Podcast: John Normand and the US compression trade

This transcript has been automatically generated and may contain errors or inaccuracies. It is provided for reference only and should not be considered a fully accurate record of the conversation.

Amrita

Welcome back to EA forum. I'm super excited to have John Normand with me. He's the head of investment strategy at AustralianSuper. For those of you who don't know AustralianSuper, it is the biggest pension fund in Australia. And as everybody knows, Australia is one of the biggest pension systems in the world. I think, John, if you told me just now it's the 15th biggest pension fund in the world.

John

That's correct.

Amrita

And this is huge. You know the reason I say I'm so excited to have you. I mean, I've been following, AustralianSuper for a while, but when I started my commodities career, at Barclays Capital, and that was a couple of decades ago, the entire market was all about. Oh, speculators are coming into commodities, and it was all about pension funds because pension money was coming into the commodity space.

So I come from the era where commodity investors was all about pension funds. Yes, I know that's changed now. It's all about high frequency trading. But for me, this is kind of going back to my roots of talking to somebody who is really, like heading up the strategy of the pension fund, which is so, so critical for, generally investment when it comes to commodities as a whole.

Oil, for sure, and especially Australia, given you are naturally exposed to so much in terms of natural resources. Yes. So firstly, welcome. Thank you for your time. Thank you for the invitation. And tell us a little bit about AustralianSuper, because I think some, who are kind of more in the generalist camp may not know about it and kind of how you guys go about kind of thinking about asset allocation.

John

Sure. So as you said, we're the largest pension fund in Australia. Australia has one of the largest pension systems in the world, and that's because of a compulsory contribution system that obliges all employers to pay 12% of everyone's salary into a pension as long as they have a job. So whether you're at McDonald's or JP Morgan.

Amrita

I.

John

As long as you got a job, 12% of that is going into a pension. And because that compulsory contribution has existed for 30 years, the asset base of the system has risen to the equivalent of a about 2 trillion pounds or 4 trillion AUD. So we're the largest fund in that system. We invest globally because the size of the asset base is so large that we can't really find sufficient asset class and sector reciprocation within Australia.

That's why we've got a big office here and also in New York. But the way we allocate is by asset class. This is a traditional perspective for pension funds where they have a variety of objectives. They might want to have a certain absolute return target. They might have want to have a certain return premium above inflation. And so they look for the asset classes that are likely to deliver that over the long term.

This is why if you're a fund like us, which has a pretty young membership demographic, the average number of the fund might only be in their 40s. Let's do another 20, 25 years of, sort of investible life and their assets. We're naturally going to take more risk than a pension fund that's got a younger, an older demographic, which is closer to retirement.

But as we look for those assets that are going to perform best, but also skews us more towards private assets because we can afford that illiquidity of those markets in order to get the higher return. But it does raise this question around whether that's sufficient to generate the premium over inflation. And this is a bit of a difference, maybe from some of the American pension funds or maybe the UK pension funds.

If you're a pension fund in a country where there's not a natural exposure to to resources, whether that's oil or metals or commodities, you're going to want to own a commodities index because you need something that's a little more leverage to the price cycle. Whereas if you're a pension fund that's located a natural resource producer like Australia, you've got that exposure through your listed equities and the resource stocks within it.

So this is one reason why we don't take direct exposure to commodities through a commodity index, as I'm sure many of your clients do if they're U.S or UK pension funds. But we do have quite high exposure to commodities through the Australian equities and the resource stocks within that. So we care about commodities a lot as it informs the view on listed equities and our resource stocks as it informs our view on infrastructure assets.

But we don't take the direct exposure through the futures. Yeah.

Amrita

Because you'd be doubling exposure effectively. But then so this is really interesting because you've got a global or you have to have a global purview of like because you're investing. So what has this year meant for you guys? Right. In terms of the volatility we've seen in the market? Ever since President Trump took office and especially given Australia's relationship with China.

