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Hi, I'm Scott Steele and I'm here with Flavio Carpanzano. And we're both really happy to have you join us for our regular look into fixed income markets. Welcome, Flavio. Thank you very much. I think maybe a good place to start is with the recognition that the opportunity in fixed income is still very attractive. You've got yields that are at or close to historical levels and you're at that point. In the economic cycle where central banks are giving real consideration to start cutting policy rates, which could lead to a tailwind in terms of capital appreciation. Now the magnitude and the pace of those cuts are probably not going to be as aggressive as the markets had originally priced in. But what is also interesting is there could be a sense of divergence across those policy rates across different countries. Yeah, you're absolutely right, Scott, both on the fixed income out. So it's interesting you mentioned these global divergence that we see across the economies because one of the topic at our latest portfolio strategy group meeting which is a meeting that the Capital Group we do twice a year is today's meeting where all the portfolio manager, trader and analyst meet together to discuss the outlook of the economy over the cyclical and then also the long term horizon. And the the main thing was really global divergency and the the first question actually that we ask internally is why economies overall? And particularly in countries like the US had been so resilient despite these aggressive hike in interest rates. And the answer that we gave is economy. We're always being resilient for two main reasons. One, the labor market has been quite tight globally. So today if you look at unemployment rate is started to gradually increase but still remains below the equilibrium rate and this is probably because some workers shift some preference into other sectors so. And then workers in hospitality has become difficult but then also unfortunately you have a long term sickness and highly retirement. This combined with the fact that actually incorporates a bit more reluctant to make workers redundant and this is again coming from the experience of COVID where they made a lot of people redundant and then they had to rehire and they struggled with that. So they've been a combination of these factors that ultimately create a labor market overall quite tight and these in combination particularly in the US. Where fiscal policy had been quite loose and it was interesting because he was losing a period of a high growth and so in a way offset the tight monetary policy. So the combination of these factors create some country that they've been quite resilient from an economic perspective and we're talking about US, Japan, India. However, on the other end we started to see some countries like Europe, UK, China that we think there are more fragile in the sense actually economy started to grow less. And pre pandemic, so interesting to hear your view about why if you think that some economists have been more fragile and why is that? Yeah, it is interesting because a couple of facts did come out of those PSG meetings and maybe for I trust those, I'll just take a quick step back and and define how we look at resilience versus fragile economies. So the definition for us for a resilient economy is 1 whose current economic activity or economic growth is higher than it was pre pandemic and vice versa for those that are more fragile in nature, their current. Economic growth is lower than pre pandemic and a simple example of that would be the US and Europe. Pre pandemic US is growing around 2.2%. Today it's growing around 3.1%. Europe on the other hand was growing around 2% and today is only growing around half a percent. So there's an example of an economy that is resilient as you mentioned the US and one that's more fragile like Europe. Now the key reasons behind that, I like the fact that you mentioned type tight labor markets pretty much. Everywhere. Yeah. It's like kind of rules that out as a reason for this. So we really think it boiled down to a couple of factors. The 1st is consumption. If you look in the US, the US consumer has been incredibly resilient in the face of the pace of hiking that we've seen by the Federal Reserve. And that's really important for the US because consumption is such a large part 2/3 or so of overall economic growth. And so that's really helped. The US out. What's interesting though is that consumer spending hasn't been resilient everywhere around the world, there definitely has been divergence in terms of consumer spending. And so if we look at an area like Europe there where consumers had additional money, they chose to try to rebuild their balance sheets as opposed to higher spending. And as a result of that post pandemic spending is actually far below what normal activity would be. Essentially you mentioned these factors. Or divergence in developed market, you mentioned US and Europe reality, we see divergence also in emerging markets. And if you took the biggest economy we're talking about, India Today is definitely the fastest growing economy in the world and we see definitely resilience there over the city current secular horizon. And these resilience for India is really down to the fact that inflation actually has been stable and falling interest rates and monetary policy actually remain still. Quite tight fiscal policy as well has been quite tight despite his election here for India. And this is in combination with the stability from a political perspective which allow and denounce the the, the country to to have a structure long term reform. And that's why we believe a country like India is going to be resilient from a cyclical and more long term structural horizon. And this is the opposite unfortunately we see in a country like China that as we know over the silica. Horizon is weakening and the growth has been relatively slow and this goes to the factors underlying the economy where in the past as we know one of the main driver of China was on one end the real estate. And unfortunately the real estate market continue to be negatively impacted by China. And so this way on growth and this is in combination with the stimulus from a fiscal perspective, we started to see some signs there, but there's no been really meaningful. So from that perspective, we see a government where on one end as the ability to stimulate the economy if needed. But at the moment the willingness is not there because it's trying to arrange a near sort of deleveraging which is costly in the short term. And so you can see even in emerging market this kind of divergency. I think there is another point I'm talking about. Structural divergency, this is the same for developed market, but the question that we ask ourselves is that are resilient country remain resilient over the long term. And again when we look at the US for example, we believe is going the growth is going to be resilient even over the long term, over the next two to five years because of the long term factors like demographics, productivity, trade dependency, geopolitics, actually they are all in favor of the US I can pick up a few examples. Trade dependency, you mentioned before the bulk of the GDP in the US is driven by consumption. the US from the perspective is almost like a closed economy. And so it's less impacted by trade, is less impacted by a slowdown in China. And so the economy has been more resilient to the trade dependency. On the other end, we look at productivity. Productivity has been extremely strong in the US we talk about 3% and this is a combination of course of a fiscal stimulus, strong investment, artificial intelligence. Workers shifting into more high productivity part of the sector. So combination of all these factors that are going to offset like demographics, we're going to offset potential high depth in the US So it's interesting we see resilient country to remain resilient. The question mark is if fragile countries, are they going to say fragile in the long term, right. So an interesting point you made about India going through sort of structural change in order to be able to have a longer term structurally resilient. Economy, you think in general, our view would be that a country that is cyclically fragile in the absence of those sorts of structural reforms will likely be fragile for a longer time period. And Europe's probably a good example of that in contrast to what you just described about the US So if you look at productivity in Europe, it's significantly lower than the productivity levels of productivity growth that we're seeing in the United States due to lower investment and lower. