Hello, and welcome to The Credit Edge, a weekly markets podcast. My name is James Crombie. I'm a senior editor at Bloomberg. This week, we're very pleased to welcome Gabriella Santos, chief market strategist for the America's at JP Morgan Asset Management. How are you, Gabriella.

Hello, and welcome to The Credit Edge, a weekly markets podcast. My name is James Crombie. I'm a senior editor at Bloomberg. This week, we're very pleased to welcome Gabriella Santos, chief market strategist for the America's at JP Morgan Asset Management. How are you, Gabriella.

I'm doing well. Thank you so much for having.

I'm doing well. Thank you so much for having.

Me, Thank you so much for joining us. So we very excited to have you on the show. We're also delighted to welcome back Rob Schiffman from Bloomberg Intelligence as our co host.

Me, Thank you so much for joining us. So we very excited to have you on the show. We're also delighted to welcome back Rob Schiffman from Bloomberg Intelligence as our co host.

Hello, Rob, Oh, so happy to be here.

Hello, Rob, Oh, so happy to be here.

So just to set the scene a bit here, US markets are rallying as rates come down, the economy keeps chugging along, and investors look forward to a new administration, which the bulls think will be very pro growth. Credit markets are also on fire, and we've seen a huge amount of borrowing by companies, with more to come. In twenty twenty five. Private debt in particular has experienced a meteoric rise. It's now a one point six trillion dollar market, but it could well be worth tens of trillions dollars more when you include all of the asset based finance, but very tight bond spreads, tons of insuance and rising fund inflows. That doesn't mean zero risk in credit markets. The Feds started to ease, but yields remain elevated, and the stated aims of the next government all sound very inflationary, signaling a period of higher for longer interest rates. That means high debt costs, which will hurt borrowers across the board, especially the weak ones. In the background, we have a lot of geopolitical risk, which will only be amplified by the Trump trade wars. Plus the threat of recession hasn't gone away entirely. A downturn would cause a lot of distress in credit markets. So what's your view, Garbriella. You expect the economy to keep growing and no accession, but what about inflation. Surely that's going to be a big problem for investors and markets next year.

So just to set the scene a bit here, US markets are rallying as rates come down, the economy keeps chugging along, and investors look forward to a new administration, which the bulls think will be very pro growth. Credit markets are also on fire, and we've seen a huge amount of borrowing by companies, with more to come. In twenty twenty five. Private debt in particular has experienced a meteoric rise. It's now a one point six trillion dollar market, but it could well be worth tens of trillions dollars more when you include all of the asset based finance, but very tight bond spreads, tons of insuance and rising fund inflows. That doesn't mean zero risk in credit markets. The Feds started to ease, but yields remain elevated, and the stated aims of the next government all sound very inflationary, signaling a period of higher for longer interest rates. That means high debt costs, which will hurt borrowers across the board, especially the weak ones. In the background, we have a lot of geopolitical risk, which will only be amplified by the Trump trade wars. Plus the threat of recession hasn't gone away entirely. A downturn would cause a lot of distress in credit markets. So what's your view, Garbriella. You expect the economy to keep growing and no accession, but what about inflation. Surely that's going to be a big problem for investors and markets next year.

So I do think in terms of the base case here for next year, it's really looking like it's a pretty good but pretty solid economy. We like to call it our twenty twenty four economy and then take two next year, so two percent rounding down growth, no recession in the base case, two percent inflation in the base case, and four percent unemployment. I do think if we consider how that might change next year, a lot of it will depend on some of the policies of the new administration, especially around taxes, deregulation, immigration, tariffs, and that can help us to really nail down the decimal places there. Of that twenty twenty four forecast, I do think some of it is pro real economic growth, some of it might actually depress real economic growth, and some aspects of it might be inflationary. So it's not all good, it's not all bad, and it will really depend on the scale of the scope the sequencing of all of these policies. I think it's in listening to note in the bond market that yields have moved up fifty basis points since we started pricing in the probability of a Republican sweep. The majority of the move higher we have seen from real yields, which I think is just a signal of the more resilient real economic growth side. But we've also had to move higher in inflation break events, so that's an early sign that inflation is coming back to be top of mind, not because of where we are right now, but because we're trying to shape those contours next year, and that would be very dependent on the policy.

So I do think in terms of the base case here for next year, it's really looking like it's a pretty good but pretty solid economy. We like to call it our twenty twenty four economy and then take two next year, so two percent rounding down growth, no recession in the base case, two percent inflation in the base case, and four percent unemployment. I do think if we consider how that might change next year, a lot of it will depend on some of the policies of the new administration, especially around taxes, deregulation, immigration, tariffs, and that can help us to really nail down the decimal places there. Of that twenty twenty four forecast, I do think some of it is pro real economic growth, some of it might actually depress real economic growth, and some aspects of it might be inflationary. So it's not all good, it's not all bad, and it will really depend on the scale of the scope the sequencing of all of these policies. I think it's in listening to note in the bond market that yields have moved up fifty basis points since we started pricing in the probability of a Republican sweep. The majority of the move higher we have seen from real yields, which I think is just a signal of the more resilient real economic growth side. But we've also had to move higher in inflation break events, so that's an early sign that inflation is coming back to be top of mind, not because of where we are right now, but because we're trying to shape those contours next year, and that would be very dependent on the policy.

Can the FED cut rates in December?

Can the FED cut rates in December?

We think for December, And this has been interesting this week to hear some of the last FED speak before the blackout period for the meeting mid December, and I think it was fascinating to see that Governor Waller had a speech called cut or Skip, so clearly he knows here how to draw in an audience, and he seemed to lean on the side of cutting in December. So the market's pricing in let's call it, seventy percent chance of a cut in December unless something changes with the jobs report Friday or CPI next week, that seems doable. But I do think the market was right to take out a lot of the rate cuts next year. Right. We've taken out one hundred basis points of cuts. Really we think next year maybe we see another couple of twenty five basis points, but it does seem like we're likely to see a terminal rate closer to three and a half four percent. And I think for credit as long as that's coming from primarily more resilient economic growth and hence resilient earnings and credit metrics. That's okay, that's good. You can still have very tight spreads. You can also have equities at all time highs. But I think to the extent that maybe you continue seeing interest rate volatility and a move higher yields on the curve coming more from the inflation side or fiscal concerns. That's one. Maybe you can see a bit more of a choppy outlook for spreads.

We think for December, And this has been interesting this week to hear some of the last FED speak before the blackout period for the meeting mid December, and I think it was fascinating to see that Governor Waller had a speech called cut or Skip, so clearly he knows here how to draw in an audience, and he seemed to lean on the side of cutting in December. So the market's pricing in let's call it, seventy percent chance of a cut in December unless something changes with the jobs report Friday or CPI next week, that seems doable. But I do think the market was right to take out a lot of the rate cuts next year. Right. We've taken out one hundred basis points of cuts. Really we think next year maybe we see another couple of twenty five basis points, but it does seem like we're likely to see a terminal rate closer to three and a half four percent. And I think for credit as long as that's coming from primarily more resilient economic growth and hence resilient earnings and credit metrics. That's okay, that's good. You can still have very tight spreads. You can also have equities at all time highs. But I think to the extent that maybe you continue seeing interest rate volatility and a move higher yields on the curve coming more from the inflation side or fiscal concerns. That's one. Maybe you can see a bit more of a choppy outlook for spreads.

