporate in Japan. On top of that, they are very exposed to the whole global growth story and that's why I see that there's a bit of here and there, a bit of rally, but it's going be be capped.

Guy Miller: Now, I'm going to ask Tom and Charlotta a little bit about the dollar in a minute or two. A weaker dollar generally seen as a good thing for emerging markets. Anything else on that side before we speak to Gustavo maybe about Latin America that you're seeing, particularly perhaps in the Asian region?

Ha Nguyen: I think it's not been a very easy year for emerging markets up until the time where we have a dollar weakness. So it's allowed central bank to cut rates in some part of the region. And also there are a bit of flows coming into EM when people try to diversify out of the US. But at the end of the day, I think the business model in the US is still very top in terms from the investor point of view, from the return on equity, even though valuation EM is relatively attractive. But I think the dollars, I think Thomas will come back to that, but definitely it looks relatively quite oversold right now. If we have a reversal of the dollars and definitely the impact on the EM would be negative. So I would be quite cautious when we think about EM. But I mean, EM is quite a complex basket because in EM we have take play like Taiwan, we have recently a re-rating from South Korea, that is we can overweight for example but some typical EM that's very sensitive to the whole movement of global growth as well as the dollar and I would be...

Guy Miller: You, you also like India. Is that right?

Ha Nguyen: So India is EM definitely, but the story is slightly different there. So one of the countries is relatively resilient to the whole tariff with the U.S. Because the rest of EM, especially in Asia, very, very vulnerable to the whole tarif fund with the United States. So definitely that is one thing. The second thing is that, you know, has been India has been a darling in the last couple of years, a bit of a consolidation going through and now flow is coming back because growth is improving quite a bit in the second half of the year, so definitely valuation is not the most attractive, but I think from the growth story, India is also the best market in terms of RoE, in terms of earning growth and things like that in Asia, so it's definitely also attractive.

Guy Miller: For sure, there's a real story there. But look, Gustavo, joining us live on the line from Chile, thank you for joining us. It's been a remarkable performance for some of these LATAM equity markets this year. Massive double digit returns. Is that all done? Are we done and dusted or is there still some upside to have in the remaining six months of the year?

Gustavo Yana, Market Strategist & Economist LatAm, Zurich Chile Asset Management: Yes, as you played it out, this has been an extraordinary performance here today. And of course, given that extraordinary rally, it seems that potential upside could have been stretched out. However, we remain constructive. I think that part of the outperformance have been, of course, related with the mentioned by high in terms of dollar weakness. However, some of the bureaucratic things have also appeared. For instance, as we mentioned in the prior podcast, there is a relative insulation of Latam in terms of the US tariff war, and also this kind of more appeal on the potential shift in terms of more market-friendly administration going forward in several economies within the region. Low valuation from historical levels, potential upside on that could be well, one of the key reasons that they have pointed us to remain constructive of the region.

Guy Miller: Very good. So let's round off with the perhaps elephant in the room, Tom, Charlotta. The dollar. Not you, don't worry, Tom. It's the dollar. So the dollar only at the end of last year we were being asked about is this a case of a Mar-a-Lago accord to bring down the value of the dollar, which we thought was ridiculous. The dollar was in a spike, but even by historic standards it was kind of still within a broad range. Now, six months later, we're being asked, is this the end of the US of the reserve currency? I suspect I know the answer, in fact I do know the answer to this, but what's your take on all of that?

Tom Liebi: Yeah, let's pick up the topic about narratives again, and that is obviously quite clearly linked. I mean you mentioned it. Everybody was kind of talking up the U.S. until quite recently, and now the opposite seems to be true. Or everybody talks about the end of U. S. exceptionalism. It's quite interesting. Maybe just a few observations. Yes, it's true that the dollar has sold off quite significantly, about 10% if you look at the broader index, but it comes from overvalued levels quite clearly according to many measures. Starting with the purchase power parity, but there's many more. So it's just a rebalancing. I mean, where we currently are is roughly where we were five, 10 years ago. So kind of an average level, nothing exceptional. We also write in the mid-year outlook about the momentum in currency markets. So usually, there's a bit of an overshooting. But coming back to the narrative currently. And what we have observed, we talked about the treasure yields rising quite rapidly. We have seen the dollar weakening. That's a pattern that we usually tend to see from emerging markets, weaker currency and weaker bond markets. So that is unusual. The good thing, the move in interest rates has stabilized. We talked about that initially. We even expect them to fall a bit further. But the dollar outflow has not stopped fully. And it is a quite crowded trade. There seems to be a strong consensus that the trade continues, which is where I usually get a bit suspicious. And I wouldn't be surprised if we do see a bit of a stabilization or probably even a rebound. Once again, what we have seen over the past few months is nothing too unusual. The dollar is not stretched, if you look at it in a longer-term environment. But the short-term move has been quite rapid. So. I would expect that narrative maybe to be watered down.