John

So the good news is that when you're a long term investor, you can go to sleep a lot more easily than you can if you're a short term investor. Because the point is, I guess twofold. One is you're not going to get stopped out, as you would with some of your high frequency trading accounts. And and secondly, if you have permanent capital and your cash flow positive because you always have inflows as the Australian super funds tend to do, you can take advantage of moves lower in markets to get the exposure you want over the long term.

So for us, these sorts of events are usually pretty helpful for the portfolio over the medium term, as long as you can remind yourself that when these shocks occur that even if the worst case eventuates, which is the recession, it's not going to be something that's a permanent state of affairs. So there's no sense at overreacting and de-risking into this.

You should either keep your exposure intact, thinking 3 or 6 months down the line, you'll be back to your high watermark, or you should use the dips in the market to to add. So it's a lot easier to to manage through these sort of circumstances if you're a long term investor than if you're a short term investor. I think the thing that's maybe a little more problematic is that because you are a long term investor, you do have to add because you are going to buy some assets that you are incapable of liquidating over the next few years, like, like a lot of private assets, you need to be sure that the long term investment thesis hasn't changed fundamentally because of some of these policies that the Trump administration is putting in place. So if you're exposed to transportation assets and you recognize that tariffs are coming up the supply chain, you might wonder whether or not that port you own or that road you own, or that logistics platform is very exposed to tariffs. And supply chains being tighter and sort of less less constructive for the long term.

Thankfully, we don't have that problem with the assets we owned. But it but it surfaces a lot of questions that you have to ask about asset specific risks that come from these policies that the administration is putting in place, and it could be semi-permanent.

Amrita

I think you've raised two things there. One is the R-word because we've gone through the whole recession or recession. But the other thing I think it's more important is even before the Trump administration, I think the US policy has been decoupling from China. Right. And that is a theme. It's a long term theme that's going to affect all of us.

I mean, it's affecting us when we are looking at commodity markets and just even the pure fundamentals of oil. And it goes both ways, because right now China seems to be stockpiling everything. And suddenly, again, there are signals that, okay, we're going to take care of ourselves and be less reliant, but massive long term implications as well, because we've all look to China to be the supplier of manufactured goods, and suddenly everybody wants to be self-sufficient.

Weirdly, it could be a very bullish cycle for commodities in the next few years if everybody is building stuff for becoming self-sufficient. But then after five years, you're going to have massive oversupply everywhere because there's too much capacity, right? So let's talk recession first, like what's your view on that? But then dovetailing into like more structurally, do you see a more fragmented world?

Because now we think globalization isn't as cool as it used to be? I would say.

John

Yeah. I've never been in the recession camp, mainly because I thought that what was going on in the US, despite all the all the anxiety around the tariffs and globalization, was essentially a tax hike. That's what a tariff is. And so you can quantify the, the, the nominal value of that tax hike. And you can also think about all the offsets to that tax hike that would come through the budget process in the US.

And when you put both of those together, what you end up with is a a minor squeeze to corporate margins and household disposable income, and not a big one. And if it's a minor squeeze to both of those sides of the those different types of balance sheets in the economy and you also recognize that these are not balance sheets, which are in very overleveraged positions.

It's really hard to kind of spin that forward into a recession call. So that's been a pretty high conviction view on our side in the fund, is that this wouldn't be a recession of any meaningful kind of consequence, even though you can have these sort of market scares. It's not their entire quarter. But it does raise these longer term issues around how much damage is the administration doing to the economy over the long term by not only imposing taxes that make the supply chain suboptimal, but also pursuing a lot of immigration policies, which have this impact on on long term growth.

So there are things that make us less bullish on what U.S growth and earnings and margins are going to look like over the long term. But they aren't things that make us compress any of those variables, whether it's growth, you know, earnings margins down to the levels of growth and earnings and margins that you see in non-U.S. economies.

That's why I think all of this talk about end of American exceptionalism and, liquidation of U.S..

Amrita

Assets, treasuries and stuff.

John

Investors, it's it's stretched to me because I think it doesn't really distinguish between a compression of rates of return between the U.S. and the rest of the world, or a reduction in the spread, as opposed to a reversal where the rest of the world is paying a lot more than the U.S.