I do want to drill down deeper on credit, but before we get there, I want to get a little more insight into your secret sauce because whatever you've been dishing out has just been spot on the last few years. And I just think you know you've been able to pick the right times, the right sub segments of each of these markets. But the biggest difference right now is this election. And I'm just wondering, with this giant umbrella of new changes, in particular people in the cabinet, what your thoughts are from a tariff perspective, from a policy perspective, that's really going to shape that bigger, broader, generally bullish view that you had going into this election.

I do want to drill down deeper on credit, but before we get there, I want to get a little more insight into your secret sauce because whatever you've been dishing out has just been spot on the last few years. And I just think you know you've been able to pick the right times, the right sub segments of each of these markets. But the biggest difference right now is this election. And I'm just wondering, with this giant umbrella of new changes, in particular people in the cabinet, what your thoughts are from a tariff perspective, from a policy perspective, that's really going to shape that bigger, broader, generally bullish view that you had going into this election.

So I think the secret sauce for US has been really looking much more at the track ends so cyclically with the economy, I think the trend here is really that we're past the cyclical storm. This is the first year that we can really say that, and by that we mean all the effects of COVID and the inflation shock and the rate shock, and finally the economy is just normal and that's a good place to go into next year. And then if you look at the trend of structural forces, all of this AI and AI adjacent adjacent capital investment, that's a powerful force behind business private investment, something that we think can help productivity over time. So overall it's a pretty resilient foundation, both cyclically and structurally. And on top of that, then we overlay policy, and I think if we listen to some of the members of that have been nominated from the administration, I think you can gather, for example, from US Trade Representative Designate Jamis and Greer that he and other members of the administration really do see tariffs not just as a thread or a negotiating tool, but also a policy tool for domestic aims and an end in and of itself. And so that's what lead us to believe that next year we are likely to see early on some tariffs actually implemented. If you also listen to other cabinet members within the economic sphere, what you also see in terms of target it's very much focused on national and economic security and especially with relation to China. So for next year, we think some of these tariffs are much more just on the negotiating camp and those specifically with Mexico, with Canada, it's about immigration and getting other getting those countries to close the back door to China. Some of those tariff proposals are actually also likely to be implemented, and that's with regards to China, and here is kind of a working base case, subject to revision. We do think it can be likely to see about half of the tariffs that are being discussed on Chinese goods and here. I think it'll all depend on the exclusions. It'll all depend on the timing. But that's something that we saw last time around. Is something that impacts the type of goods, of course that we import from China and here specifically intermediate goods, and then this next phase it might even involve end consumer goods. This all brings me, it brings us to the conclusion that maybe if we think about retail, which has been under a lot of pressure the past couple of years, is kind of coming out of that storm. Unfortunately, it's not clear skies ahead we might see, for example, that sector is being particularly impact did by some of these potential likely tariffs on Chinese imports.

So I think the secret sauce for US has been really looking much more at the track ends so cyclically with the economy, I think the trend here is really that we're past the cyclical storm. This is the first year that we can really say that, and by that we mean all the effects of COVID and the inflation shock and the rate shock, and finally the economy is just normal and that's a good place to go into next year. And then if you look at the trend of structural forces, all of this AI and AI adjacent adjacent capital investment, that's a powerful force behind business private investment, something that we think can help productivity over time. So overall it's a pretty resilient foundation, both cyclically and structurally. And on top of that, then we overlay policy, and I think if we listen to some of the members of that have been nominated from the administration, I think you can gather, for example, from US Trade Representative Designate Jamis and Greer that he and other members of the administration really do see tariffs not just as a thread or a negotiating tool, but also a policy tool for domestic aims and an end in and of itself. And so that's what lead us to believe that next year we are likely to see early on some tariffs actually implemented. If you also listen to other cabinet members within the economic sphere, what you also see in terms of target it's very much focused on national and economic security and especially with relation to China. So for next year, we think some of these tariffs are much more just on the negotiating camp and those specifically with Mexico, with Canada, it's about immigration and getting other getting those countries to close the back door to China. Some of those tariff proposals are actually also likely to be implemented, and that's with regards to China, and here is kind of a working base case, subject to revision. We do think it can be likely to see about half of the tariffs that are being discussed on Chinese goods and here. I think it'll all depend on the exclusions. It'll all depend on the timing. But that's something that we saw last time around. Is something that impacts the type of goods, of course that we import from China and here specifically intermediate goods, and then this next phase it might even involve end consumer goods. This all brings me, it brings us to the conclusion that maybe if we think about retail, which has been under a lot of pressure the past couple of years, is kind of coming out of that storm. Unfortunately, it's not clear skies ahead we might see, for example, that sector is being particularly impact did by some of these potential likely tariffs on Chinese imports.

What kind of retail that I mean, we're talking about all retailing. This seems like the high end consumer is still doing fine. Is it the more sort of budget stores that are in trouble?

What kind of retail that I mean, we're talking about all retailing. This seems like the high end consumer is still doing fine. Is it the more sort of budget stores that are in trouble?

Yeah, So if we think about what we still import from China around consumer goods, it's electronics, for example, it's some aspects of clothing, and so here we're we're thinking more on the consumer discretionary and consumer durable and non durable goods kind of sphere. And I do think, of course, this is not the first movie. We've already seen the first one in twenty eighteen. We have had a trade war one point zero, and we have had an adjustment of supply chains since then. And it's very real when you look at US imports from China that used to be twenty one percent of all of our imports, it's now thirteen percent. So to an extent, there has been some diversification of these supply chains to Southeast Asia, to Mexico to India, but there is still, to an extent a certain amount of these types of consumer goods that are coming from China. I think at the end of the day, it's just accelerates that movement of a China plus one strategy for companies and really a manufacturing base that's much more localized around where the end consumer is.

Yeah, So if we think about what we still import from China around consumer goods, it's electronics, for example, it's some aspects of clothing, and so here we're we're thinking more on the consumer discretionary and consumer durable and non durable goods kind of sphere. And I do think, of course, this is not the first movie. We've already seen the first one in twenty eighteen. We have had a trade war one point zero, and we have had an adjustment of supply chains since then. And it's very real when you look at US imports from China that used to be twenty one percent of all of our imports, it's now thirteen percent. So to an extent, there has been some diversification of these supply chains to Southeast Asia, to Mexico to India, but there is still, to an extent a certain amount of these types of consumer goods that are coming from China. I think at the end of the day, it's just accelerates that movement of a China plus one strategy for companies and really a manufacturing base that's much more localized around where the end consumer is.

You talk a lot about the growing breadth of the market, and it sounds like, you know, there's been a few players that's really benefited, but there's a lot more and a lot of other sub sectors to benefit. The counter though I wonder about China is that when you think about AI and just dramatic growth, everything has to go through China. Like when you start thinking, like how much you think about black Swan type risks that China effectively controls everything when it comes to AI, right, you can't basically get a semiconductor made unless it's going through something that China controls. So how do you take out like, oh, there's going to be tariffs on China, but the rest of the world doesn't have to worry about it just some small sub sectors.

You talk a lot about the growing breadth of the market, and it sounds like, you know, there's been a few players that's really benefited, but there's a lot more and a lot of other sub sectors to benefit. The counter though I wonder about China is that when you think about AI and just dramatic growth, everything has to go through China. Like when you start thinking, like how much you think about black Swan type risks that China effectively controls everything when it comes to AI, right, you can't basically get a semiconductor made unless it's going through something that China controls. So how do you take out like, oh, there's going to be tariffs on China, but the rest of the world doesn't have to worry about it just some small sub sectors.

Yeah, And I think it's that mix of tariffs and industrial policy. And I think in the previous Trump administration there was more of a focus on the tariff side. Under the Biden administration, there's also been some focus on tariff and on tariff exclusions, but also on a broader industrial policy, and I think it's going to be a combination of both from here on out, and especially when it comes to semiconductors, which is kind of the perfect epicenter of this national security and economic security epicenter since it's dual use technology in the military as well as consumer and corporate production. And I think really it's it's less about our dependence on China directly for semiconductors. I think indirectly, the epicenter of this with China really is around critical minerals, and China knows it has that lever where so many raw materials nickel magnesium come from China, and China this morning was using that as a way to retaliate against some limits on exports to China. But I think it's it's more indirectly through the critical minerals where I think industrial policy fits in is more our dependence on broader Asia for the manufacturing of semiconductors ninety percent in Taiwan for those advanced GPUs, but then an additional forty five percent from Korea and Japan when it comes to memory semiconductor production. So I think we'll continue seeing a lot of industrial policy measures like the Tips Act. There'll be a Chips Act two point oh three point oh four point oh five point zero to try to reshore some of the semiconductor manufacturing capacity. I see the relationship with China around semiconductors more from the US side in putting up barriers and the transfer of that intelligence to China to keep it to slow down its progress. And we have seen China about three four years behind the US and semiconductor technology, and we have seen the Biden administration and likely the Trump administration continue to focus on putting some limits around that transfer of technology.

Yeah, And I think it's that mix of tariffs and industrial policy. And I think in the previous Trump administration there was more of a focus on the tariff side. Under the Biden administration, there's also been some focus on tariff and on tariff exclusions, but also on a broader industrial policy, and I think it's going to be a combination of both from here on out, and especially when it comes to semiconductors, which is kind of the perfect epicenter of this national security and economic security epicenter since it's dual use technology in the military as well as consumer and corporate production. And I think really it's it's less about our dependence on China directly for semiconductors. I think indirectly, the epicenter of this with China really is around critical minerals, and China knows it has that lever where so many raw materials nickel magnesium come from China, and China this morning was using that as a way to retaliate against some limits on exports to China. But I think it's it's more indirectly through the critical minerals where I think industrial policy fits in is more our dependence on broader Asia for the manufacturing of semiconductors ninety percent in Taiwan for those advanced GPUs, but then an additional forty five percent from Korea and Japan when it comes to memory semiconductor production. So I think we'll continue seeing a lot of industrial policy measures like the Tips Act. There'll be a Chips Act two point oh three point oh four point oh five point zero to try to reshore some of the semiconductor manufacturing capacity. I see the relationship with China around semiconductors more from the US side in putting up barriers and the transfer of that intelligence to China to keep it to slow down its progress. And we have seen China about three four years behind the US and semiconductor technology, and we have seen the Biden administration and likely the Trump administration continue to focus on putting some limits around that transfer of technology.

So from the big picture, you see a lot of the tariff conversation is more saber rattling than something that could meaningfully disrupt global economies and returns over the next year.

So from the big picture, you see a lot of the tariff conversation is more saber rattling than something that could meaningfully disrupt global economies and returns over the next year.

I think it's part saber rattling but part policy, and I think that's the key for investors to identify which ones, which I do think if we think about some of the proposals, for example, of twenty five percent tariffs on Mexico and Canada, that we very much think is a negotiating tactic. If we think about it, a company like General Motors, fifty five percent of the truck sold in the US are imported in sixty percent of those from Mexico and Canada. So that's just an example something that's truly disruptive economically speaking, unlikely to happen. We also saw this the first time around, and Mexico was able to give a little bit on the immigration front, and hence we got the new USMCA deal and NOE tariffs I posed, So that one, I think is much more about negotiation. I think the ones with regards to China, that's where we're likely to see in ourview, about half of them actually implemented, because it it's really part of a broader, I think by partisan view of a competition with China from here on out. So that impacts our view of Chinese growth next year. At face value, it's something that could shave off one two percentage points from China's annual GDP growth of course, it has ways to counteract that. We're likely to see more physical stimulus from China. We're likely to see weakness in the Chinese yuan to partly offset the increase in tariffs, so that can help at least offset some of that downward pressure on economic growth, but not all. And this is what leaves us thinking that within international markets, within emerging markets especially, we prefer to focus on stories where there are other structural drivers in place that are not dependent on the cyclical recovery here from China or from Europe, which is very much an indirect play on China.

I think it's part saber rattling but part policy, and I think that's the key for investors to identify which ones, which I do think if we think about some of the proposals, for example, of twenty five percent tariffs on Mexico and Canada, that we very much think is a negotiating tactic. If we think about it, a company like General Motors, fifty five percent of the truck sold in the US are imported in sixty percent of those from Mexico and Canada. So that's just an example something that's truly disruptive economically speaking, unlikely to happen. We also saw this the first time around, and Mexico was able to give a little bit on the immigration front, and hence we got the new USMCA deal and NOE tariffs I posed, So that one, I think is much more about negotiation. I think the ones with regards to China, that's where we're likely to see in ourview, about half of them actually implemented, because it it's really part of a broader, I think by partisan view of a competition with China from here on out. So that impacts our view of Chinese growth next year. At face value, it's something that could shave off one two percentage points from China's annual GDP growth of course, it has ways to counteract that. We're likely to see more physical stimulus from China. We're likely to see weakness in the Chinese yuan to partly offset the increase in tariffs, so that can help at least offset some of that downward pressure on economic growth, but not all. And this is what leaves us thinking that within international markets, within emerging markets especially, we prefer to focus on stories where there are other structural drivers in place that are not dependent on the cyclical recovery here from China or from Europe, which is very much an indirect play on China.

One of the reasons we're really excited to have you in the studio in New York, Gariela, is that you have a really broad mandate. You see a lot of things. I don't know how you find time for all of it. But talk to us a bit about how credit fits into a portfolio more, you know, versus equity versus other things. People in credit that we have on this show talk about equity like returns in areas of private credit, and you know, some of the more arcane parts of this market. But what from an outside perspective, what is the opportunity in corporate credit right now for a global investor.

One of the reasons we're really excited to have you in the studio in New York, Gariela, is that you have a really broad mandate. You see a lot of things. I don't know how you find time for all of it. But talk to us a bit about how credit fits into a portfolio more, you know, versus equity versus other things. People in credit that we have on this show talk about equity like returns in areas of private credit, and you know, some of the more arcane parts of this market. But what from an outside perspective, what is the opportunity in corporate credit right now for a global investor.

Thank you. And actually it's been really exciting time in fixed income markets, not just for the volatility and interest rates and all this discussion of the FED, but also exciting time in terms of what it brings to portfolio construction. I grew up in Brazil. I study emerging markets. That's where I focus my research on, and fixed income, of course is a key part of you know, any investor's allocation. And in the US it used to be about equities, equity, equity, equity, and then finally now that we have some more normal, positive real rates again, I feel like it's it's become much more of a balanced conversation. You know, if you want to take risk, is it better to take it in the equity market and the corporate credit market? How can you balance total return and income. There's a lot to play for. It's actually quite an exciting time, especially for institutional clients. If you're a pension and insurance company, you're actually fully funded now you can actually meet your return targets, and you can do that by de risking, by allocating more to fixed income, including corporate credit. We're also starting to see more retail individual investors get a bit more excited about fixed income, kind of leaving behind the memory of those that bear market and fixed income in twenty twenty two and start getting excited about building a more core fixed income allocation. When it comes to corporate credit in the traditional sense, investment grade, high yield, I think the double digit you know, equity like returns, A good part of that is probably behind us. With think credit spreads. If you think about valuations are incredibly incredibly tight, but they can stay tight given those good fundamentals we talked about. It's more just expecting the return to come from the carry, and the carry's pretty good. Five five and a half percent in investment grades, seven seven and a half percent in high yield. That's not bad. And so if you think about the fundamentals looking good, spreads looking tight, but all in income looking attractive, if you think about the technicals, then as that third thing we focus on, we're likely to continue seeing a lot of demand for credit from institutional and more and more from individual as well. And we still think next year can be a year where you have more demand that actual issuance coming online. So a similar backdrop to this year in that respect, I've.

Thank you. And actually it's been really exciting time in fixed income markets, not just for the volatility and interest rates and all this discussion of the FED, but also exciting time in terms of what it brings to portfolio construction. I grew up in Brazil. I study emerging markets. That's where I focus my research on, and fixed income, of course is a key part of you know, any investor's allocation. And in the US it used to be about equities, equity, equity, equity, and then finally now that we have some more normal, positive real rates again, I feel like it's it's become much more of a balanced conversation. You know, if you want to take risk, is it better to take it in the equity market and the corporate credit market? How can you balance total return and income. There's a lot to play for. It's actually quite an exciting time, especially for institutional clients. If you're a pension and insurance company, you're actually fully funded now you can actually meet your return targets, and you can do that by de risking, by allocating more to fixed income, including corporate credit. We're also starting to see more retail individual investors get a bit more excited about fixed income, kind of leaving behind the memory of those that bear market and fixed income in twenty twenty two and start getting excited about building a more core fixed income allocation. When it comes to corporate credit in the traditional sense, investment grade, high yield, I think the double digit you know, equity like returns, A good part of that is probably behind us. With think credit spreads. If you think about valuations are incredibly incredibly tight, but they can stay tight given those good fundamentals we talked about. It's more just expecting the return to come from the carry, and the carry's pretty good. Five five and a half percent in investment grades, seven seven and a half percent in high yield. That's not bad. And so if you think about the fundamentals looking good, spreads looking tight, but all in income looking attractive, if you think about the technicals, then as that third thing we focus on, we're likely to continue seeing a lot of demand for credit from institutional and more and more from individual as well. And we still think next year can be a year where you have more demand that actual issuance coming online. So a similar backdrop to this year in that respect, I've.

Heard you talk a lot about taking credit risk versus duration, and I'm just wondering, like, recognizing how tight spreads are, what does that mean in terms of how far down the credit curve are you suggesting people go, And where's that cut off between real credit risk and relative returns, particularly for total rate of return managers who just don't have that extra juice to play with.

Heard you talk a lot about taking credit risk versus duration, and I'm just wondering, like, recognizing how tight spreads are, what does that mean in terms of how far down the credit curve are you suggesting people go, And where's that cut off between real credit risk and relative returns, particularly for total rate of return managers who just don't have that extra juice to play with.

Yeah, So I think when you are in an environment where you have such tight spreads, you should listen to it in the sense that it suggests that there's little room for error there in terms of the market overall or specific issuances. And so I think that's the environment where it's really, really, really important to take credit risk by focusing on credit selection right, to actually think through what's going on in specific sectors, specific names, because there is little room prayerr. But what credit spreads don't tell us is that there's actual reason for a red traffic light here, or reason to avoid altogether the acid class if those fundamentals are there, which they are, and if those all in yields are still attractive and additive to portfolio construction, which which they are at this moment. So when we think about where we take risk. Is it in the equity market, is it in corporate credit? To be honest, neither one is a screaming cheap option. Right. Spreads are tight, equities are at all time highs with a twenty two time pe. So it's hard to say, let's overweight credit at the expensive equities.

Yeah, So I think when you are in an environment where you have such tight spreads, you should listen to it in the sense that it suggests that there's little room for error there in terms of the market overall or specific issuances. And so I think that's the environment where it's really, really, really important to take credit risk by focusing on credit selection right, to actually think through what's going on in specific sectors, specific names, because there is little room prayerr. But what credit spreads don't tell us is that there's actual reason for a red traffic light here, or reason to avoid altogether the acid class if those fundamentals are there, which they are, and if those all in yields are still attractive and additive to portfolio construction, which which they are at this moment. So when we think about where we take risk. Is it in the equity market, is it in corporate credit? To be honest, neither one is a screaming cheap option. Right. Spreads are tight, equities are at all time highs with a twenty two time pe. So it's hard to say, let's overweight credit at the expensive equities.

Is there a credit bucket you prefer, you know, triple c's over triple.

Is there a credit bucket you prefer, you know, triple c's over triple.

B's, And so I think what's interesting is earlier this year, last year, when we were still worried about, you know, the possibility of a hard landing, it was very much up in quality investment grade over high yield, highest rated possible. I think now that we've arrived we have a soft landing, we know that it's more just shaping the contours. There is the confidence to take a little bit more risk within credit. So maybe, for example, for high yield, not stay solely focused on double b's, Maybe look at single bee. I don't think it's the environment though, to be looking at triple c's. It's not that kind of nirvana economy. It's a good, good enough and good corporate profits. But that's still where you're likely to see a mild increase in defaults, which right now are very very low and we think could reach closer to two percent, but exclusively in the triple sea bucket. So maybe a good happy medium between recognizing the resiliance and so the economy, but being aware of certain headwinds we've spoken about is to focus more on that single bee bucket.

B's, And so I think what's interesting is earlier this year, last year, when we were still worried about, you know, the possibility of a hard landing, it was very much up in quality investment grade over high yield, highest rated possible. I think now that we've arrived we have a soft landing, we know that it's more just shaping the contours. There is the confidence to take a little bit more risk within credit. So maybe, for example, for high yield, not stay solely focused on double b's, Maybe look at single bee. I don't think it's the environment though, to be looking at triple c's. It's not that kind of nirvana economy. It's a good, good enough and good corporate profits. But that's still where you're likely to see a mild increase in defaults, which right now are very very low and we think could reach closer to two percent, but exclusively in the triple sea bucket. So maybe a good happy medium between recognizing the resiliance and so the economy, but being aware of certain headwinds we've spoken about is to focus more on that single bee bucket.

Even in that bucket though the low rated single bees, you know, they've they've got very high funding costs relatively speaking, and as we've talked about, rates aren't really going to go down as fast as a little and we're hoping next year, so they're kind of, you know, potentially going to hit the wall. Some of them might get helped out by private credit. Others, you know, maybe not distressed, maybe not bankruptcy, maybe not default. But you know, there are a lot more liability management deals going out there, a lot more so called credits are on credit of violence. There's a lot more risk, it seems, you know, maybe it's all lawyer work at this point, but how do you kind of factor all that in?

Even in that bucket though the low rated single bees, you know, they've they've got very high funding costs relatively speaking, and as we've talked about, rates aren't really going to go down as fast as a little and we're hoping next year, so they're kind of, you know, potentially going to hit the wall. Some of them might get helped out by private credit. Others, you know, maybe not distressed, maybe not bankruptcy, maybe not default. But you know, there are a lot more liability management deals going out there, a lot more so called credits are on credit of violence. There's a lot more risk, it seems, you know, maybe it's all lawyer work at this point, but how do you kind of factor all that in?