Guy Miller: Yeah, I mean, I would certainly agree with you with a crowded trade. It seems to me that the most crowded trade I've heard about so far in the last couple of months. So yes, as you imply, probably a little bit further to go. But broadly, a lot of that move is done. Now, one currency, again, the dollar has been weak against. We all speak about the dollar, but the Swiss franc Charlotta. I mean the Swiss franc is the safest of safe havens here in our little bubble in Zurich. The Swiss National Bank has cut rates to zero. What's that dollar-franc relationship like now, and where do you think it's going to go?

Charlotta Groth: Yeah, we spoke a lot about darlings here today, and I think the Swiss franc is clearly a darling for many. But there are good reasons for it to be so. The fundamentals are strong. It's a country that is running a persistent and, dare I say, large trade surplus. There is a lot of demand for Swiss franc. It is also a country that has persistently undershooting other regions in terms of inflation, and over the past few years that has become very important. And it's also a country where, as you say, interest rates have already fallen to zero. So there is kind of a a there is not a lack of policy space because you create policy space. If you need policy space, you create it. But all of that together means that, yes, the Swiss franc is probably likely to remain strong. He has fallen or risen to a historical height.

Guy Miller: Could we get interventions to weaken that, just from a domestic Swiss economy perspective?

Charlotta Groth: Yeah, I mean, clearly the strength versus the dollar, maybe slightly less so versus the euro, is the headwind for the domestic economy. The manufacturing sector is very important in Switzerland, especially kind of smaller and mid-sized companies, they are struggling. And on top of it, of course, they have tariffs. So clearly, controlling and avoiding a further sharp increase in the Swiss franc is a key policy objective. And I think the Swiss National Bank was very clear about in the last meeting where they cut rates to zero, that FX interventions remain part of their kind of policy toolbox. Compared to what we've seen previously, I would suspect they're gonna be much less kind of aggressive on that side going forward. And I think when we think about the Swiss franc, as we said, it has already strengthened, actually has strengthened ahead of most other countries, versus the dollar, and we think that we are not going to see much more strength on that side but risk to the Swiss franc is always to the upside.

Guy Miller: Great, thank you for that. Thank you to all of you for listening to the MSME team generally. So to round up from a market perspective, I mean, it seems that we believe that some of the bond moves that we had early in the year were overdone, seeing some highs reach, we think, back in April time. Bond yields, we think can moderate a little bit, certainly over the remainder of this year. As you heard from Puneet, the risk that's being, ot the risk premia being offered in the credit markets we don't really think is... Is reflective of the risks that are there and certainly if we want to play upside, which we do, we see more of that upside coming in the broader equity markets that perhaps are not quite as capped as some of the credit markets are in terms of hitting the lower bind for spreads. It is worth saying that although fundamentals are still challenged, you heard that in terms of our economic podcasts, that means that revenues on margins are going to find it difficult for the remainder of the year. It is worth pointing out in that last point about the US dollar. The dollar weakness, the 10% decline that we have seen, should be helpful certainly for US corporate earnings. So maybe this brings investors at least to turn their attention back somewhat to the US markets. But I think one of the key drivers right now as equity markets break out has been a function simply of momentum. A lot of institutional investors have been short the market, they've been struggling to close the short and in some cases going long to play performance into year end. We continue to see... Retail investors buy the markets and buy any dips that they can. And certainly within the US market we're seeing corporations that have got very, very strong cash flows, cash balances. They're continuing to be doing their stock repurchases. So there's a number of reasons beyond fundamentals, which maybe are a little bit stretched, why this market continue to grind higher. But as we always say in this world that we're living in, a land of confusion, there's likely to be still a great deal of volatility. Over the period going into year-end, so one has to be nimble. Once again, thank you all for joining us. If you haven't already, please do listen to the podcast that we've just put out on the global macroeconomy. And remember, as always, you can read our full report, see our videos, and we can pick that up on Zurich.com forward slash MSME. And we look forward to again speaking to you very soon.