Amrita

Yeah, but I think that's a very good point because we've had, I'm sure you know, Jeff Korean Jeff's very bullish Europe. He's been I think last year he was here. He's like you know Europe is kind of the next big thing. But in some ways you're saying the same thing. It's not that it's Europe or the US, it's just the compression of the returns between the different regions because U.S. has been the best returns.

John

Correct for.

Amrita

So long.

John

This is this is relevant to how people think about China, because China has been the economy which hands down has, has, has been realizing the one of the greatest compression of trend growth that the world has seen in 50 years. You know, having the growth rate from 8 or 10% to something like 4 to 5 is is really significant.

And with the US now seeing some marked in its trend growth expectations as well, a lot of people get kind of excited about the prospects for China. And, being a substitute, major investable market compared to the U.S, and there's some validity to that over the the short term, if you're talking about a market which is depressed in terms of valuations, depressed in terms of investor positioning, some modest change in the relative outlook between the US and those and those countries, then of course, you're going to see some position adjustment and some rerating of the cheaper market versus the expensive market.

But you have to get down to the basic issue is, is China over the next 2 to 5 years, a 4 to 5% economy, or is it a 3 to 4 or is it a 5 to 7? And even within that that growth trajectory that you anticipate, is it one that as commodity, as intensive, you know, for all types of commodities as it used to be?

And, you know, kind of gone through that story with base metals over the past decade, and they're becoming less resource intensive from the perspective of base and also bulk commodities. And now the decarbonization question is pretty front and center in terms of whether you can really equate that rate of growth with the same rate of of energy usage you have in the past.

So there's a lot of interesting no longer term questions that come out of, you know, a very simple starting point, which is China is a mediocre growth economy, that everything going on structurally and in terms of commodity intensity is still pretty important.

Amrita

Yeah. I mean, I'd say from the oil point of view, right. The biggest change we have seen is 100% on China. Right? It's gone from a country which was growing at a million barrels per day of demand growth, steady right every year, even when it slowed to about anywhere between 500 and 800,000. That's like nowadays global growth. Right.

And that was China by itself. Pretty much since 2004 onwards. It's been a consistent story. It's been decelerating. But really this shift I would say since Covid, right. That was the double whammy where you had the kind of, decarbonization policies and you had the hit to the property sector, which is a really big consumer of petrochemicals. That double whammy has now gotten to the point where last year was the first time in decades and if really ever, outright Chinese oil demand fell.

And that's very rare. And now everybody's recalibrate. I think it doesn't help that you've got the Bloomberg's of the world kind of constantly talking about EVs. And you know which is a really big thing. Don't get me wrong. I mean 50% of Chinese, car sales are now electric cars, but you're also getting more hybrids so that there's nuances there.

But it's more that structurally, to your point, oil demand and energy demand in China is just not going to be what it used to be, because the energy intensity has just gone down so much. The are continuous. I mean, I think coal is still really big, but they're continuously investing in renewables. And it's not about, you know, one of the things we deal with on the energy side, a lot of them we'll talk about all this is about China being greener, insure city pollution.

You know, I've been visiting for years. And nowadays when I go back it's much more like cleaner kind of skies, etc. but this has as much to do with energy security. They do not want to be reliant on, be it crude oil, be it gas. It's more like, okay, we've got call it secure, it's cheap. We'll kind of, fuel everything with that.

But I think the challenge now becomes global oil demand growth, which used to be steady state of 1.5 million barrels per day, is now maybe 800,000 barrels per day. Like without the China, like China is now 203 hundred of growth. That's a structural change in the oil market. Right. And then the back end of the curve reacts to that because suddenly you need the supply.

But you don't need as much supplies before.

John

So what would what would change that demand story. Is there another region of the world that you think could provide some offset under certain conditions, or if global manufacturing picked up over the next couple of years because interest rates were down and companies adjusted to tariffs and the cycle kind of reset in terms of industrial production picking up again, is that enough to change demand in a in a meaningful way, or is there really a reasonably hard cap on on demand in terms of how much?