And I think that brings us to the point about security selection. Right when you have expensive valuations, when you have you know, normal rates for longer, that's the environment where there's actual real value add in thinking through which ones are stressed, which ones aren't, where there's value where there isn't, and that goes beyond just the sector level, but at a true security name level. I think in terms of the Raids conversation, I would make two points that give us a little bit more comfort that we're not at the beginning of a broader, more ominous credit cycle here. The first is it's been really impressive to see and we have this fabulous chart that shows that it's really more of a credit mountain rather than a credit wall, including in high yield, where we have a pickup over the next few years, but a very moderate pickup in terms of actual maturity and refinancing at higher rates. The second thing that gives us a lot of comfort actually is private markets, right, whether it's plenty of demand in public markets and if not at not the right price and conditions, then the private markets are there. And this actually includes both for high yields and for investment grade, which private managers are trying to move into more and more. And I think that's been a secret weapon here for this cycle where we've had this move higher in rates, but we've seen less of a transmission, less of a disruption into the economy and credit markets. I think a big reason is that the liquidity was there, including from private markets.

And I think that brings us to the point about security selection. Right when you have expensive valuations, when you have you know, normal rates for longer, that's the environment where there's actual real value add in thinking through which ones are stressed, which ones aren't, where there's value where there isn't, and that goes beyond just the sector level, but at a true security name level. I think in terms of the Raids conversation, I would make two points that give us a little bit more comfort that we're not at the beginning of a broader, more ominous credit cycle here. The first is it's been really impressive to see and we have this fabulous chart that shows that it's really more of a credit mountain rather than a credit wall, including in high yield, where we have a pickup over the next few years, but a very moderate pickup in terms of actual maturity and refinancing at higher rates. The second thing that gives us a lot of comfort actually is private markets, right, whether it's plenty of demand in public markets and if not at not the right price and conditions, then the private markets are there. And this actually includes both for high yields and for investment grade, which private managers are trying to move into more and more. And I think that's been a secret weapon here for this cycle where we've had this move higher in rates, but we've seen less of a transmission, less of a disruption into the economy and credit markets. I think a big reason is that the liquidity was there, including from private markets.

I'm sorry, you know we are hearing a lot more about bespoke type of private high grade credit type of deals, and that's definitely growing. I'm interested going back to your comment though about more demand next year than supply, and I wonder how that plays in to access, availability and cost the capital. In terms of what your thoughts are on M and A for next year, it would seem like it would increase significantly, And also if there's even a bigger private credit ROLEMA expanding beyond to going back to maybe not the golden tastes of LBOs, but having more leverage transaction that we've seen over the last few years, and how you manage that from both offensive and defensive perspective.

I'm sorry, you know we are hearing a lot more about bespoke type of private high grade credit type of deals, and that's definitely growing. I'm interested going back to your comment though about more demand next year than supply, and I wonder how that plays in to access, availability and cost the capital. In terms of what your thoughts are on M and A for next year, it would seem like it would increase significantly, And also if there's even a bigger private credit ROLEMA expanding beyond to going back to maybe not the golden tastes of LBOs, but having more leverage transaction that we've seen over the last few years, and how you manage that from both offensive and defensive perspective.

Yes, and you mentioned a second important risk for this positive view we have for next year. The first we had discussed previously around interest rate volatility related to inflation and fiscal concerns. The second one is around exactly how much of an M and A pickup are we going to see? And here specifically thinking of large mega deals that need to be financed through large issues. And here is where I think one of the policy aspects that's much talked about certainly is this focus on less regulation. Under this new administration versus the previous one, we are likely to see businesses have a bit more confidence in pursuing deals as a result. But I think it's not quite the environment where we just expect a fire hose of large deals and issuance coming day one. So that's a risk if we do see that, But if it's something where there's a slight pickup in M and A in certain sectors and especially more of mid small range, and that's something that can be absorbed by a tremendous amount of demand. And here it's important to think on the demand not just from the US investor base, but also internationally. We talked about tariffs and kind of the challenge globally. I do think still US corporate credit markets are by far the best option when we look at global corporate credit markets, and with still attractive all anials, that means still pretty decent international demand for that debt. The last thing you mentioned leverage buyouts, one thing we hear thinking about the secret sauce and thinking about the trends. I think companies investors have really come to understand that this really is a normal for longer environment. And maybe you know, we took out one hundred basis points of FED rate cuts, but we're still talking about an elevated rate environment, and one that's not just here and now, but really a feature of this next cycle. And that leads us to believe for new private equity deals that there will be a bit more structurally less leverage embedded in them, and so that also gives us a bit of comfort there.

Yes, and you mentioned a second important risk for this positive view we have for next year. The first we had discussed previously around interest rate volatility related to inflation and fiscal concerns. The second one is around exactly how much of an M and A pickup are we going to see? And here specifically thinking of large mega deals that need to be financed through large issues. And here is where I think one of the policy aspects that's much talked about certainly is this focus on less regulation. Under this new administration versus the previous one, we are likely to see businesses have a bit more confidence in pursuing deals as a result. But I think it's not quite the environment where we just expect a fire hose of large deals and issuance coming day one. So that's a risk if we do see that, But if it's something where there's a slight pickup in M and A in certain sectors and especially more of mid small range, and that's something that can be absorbed by a tremendous amount of demand. And here it's important to think on the demand not just from the US investor base, but also internationally. We talked about tariffs and kind of the challenge globally. I do think still US corporate credit markets are by far the best option when we look at global corporate credit markets, and with still attractive all anials, that means still pretty decent international demand for that debt. The last thing you mentioned leverage buyouts, one thing we hear thinking about the secret sauce and thinking about the trends. I think companies investors have really come to understand that this really is a normal for longer environment. And maybe you know, we took out one hundred basis points of FED rate cuts, but we're still talking about an elevated rate environment, and one that's not just here and now, but really a feature of this next cycle. And that leads us to believe for new private equity deals that there will be a bit more structurally less leverage embedded in them, and so that also gives us a bit of comfort there.

It's so funny just hearing the phrase normal for longer. If you turn on any news program, it certainly doesn't seem like it's anything is normal these days. So interesting from a financial perspective that you can get that much level of comfort.

It's so funny just hearing the phrase normal for longer. If you turn on any news program, it certainly doesn't seem like it's anything is normal these days. So interesting from a financial perspective that you can get that much level of comfort.

From a rates environment, right, We've been here before, and it's actually for a good reason. We entitled our Long Term Our long Term Capital Market Assumptions p IS Healthier Foundations, because that's ultimately why we think we have higher rates is because we've finally broke through that malaise we had of weak nominal growth that needed low rates, emergency medicine and we're past that. We actually the economy not just survived higher rates, but thrived even despite higher rates. And I think that that's an environment where you can get income and you can also take risk within credit to get it.

From a rates environment, right, We've been here before, and it's actually for a good reason. We entitled our Long Term Our long Term Capital Market Assumptions p IS Healthier Foundations, because that's ultimately why we think we have higher rates is because we've finally broke through that malaise we had of weak nominal growth that needed low rates, emergency medicine and we're past that. We actually the economy not just survived higher rates, but thrived even despite higher rates. And I think that that's an environment where you can get income and you can also take risk within credit to get it.

You know, one of the things I heard you talk about pre election was again this broadening of the growth environment and how AI was maybe the epicenter, but it expanded beyond that places like healthcare or utilities. I think the trouble, at least from the credit side, at least that I see, is that it's dominated by a handful of super highly rated, super tightly trading names. So like, how do you take advantage of that? What are the sub sectors? What are the spots you can go to as a credit as a credit investor to take advantage of that expansion of growth beyond MAG seven.

You know, one of the things I heard you talk about pre election was again this broadening of the growth environment and how AI was maybe the epicenter, but it expanded beyond that places like healthcare or utilities. I think the trouble, at least from the credit side, at least that I see, is that it's dominated by a handful of super highly rated, super tightly trading names. So like, how do you take advantage of that? What are the sub sectors? What are the spots you can go to as a credit as a credit investor to take advantage of that expansion of growth beyond MAG seven.

And that's such an important point at the top line, you know, we have nearly ten percent earnings growth expected this year. Last year wasn't as bad as people thought, But really the big story last year and early this year was how concentrated that earnings growth was exclusively in the MAG seven. So made sense that they did so well, but really the big story that's been taking shape the second half of this year into next year is really the earnings recovery in other sectors. And finally, we have about depends on the quarter of between eight and nine sectors reporting positive earnings growth again, so it really is a broadening out based on a broadening out of actual corporate earnings and corporate health. One of the things that's encouraging to see is we seem to have had a body being out in the margin contraction, which had been the issue for two years for a lot of sectors, and we're back to trend, which is a board drifting margin for US companies. The risk there for next year and beyond, we think is more on the top line. How much more ability to pass on colls or raise prices do different companies and sectors have, But overall it's still a resilient and a broader earnings path from here, we think, including not just large cap but also mid cap and small cap. I think in terms of sectors, one that we feel has really turned the quarter more broadly is financials. So if we think about the trend over the last year or so, it's been very heavily favorable for very large banks, and now we seem to be finally seeing your more super regional, regional mid size banks also turning the corner in terms of profitability, So less pressure right on deposits as rates have come down and banks are able to pass that on at the same time that there's hope for a bit more loan growth and at still pretty elevated levels. And so financials is one here specifically think of US financials, not necessarily you know, Yankee banks. It's more of a US story, is one that plays very nicely into that economic resilience normal for longer and earning's breath coming back.

And that's such an important point at the top line, you know, we have nearly ten percent earnings growth expected this year. Last year wasn't as bad as people thought, But really the big story last year and early this year was how concentrated that earnings growth was exclusively in the MAG seven. So made sense that they did so well, but really the big story that's been taking shape the second half of this year into next year is really the earnings recovery in other sectors. And finally, we have about depends on the quarter of between eight and nine sectors reporting positive earnings growth again, so it really is a broadening out based on a broadening out of actual corporate earnings and corporate health. One of the things that's encouraging to see is we seem to have had a body being out in the margin contraction, which had been the issue for two years for a lot of sectors, and we're back to trend, which is a board drifting margin for US companies. The risk there for next year and beyond, we think is more on the top line. How much more ability to pass on colls or raise prices do different companies and sectors have, But overall it's still a resilient and a broader earnings path from here, we think, including not just large cap but also mid cap and small cap. I think in terms of sectors, one that we feel has really turned the quarter more broadly is financials. So if we think about the trend over the last year or so, it's been very heavily favorable for very large banks, and now we seem to be finally seeing your more super regional, regional mid size banks also turning the corner in terms of profitability, So less pressure right on deposits as rates have come down and banks are able to pass that on at the same time that there's hope for a bit more loan growth and at still pretty elevated levels. And so financials is one here specifically think of US financials, not necessarily you know, Yankee banks. It's more of a US story, is one that plays very nicely into that economic resilience normal for longer and earning's breath coming back.

Is it not still a commercial real estate hit to come for those banks.

Is it not still a commercial real estate hit to come for those banks.

So it's been interesting to see signs that actually commercial real estate seems to be bottoming and turning around. And here we see that in the work we do in alternatives that a lot of the pain, the markdowns really were felt for the last two years or so, and some did that more heavily than others. And that actually, now when we think about net new absorption from it's turned from deeply negative to less bad. And that's good. That's a sign of an inflection point, and that's a sign to us that actually maybe the worst of what could have come from commercial real estate. Maybe we've seen doesn't mean there won't be issues, but that they're understood, the activity is turning around and that actually there could be some less clouds going forward than we've had for a while now.

So it's been interesting to see signs that actually commercial real estate seems to be bottoming and turning around. And here we see that in the work we do in alternatives that a lot of the pain, the markdowns really were felt for the last two years or so, and some did that more heavily than others. And that actually, now when we think about net new absorption from it's turned from deeply negative to less bad. And that's good. That's a sign of an inflection point, and that's a sign to us that actually maybe the worst of what could have come from commercial real estate. Maybe we've seen doesn't mean there won't be issues, but that they're understood, the activity is turning around and that actually there could be some less clouds going forward than we've had for a while now.

We Siri maybe is just symbol of though of like all the things that might be able to go wrong, Like what are the couple biggest risks? To your view, I think from the again, from the bottoms up, spreads are so tight, people are constantly asking like what's cheap? What should we get long? And we have that conversation lot you sort of own everything, you own the sector, you ride, the carry But from a name perspective, it seems like there's so many things can go wrong. From the big picture, what do you worry about? What are you toss and turn about at night?

We Siri maybe is just symbol of though of like all the things that might be able to go wrong, Like what are the couple biggest risks? To your view, I think from the again, from the bottoms up, spreads are so tight, people are constantly asking like what's cheap? What should we get long? And we have that conversation lot you sort of own everything, you own the sector, you ride, the carry But from a name perspective, it seems like there's so many things can go wrong. From the big picture, what do you worry about? What are you toss and turn about at night?

So we toss in turn at night less about the cyclical structural trend here, which we've talked about is pretty good, But we think more about the shocks that can knock us off kilter, because if you think about, you know, the last twenty five years in the US, we've only had two recessions, and they've been big shocks. That got us there financial crisis and then of course the pandemic. Otherwise, this is a pretty large, steady ship that just kind of keeps chugging along. So what kind of shock could we see that really knocks confidence and hence leads to a big business retrenchment and then eventually consumer retrenchment. I think it takes a lot. It takes lot these days. Actually, we do worry a bit around this conversation we were having earlier around tariffs and trade, and here it will very much just depend on the scale and scope of it. Maybe we are wrong, and actually it's not just a negotiating tactic. We actually do see universal tariffs, or we see tariffs on our main partners, Canada and Mexico. That's something that could be particularly disruptive for autos and consumer electronics. So we do worry about that. That could be a shock to business confidence, to gapex, to hiring of course, to margins and corporate fundamentals. The other one we spend time thinking about around policy is just the debt and deficit trajectory. We think we've seen a ceiling around five percent, but we'll have to see and that'll very much depend on the tax bill next year. I think investors understand we'll have the extension of the twenty seventeen Tax Cuts and Jobs Act provisions that are set to expire. But do we get additional fiscal cuts on top of that, and is that something that comes to bite again and leads to yields disruptively moving higher and higher again, and then it brings about the concerns all over again about financing risk and about just the possibility of a hard landing.

So we toss in turn at night less about the cyclical structural trend here, which we've talked about is pretty good, But we think more about the shocks that can knock us off kilter, because if you think about, you know, the last twenty five years in the US, we've only had two recessions, and they've been big shocks. That got us there financial crisis and then of course the pandemic. Otherwise, this is a pretty large, steady ship that just kind of keeps chugging along. So what kind of shock could we see that really knocks confidence and hence leads to a big business retrenchment and then eventually consumer retrenchment. I think it takes a lot. It takes lot these days. Actually, we do worry a bit around this conversation we were having earlier around tariffs and trade, and here it will very much just depend on the scale and scope of it. Maybe we are wrong, and actually it's not just a negotiating tactic. We actually do see universal tariffs, or we see tariffs on our main partners, Canada and Mexico. That's something that could be particularly disruptive for autos and consumer electronics. So we do worry about that. That could be a shock to business confidence, to gapex, to hiring of course, to margins and corporate fundamentals. The other one we spend time thinking about around policy is just the debt and deficit trajectory. We think we've seen a ceiling around five percent, but we'll have to see and that'll very much depend on the tax bill next year. I think investors understand we'll have the extension of the twenty seventeen Tax Cuts and Jobs Act provisions that are set to expire. But do we get additional fiscal cuts on top of that, and is that something that comes to bite again and leads to yields disruptively moving higher and higher again, and then it brings about the concerns all over again about financing risk and about just the possibility of a hard landing.