Amrita

And it's a very good question, because I think a lot of people will say, oh, India is the next China, right? It's not the same, I'm sure. Within your investments, I mean, you're looking at India as well, doing really well, don't get me wrong, but the size of the Indian oil demand kind of market is a third of China.

So yes, it's growing very quickly seven, 8%, but you're not going to get your 250,000 barrels per day of growth rather than and on a base which is 5 million barrels per day versus you used to grow at a million barrels per day on a kind of 12, 13 million barrels per day market. Right. Also, efficiency gains in India, are definitely kind of picking up the difference.

I think what I'm excited about in India, I think the India's going to mirror more of the US, like roads are finally getting built and really good quality roads. People are doing, driving holidays, which is really never happened before in India. And I think it's going to mirror a lot of that gasoline story, which, the US always sees.

It's going to be interesting to see with the trade war. Do you get companies like Apple actually relocate to India? You get a bit of manufacturing boom there. I think that's still a TBC given everything that's going on. I think overall, yes, if there's a bit of a manufacturing boom, but also weirdly, I think given the anti, EV policies that we are seeing out of the Trump administration, US oil demand weirdly could end up being surprising the market because everybody's got really steep declines in US oil demand.

And you're starting to see yes short term again taking the two differently. There's pressures on the consumer definitely kind of felt slow down in the economy. But more medium term we're getting less and less electric cars being sold right. So suddenly you can get pockets of growth out of the US at least versus expectations. India, Southeast Asia is going to do very, very well.

It's still not going to be enough to I think, like it's collectively good enough as in China. But I don't think a single country is going to be a China for a long time, if ever. And I think so. Your oil demand growth is more. Maybe you could get back to a million barrels per day. But it's very hard to get to that 1.5 to without, like a country kind of carrying half of that essentially.

John

So one of the issues we talk about a lot in the fund is the energy transition and how this should be supportive of prices, but also price fall. And this has an impact on our inflation outlook. And this motivates a whole range of asset allocations that we have to protect ourselves against inflation. But I guess the counterargument would be that the demand side is is weakest stroke mediocre?

It could be that way for a while. So you'd need a pretty big supply constraint in order to give you that upside on prices that would feed through to CPI. That would then become problematic for portfolios. Am I being too, too optimistic on the ability of demand to constrain price rises? Or can you see the supply crunch coming online at some point in the next?

I don't know, let's call it two, three, four years that we should be talking supercycle again and all these other kind of disruptive consequences of that.

Amrita

I think supercycle might be like sitting here right now at $65. Brant could be you know if you make headlines with this podcast, it's like oh the supercycle is coming back. But I think it's a valid question to ask for two reasons. One, shale is starting to peak, and I don't think that's in the price at all, partly because I think people have called for shale peaking for a while, and it hasn't.

And I think we're finally starting to see the signs of pure black oil production plateauing out. And it's, you know, it's going to be in the Permian, it's within the majors, and it's very different right now. You get some growth consistently, but not a lot of growth. You know, when you're looking out 3 or 4 years and especially in this price environment and costs still costs are going up.

Like generally cost inflation is a big part of their kind of break evens going up. And you can see it in the acreage is just getting Garcia and gas is a very interesting story. We can come on to that in a second. But I think the other thing is that really we haven't been investing like we we getting this big tranche of projects now which is Brazil, Guyana, Canada.

And after that, with all the kind of ESG talks that we've seen, we've not really invested in kind of big projects. So if OPEC starts to bring back which they have starting to bring back all that production, you're not going to be left with a lot of spare capacity after they've brought everything back. Right. So couple of years of lowish prices.

But I think when you start to look 27 and beyond, the market looks very interesting because then suddenly, even with an 800,000 barrels per day demand growth, the supply is going to be like, okay, where is that going to come from? Because if shale starts to plateau effectively, then west, then you just have natural decline rates. And just any outage can kind of really take us away.

John

But that is and that's dependent on outages as opposed to just the, the, the medium term balances.

Amrita

I would say even the medium term balances, because if you're not getting a million or I mean shale at some point was growing by 2 million barrels per day, right under the previous Trump administration. If that starts to plateau out, then you are just base declines like you. You won't even be able to meet just 800,000 of demand.

I think you will get that kind of it's hard to pinpoint that exact year, but I would say it's towards the end of this decade, right, that you start to get that. Like there's probably going to be one more of this kind of price cycle. And then of course, that kind of the demand story kind of kicks in.

Right. How quickly are we transitioning away? I think one of the things we do a lot of work on over here is that, okay, we're talking about electric cars, but is it really electric cars. Is it hybrids. Because suddenly hybrids means that your gasoline is going to just be there for a longer, super efficient car. But again, those are the things that matter a lot.

Downstream is also very, very challenged right now with refineries shutting down a lot. So you could get a weird situation where even if, let's say oil is back to 80 or 90, but you suddenly get gasoline prices much higher, which is very important for CPI. So I think those are things that like become like 27 onwards. There seems to be a crunch coming when it comes to actually inflation.

Yeah. Even if it's not from the crude side but from the gasoline and diesel side. That's very.

John

Light. And if you had to rank various energy products in terms of, upside price potential over the next few years, where would you put crude versus products versus gas versus power?

Amrita

I mean, in that range, the power, and gas are already starting to reflect what is going to be a very, very power intensive future. Right? There's definitely more upside there. And I think gas is going to be super interesting because we've got so much supply. I mean, Australia is of course contributing to some of that, but really it's Qatar with coming on with a lot of the supply.

Some projects have been delayed for sure, but the US has so much supply to give. So I think you're going to get this period where things are going to remain very tapped for gas prices. Next decade is probably more for gas, but in that 2 to 5 year horizon, the lower oil prices go now. And I think it can go even like it could go lower, like say by the end of this year or early next year.

The upside is probably going to be the highest between refined products and crude oil.

John

Okay. And I'm going to quiz you on something that might be slightly controversial, but it has to be related to President Trump. And whether you think when you look at the the whole of his energy policy mix, would you consider it coherent and that it will very likely lead to the desired outcomes, which is more U.S output and higher prices and stronger profits for energy producers, or is it more of a model where some things are positive, some things are negative?

It's not even worth talking about what it nets to, because it's unlikely that to anything all that supportive. Because this is how I think of the broad economic policy mix. I just don't know the extent to which that applies to the energy.

Amrita

Specifically, I think it's not coherent. But it is coherent in the sense of he's very clear. He doesn't like high oil prices. And I think everything he has done is very much around that. Right? Be it around like he's not putting sanctions on Russia despite significant pressure from his own party to do so. Iran, he would still prefer to get a negotiated solution.

He does not like high oil prices because ultimately, again, it goes back to and I'll come back to you on this in terms of it's the tax code bill. That's the key focus. It's to get the fed to cut rates. And if you have high oil prices, you can't do that right. Where I think it's inconsistent is then how at the same time you want drill, baby, drill to happen.

Right? Right. And I think the industry and I spend a lot of time in the US, it's coming around to understanding that, yes, this administration will deregulate everything. It will make it a lot easier to operate in the US. That will give them anywhere between five, $6 of like breakeven. But the external environment is absolutely going to kill profitability.

And, you know, somebody said this recently, I think George W Bush used to say you take one for the flag. And I think that's very much what's going on. I think the US industry has realized this is not going to be that time, right? Despite, you know, wherever their political alliances might lie. You I think they will have had more production under Joe Biden than they will have under Donald Trump.

And I think what's going on right now, again, with China, Engels is such a big part of the US production system. Suddenly you don't have license to export saying. And because again, it becomes a national security issue, this is not going to be good for us producers one way or the other. So yeah, again, if you guys have exposure to any of those kind of equity names, I think you've seen them underperform, right?

For a reason. And I think again, I though over over time the outlook is positive. But I don't think that's going to be in the near-term.