Just back to private credit briefly, Gariella, you mentioned earlier. Obviously it's good for issuers borrowers have another lever to pull if they need financing. But on the other side, you know, it's particularly good opportunity, it seems for investors who are getting you know, high yields, and you know, they have to sacrifice liquidity and maybe transparency, you know. So there's a lot of excitement about it. We've had some large investment firms on this show recently. You've just told us that it's not worth the extra risk, that there isn't enough pick up between the two markets. I'm interested in your sort of relative value views of you know, private versus public To this point, that's.

Just back to private credit briefly, Gariella, you mentioned earlier. Obviously it's good for issuers borrowers have another lever to pull if they need financing. But on the other side, you know, it's particularly good opportunity, it seems for investors who are getting you know, high yields, and you know, they have to sacrifice liquidity and maybe transparency, you know. So there's a lot of excitement about it. We've had some large investment firms on this show recently. You've just told us that it's not worth the extra risk, that there isn't enough pick up between the two markets. I'm interested in your sort of relative value views of you know, private versus public To this point, that's.

An excellent question, and I think we'll continue talking them about them equally. They're roughly the same size these days, high yield leverage loans, private credit, and so equally important and accessible more and more to all types of investors. So when we think about the yields pick up that one can find and direct lending in private credit about on average ten percent, so it's not bad, but you know it, how yield is competitive at around seven and a half, leverage loans around eight and a half. I think one of the things that we think about in private credit is actually this idea, and this is true of alternatives broadly, right, this idea that yes, you give up liquidity, and for that you get a certain premium, right, you do get a certain yield pickup, and that actually, if you're able to stomach that ill liquidity, it actually works in your favor because one of the things that you're getting from private credit is a person relationship with the borrower and the ability to do what we've already started to see, which is a mend and extend. And of course you don't want a business that's clearly failing to just kick the can down the road. But in this current environment, where there has been multiple shocks that have come on board and maybe a business just needs a bridge to the other side. Having that personal relationship with direct lending and private credit more broadly actually is something that's helpful not just for the borrower but also for the investor. And so far that seems to be all that we're seeing. We do monitor, you can monitor a mend and extend activity in the private credit market. It has ticked up, but within the bounds of normal, so still suggesting to us that it's looking pretty good, and as long as the economy and earnings remain pretty good, then that's all there is. And there's actually been a benefit to having that illiquidity. But we do worry a little bit. There are a lot of new private credit funds and maybe you know, the two hundredth fund is not as good as fund number five or ten. So of course this doesn't apply to every single one, but generally speaking, we'd.

An excellent question, and I think we'll continue talking them about them equally. They're roughly the same size these days, high yield leverage loans, private credit, and so equally important and accessible more and more to all types of investors. So when we think about the yields pick up that one can find and direct lending in private credit about on average ten percent, so it's not bad, but you know it, how yield is competitive at around seven and a half, leverage loans around eight and a half. I think one of the things that we think about in private credit is actually this idea, and this is true of alternatives broadly, right, this idea that yes, you give up liquidity, and for that you get a certain premium, right, you do get a certain yield pickup, and that actually, if you're able to stomach that ill liquidity, it actually works in your favor because one of the things that you're getting from private credit is a person relationship with the borrower and the ability to do what we've already started to see, which is a mend and extend. And of course you don't want a business that's clearly failing to just kick the can down the road. But in this current environment, where there has been multiple shocks that have come on board and maybe a business just needs a bridge to the other side. Having that personal relationship with direct lending and private credit more broadly actually is something that's helpful not just for the borrower but also for the investor. And so far that seems to be all that we're seeing. We do monitor, you can monitor a mend and extend activity in the private credit market. It has ticked up, but within the bounds of normal, so still suggesting to us that it's looking pretty good, and as long as the economy and earnings remain pretty good, then that's all there is. And there's actually been a benefit to having that illiquidity. But we do worry a little bit. There are a lot of new private credit funds and maybe you know, the two hundredth fund is not as good as fund number five or ten. So of course this doesn't apply to every single one, but generally speaking, we'd.

Also given this intense competition for a limited pool of assets, do you expect that sort of arbitrage this differential between the private, private and public which sounds like it's two hundred fifty base points, does that get squeezed in the process.

Also given this intense competition for a limited pool of assets, do you expect that sort of arbitrage this differential between the private, private and public which sounds like it's two hundred fifty base points, does that get squeezed in the process.

I think it will depend on the evolution also of the type of lending, because what used to be really just you know, to finance leverage, buyout or in your distressed or high yield market now has ambitions to move much more into the investment grade space. And so eventually is the right comparison high yield or more of a mix between high rated, high yield low level investment grade. Been seeing some private some institutional investors think of it that way. Less of a discrete buckets investment grade, high yield, leverage, loan, private credit, and more of buckets that can can encompass all four dependent on the rating. So this is my high rating bucket, this is my triple B bucket, this is my low rated bucket, and then you can kind of cross markets that way.

I think it will depend on the evolution also of the type of lending, because what used to be really just you know, to finance leverage, buyout or in your distressed or high yield market now has ambitions to move much more into the investment grade space. And so eventually is the right comparison high yield or more of a mix between high rated, high yield low level investment grade. Been seeing some private some institutional investors think of it that way. Less of a discrete buckets investment grade, high yield, leverage, loan, private credit, and more of buckets that can can encompass all four dependent on the rating. So this is my high rating bucket, this is my triple B bucket, this is my low rated bucket, and then you can kind of cross markets that way.

Do you have a home run trade for next year? Like if you had one dollar to put to work, how would you do it? You know, from both the long perspective and maybe from the short perspective.

Do you have a home run trade for next year? Like if you had one dollar to put to work, how would you do it? You know, from both the long perspective and maybe from the short perspective.

So maybe if we think a little bit about the risks. I do think we've seen a lot of dollar strength, but that is probably not the end of it. And I think a lot of the things we've been talking about higher rates in the US for longer across the curve, resilience in the US versus other places, tariffs and the risk of that to growth in China and Europe as well as the actual implementation of tariffs itself to US. Also just unfortunately a stronger dollar and it's not quite apples to apples with the first trade war. The dollars already twenty percent stronger than early twenty eighteen when we started this. But it's still environment where we see the currencies here really at scope pricing in the risk of tariffs and then eventually the implementation of tariffs, and unfortunately that tends to be in emerging markets. So think of the Chinese wand all the Asian currencies that have a high correlation to the Chinese you want to stay competitive, or the high beta currencies in Latin America that are tied to Chinese and global growth. So unfortunately, I do think one of the areas that I personally have conviction is is dollar strength and especially versus em currencies.