John

Can we at least be positive on LNG given that this is what the question seems to be trying to sell to everyone?

Amrita

Absolutely. And I think that's the big difference. Anybody with more gas exposure, because gas has got the benefits of two things. One, the huge amount of AI data center kind of push. And there is a proper concerted effort in the US to kind of ease regulation. They're very concerned about what China's doing that's going to boost gas. Oh, it will require gas because that's going to be baseload.

And us LNG, us LNG demand is actually going to be more important than AI in any case, because it's like multiple times the amount of gas volumes. And with Qatar projects getting delayed, I think that's where the exposure is going to be better if you're kind of positioned for gas. Also, there's more gas coming out as well. So if you're a midstream company, you want gas assets right now for sure.

But asking you the same question that on the I mean, obviously on the energy front, you've seen, kind of prices come down right across the board, but from other asset classes, like are you seeing the same concerns? Because I think energy's kind of very much in a crossfire of, oh, there's a lot of tariffs. Global growth is not going to be very good at least for the next couple of years.

But equity market seems to have bounced back right there just a bit like you get like you said, it's not going to be a big deal ultimately. So from an asset class point of view, where do you think like both I think value wise as well. Like you were asking me like which has got the most value, but also like generally where do you guys kind of think it's best position?

John

So I think I don't think what's going on now out of the white House is something that changes the rank. Order of returns across asset classes mean the rank order in an expansion is the defensives do worse than the cyclical assets, so bonds and cash do a lot worse than credit, equities and private assets. And that to me is the normal pecking order.

As long as the economy is expanding pretty close to trend. And there's a lot of stuff the administration is doing, which is taking what used to be a two and a half, 3% economy and pushing it down to maybe a 2% economy. But two is more or less trend in the US. And if that's what the US can manage to maintain over the medium term, I still think that the risky market is going to outperform the the safe markets.

The difference, though, is the degree to which they outperform. It's going to be a lot less because these assets, whether it's equities or private equity, to a lesser extent infrastructure, they're really assets which are leveraged to the earnings cycle. So as long as if growth is much better than trend, those are going to do a whole lot better than just, safe assets or credit.

And as long as earnings growth is moving at an above trend pace, you can justify a much higher multiple, whether that's on private assets or public assets. So the fact that we can't really count on these blue sky scenarios anymore in the US, even with deregulation, the economy is not going to go from 2 to 3. It's probably a pretty safe two from now on.

It means that the degree to which the outperformance is going to diminish, and that, I think, has an impact on how much of these you want to own. If we really thought the US was trend to, but it could deliver three in some years trend earnings of eight, it could deliver 12 baseline multiple of 20 but it could be 22.

Then you'd probably be more overweight of equities than normal. You probably have more exposure in private markets than you might normally have, because I think this is a world where the risk return curve is a bit flatter, where the spread between the very risky stuff in the safe stuff is, is more compressed. You want to be moderately overweight, even though I don't think a recession is happening normally, I'd say if a recession is not happening, you want to be quite overweight, as long as you think the cycle is going to continue indefinitely.

But this compression issue is what motivates to me to sort of smaller, degrees of, of, overweight relative to the, to the benchmarks.

Amrita

That's very fascinating. But then and you were saying earlier that maybe Ian becomes a more attractive asset class.

John

I think reflexively or I know reflexively, there's a lot of interest in Em because everyone is bearish on the dollar. Right.

Amrita

Are you guys bearish the dollar?

John

We are. And it's for all the standard reasons, of course. You know, your listeners aren't going to hear anything particular novel in terms of the rationale for being short the dollar. What I will say is that I think the degree to which one has a target that the dollar is going to go down 5% or 25%, depends on whether or not you think you could model the structural derailing of the US economy, because what's been happening so far in currencies is the dollar has been mostly moving down for pretty ordinary, cynical reasons.

Rate spreads have compressed versus the rest of the world. The dollar has been falling in tandem with that. US equities have done worse than the rest of the world because growth is being marked down. That's also fed through to to the dollar. And what's in play now is the big structural story. Whether you think there's a general loss of confidence in the quality of US governance, whether it relates to monetary policy, fiscal policy, debt management, international trade, international capital, international taxation, all these sorts of things are getting people to think that maybe foreign investors are going to reduce this long standing overweight, because the US either looks ordinary relative to other countries or it looks a lot worse. And as I commented earlier, I'm not in the camp that the US is worse than the rest of the world. And I still think it's, better than the rest of the world. Just not buy as well as.

Amrita

Much as it.

John

Used to be. Yeah, and when you kind of run that through some frameworks, it suggests that there's an easy 5% to go. On the downside, there might be 10%, but to say everything's going to be unwound at that's happened over the past 15 years in currency markets where the the trade weighted dollar has appreciated 35, 40%. I think that's too extreme.

It really suggests that the the world is going back to a very extreme state where fed funds is below rates in the rest of the world, where U.S growth is worse than the rest of the world, where the tech companies don't generate superior earnings because they no longer have a monopolistic business models. And you can tell all the scare stories and you can put them up against graphs that show 26 trillion of, you know, net foreign liabilities in the US.

And it works great in a Friday publication for a bank. But it doesn't really help you be very precise about how much this can go. So I think as a as a baseline view, you want to bet on the weaker dollar. I'd say 5 to 10% from here is pretty safe. Beyond that, it requires a lot of structural changes that I think are just not that extreme.

But if you got that on the dollar, does that matter for oil?

Amrita

I was going to say, because that's the one good tailwind for oil prices, right. Brazil or dollars. But the problem is this time around, it's not just the dollar. The correlation of how oil is acting with Treasury yields just the 2% rate, 5%, for sure. I think that's where, you know, it's one of those weird occasions that a weaker dollar is not necessarily a slam dunk, that crude is going to be higher or exactly where it does help.

And I I've always been in this camp that the dollar was too strong versus other currencies. And that's what our macro guys have been saying as well. It helps emerging markets. Right. Like one of the big headwinds is if you look at the price of oil in dollar terms versus other currency terms, other currency terms, oil is much, much higher has been.

Whereas now again, import bills are easier to pay for. Right. It just it actually helps oil demand in emerging markets. That's where I think that's a real kind of proper shift. And if that can last for a few years, it gives them that extra like places like India, places like Southeast Asia, really, really sensitive to that. But from a financial point of view, I think it's been really interesting and it was fascinating listening to you on this, because oil in particular seems to have just decided, oh, I'm going to price in this recession, whereas other asset classes are a bit more like, oh yes, maybe, maybe not kind of.

What's been the clear underperformer this whole time? Right. Partly because of OPEC strategy that they're bringing back barrels and it's a bit like okay, we have supply. And in some ways it probably also sets us up for a better cycle. Right. You know down the line versus some of the other asset classes. But I think the oil was very quick to be like, no, this is not a very good growth story.

Like maybe not as bad as the like you're saying, the 27 trillion, like, you know, debt and so on, but generally saying that this is a high yield market like the Treasury yields are just your ten years are just at a rate which is not conducive for investment, and it's not conducive for just general growth to be above trend.

And I think oil's been reflecting that before anything else today.

John

Although I think of oil as one of those markets where there is an overhang because everyone's aware of the of their.

Amrita

Spare capacity capacity. And I think once that comes down, it'll be easier for oil to actually rally right, or come off like just being kind of closer to the fundamental issue, for sure. I'm conscious of time as well, but we should, this there's so much to talk about as well. But again, given I think two questions for me, one is given you are Australia's biggest pension fund and given Australia is so exposed to China, what are your views on China?

Like you, I know you said you know, it depends a little bit on whether it's, 3 to 5% economy or 5 to 7%. Where do you guys land on that? I think we've definitely talked about we agreed it's going to be very, I mean, far less commodity intensive, but where where do you see the growth are you worried about is that there are some scary stories about China as well, right?