So maybe if we think a little bit about the risks. I do think we've seen a lot of dollar strength, but that is probably not the end of it. And I think a lot of the things we've been talking about higher rates in the US for longer across the curve, resilience in the US versus other places, tariffs and the risk of that to growth in China and Europe as well as the actual implementation of tariffs itself to US. Also just unfortunately a stronger dollar and it's not quite apples to apples with the first trade war. The dollars already twenty percent stronger than early twenty eighteen when we started this. But it's still environment where we see the currencies here really at scope pricing in the risk of tariffs and then eventually the implementation of tariffs, and unfortunately that tends to be in emerging markets. So think of the Chinese wand all the Asian currencies that have a high correlation to the Chinese you want to stay competitive, or the high beta currencies in Latin America that are tied to Chinese and global growth. So unfortunately, I do think one of the areas that I personally have conviction is is dollar strength and especially versus em currencies.

So maybe the best trade is book a trip to Europe and go buy all your luxury goods sales.

So maybe the best trade is book a trip to Europe and go buy all your luxury goods sales.

Book a trip to Europe. Maybe actually one area. And this is interesting to the first part, the glass half full part of Home Run Japan. I think maybe if you haven't gone to Japan, book the trip next month, because I don't know if this is kind of as cheap as it's going to get. We do see Japanese policymakers more and more getting ready to continue tightening policy, perhaps as soon as this month. Again that as a result suggests a slightly stronger Japanese yen. It's also tends to be a safe haven currency, especially around this tariff and global growth conversation. But most importantly, I think it's about this new era in Japan that's much more shareholder focused, that's much more focused on independent board members, buybacks, divid and yields, MNA, unlocking value. And I think we're still just in the beginning of that, and a lot of our institutional clients are very interested in redeveloping strategic allocations to Japanese equities.

Book a trip to Europe. Maybe actually one area. And this is interesting to the first part, the glass half full part of Home Run Japan. I think maybe if you haven't gone to Japan, book the trip next month, because I don't know if this is kind of as cheap as it's going to get. We do see Japanese policymakers more and more getting ready to continue tightening policy, perhaps as soon as this month. Again that as a result suggests a slightly stronger Japanese yen. It's also tends to be a safe haven currency, especially around this tariff and global growth conversation. But most importantly, I think it's about this new era in Japan that's much more shareholder focused, that's much more focused on independent board members, buybacks, divid and yields, MNA, unlocking value. And I think we're still just in the beginning of that, and a lot of our institutional clients are very interested in redeveloping strategic allocations to Japanese equities.

That to followup on Roe's point, and also to revisit his secret source comment from earlier, where do you think you're most contrarian?

That to followup on Roe's point, and also to revisit his secret source comment from earlier, where do you think you're most contrarian?

Well, I do think this idea of having international exposure is pretty contrarian these days, right, it's right. The big tagline for next year that I hear a lot is US exceptionalism, But it's not across the board, right. There are still many areas overseas that are less cyclical, that are less in the firing line here around trade policy and competition with China that have completely different stories. Japan is one of them, India's another. They tend to be in in Asia primarily, and a lot of it is very much awakening in Asia about shareholder focus, domestic investor based developed men and benefiting from this China plus one production. So I think that actually is contrary and we see a lot of investors just laser focus on US US only.

Well, I do think this idea of having international exposure is pretty contrarian these days, right, it's right. The big tagline for next year that I hear a lot is US exceptionalism, But it's not across the board, right. There are still many areas overseas that are less cyclical, that are less in the firing line here around trade policy and competition with China that have completely different stories. Japan is one of them, India's another. They tend to be in in Asia primarily, and a lot of it is very much awakening in Asia about shareholder focus, domestic investor based developed men and benefiting from this China plus one production. So I think that actually is contrary and we see a lot of investors just laser focus on US US only.

And on the private market side, everyone is so excited about it. Is it a big part of your strategy for next year? Are you going to be allocating more? Do you think everyone's going to be putting into private credit next year?

And on the private market side, everyone is so excited about it. Is it a big part of your strategy for next year? Are you going to be allocating more? Do you think everyone's going to be putting into private credit next year?

We do see a lot of interest in private credit a lot, and especially from your private wealth type of kind of mass affluent investor, where there's much more readily available vehicles to access private markets, especially private credit. But it is I would say, not the type of alternative that we're the most excited about next year. I think if you think about asset classes and alternatives that have already suffered or repricing from higher rates, that have already dealt with a lot of readjustment, that stand out to us as opportunity real estate and private equity. Of course, not across the board for real estate, pockets of single family industriils, retail, and private equity small mid still within the buyout sphere. Private credit we haven't quite seen much of a meaningful repricing. Maybe we never will, but for that marginal dollar to us, real estate and private equity are a bit more interesting.

We do see a lot of interest in private credit a lot, and especially from your private wealth type of kind of mass affluent investor, where there's much more readily available vehicles to access private markets, especially private credit. But it is I would say, not the type of alternative that we're the most excited about next year. I think if you think about asset classes and alternatives that have already suffered or repricing from higher rates, that have already dealt with a lot of readjustment, that stand out to us as opportunity real estate and private equity. Of course, not across the board for real estate, pockets of single family industriils, retail, and private equity small mid still within the buyout sphere. Private credit we haven't quite seen much of a meaningful repricing. Maybe we never will, but for that marginal dollar to us, real estate and private equity are a bit more interesting.

In the real estate you access through cnbs or direct or how do.

In the real estate you access through cnbs or direct or how do.

You I think you can do both CMBs, but also and more interestingly on the equity side through non traded rates or just direct real estate vehicles. The last thing I'll say is also we talked about inflation risk maybe coming back, and also about these long term trends and the financing needed for it. So infrastructure, debt and equity is something that is really really interesting in the alternative space as well.

You I think you can do both CMBs, but also and more interestingly on the equity side through non traded rates or just direct real estate vehicles. The last thing I'll say is also we talked about inflation risk maybe coming back, and also about these long term trends and the financing needed for it. So infrastructure, debt and equity is something that is really really interesting in the alternative space as well.

Great stuff. Gabriela Sentos, chief market stre for the America's at JP Morgan Asset Management it's been pleasure having you on the Credit Edge. Many thanks, thank you so much, and of course we're very grateful to Rob Shiftman from Bloomberg Intelligence. Thanks for joining us today. Thanks James for more credit market analysis and insight. Read all of Rob's great work on the Bloomberg Terminal. Bloomberg Intelligence is part of our research department, with five hundred analysts and strategists working across all markets. Coverage includes over two thousand equities and credits and outlooks on more than ninety industries and one hundred market industries, currencies and commodities. Please do subscribe to the Credit Edge wherever you get your podcasts. We're on Apple, Spotify and all other good podcast providers, including b Podgo on the Bloomberg Terminal, give us a review, tell your friends, or email me directly at Jcromby eight at Bloomberg dot net. I'm James Cromby. It's been a pleasure having you join us again next week on the Credit Edge.

Great stuff. Gabriela Sentos, chief market stre for the America's at JP Morgan Asset Management it's been pleasure having you on the Credit Edge. Many thanks, thank you so much, and of course we're very grateful to Rob Shiftman from Bloomberg Intelligence. Thanks for joining us today. Thanks James for more credit market analysis and insight. Read all of Rob's great work on the Bloomberg Terminal. Bloomberg Intelligence is part of our research department, with five hundred analysts and strategists working across all markets. Coverage includes over two thousand equities and credits and outlooks on more than ninety industries and one hundred market industries, currencies and commodities. Please do subscribe to the Credit Edge wherever you get your podcasts. We're on Apple, Spotify and all other good podcast providers, including b Podgo on the Bloomberg Terminal, give us a review, tell your friends, or email me directly at Jcromby eight at Bloomberg dot net. I'm James Cromby. It's been a pleasure having you join us again next week on the Credit Edge.