Their demographics aren't in their favor either. Right. And Australia is very reliant on China as well. Where do you guys see that.

John

So I think it's 4 to 5% economy because the government very publicly. Yeah target five. But they also more importantly they deliver this incremental stimulus whether it's fiscal and monetary or on the regulatory side, in order to ensure that growth is somewhere between four and a half and five. So there's a there's an alignment between the the expressed policy objective and the actual policy moves, which give the government some credibility.

This is credibility only in the sense of meeting that. Yeah, that number it's it's not credibility in the sense of kind of coming up with a solution to the housing overhang. So this is why for us, if what we care about is just the aggregate number, because we think the aggregate number is what's important for stability within Asia or spillovers to the Australian economy, it's good enough if what we care more about is just the, amount of commodity demand that's going to be generated around that 4 to 5%, it's still not impressive.

And this is why it's not motivating, you know, big, big, changes in our portfolio. We have had a, an intention for a number of years, and it's going to continue for a number of more, more years to reduce the weighting of Australian assets in the portfolio, because the amount of exposure to Australia is incredibly high for any global investor, roughly 40% of the portfolio is in Australian assets.

And if you looked at a market cap weighted portfolio of assets, you wouldn't have that skew. You'd have something much more balanced across the regions, which is why the fund is internationalizing. So we would have done that, whether probably whether China was a 4 or 5 or 6% economy. It's just a prudent diversification move to hold more of these assets.

If we had a view that China was finally going to do something transformational in the housing market, such as purchasing the excess supply, something that I think we'd have a lot more follow through to, to resource demand, then we'd probably have a different currency exposure. We might, be doing more in emerging markets, but because it doesn't seem like the country is where the policymakers are minded to take that step, we're not really positioning for something transformational.

Amrita

No, that makes a lot of sense. I mean, either way, that would be more of a tactical move versus like you're saying structurally the decision makes sense. So then in which case final question would be, you know, you were asking me about like ranking, right energy wise, like what's called the biggest upside. Like what is your favorite place to invest, be it 2 to 3 year horizon or slightly longer, depending on, you know, whatever you think is the best value out there right now.

It could be anything.

John

So I wish I could give you some asset class that I thought was going to outperform all the others by miles, but I think that's only the kind of statement you make when you think there's a lot of upside on the earnings cycle in the, in the economy. So for me, it's about definitely sticking with more growth assets and more risky assets relative to the defensive ones.

And I would do that even though I have very little confidence that the US administration is going to deliver better outcomes for the economy. But I believe there's enough going right in the economy to keep the risky markets outperforming. And so I'm not bothered by the levels. I'm not really bothered by the valuations and not bothered by the imperial style of policymaking in the US and what that means for for volatility.

And in that sense, it's a pretty bullish view that, that just to to stick with the kind of things we've been doing for years, expresses a lot of confidence that it's all going to hang together, even though there's a lot of chaos going on under the surface. But, you know, I'd be misrepresenting things if I said, you really need to be focusing on.

Amrita

Tesla for.

John

Credit or, yeah, growth, equities or anything like that. I just don't think we're in that kind of, blue sky environment for, for growth and earnings where you can make those kind of calls.

Amrita

But to be honest, the fact that you are saying stick with us in some ways is a huge call because, you know, I've spoken to ample people both in the oil industry and in the macro space who are genuinely writing the obituary for a lot of us stuff, saying that, you know, whether the dollar or it's dead or the US economy, like you said, it's it's the end of the US dominance.

There's a lot of that going around. So I think this is a very, a very realistic and a very balanced view, I would say. Right. Like regardless of what's going on, the chaos out of the white House, that if you believe the economy in itself has enough going for itself, then, you know, again, you're not going to get double digit growth necessarily.

But you will still get steady growth in the risky assets, right? Yeah. Okay, John. Super, super interesting. I think we could have gone on for a lot longer. So hopefully, like, we could get you back and we can talk about other things too. Yeah. But yeah, thank you for joining us. And, I think this was absolutely fascinating to you.

John

Thank you. Thank you for the invitation.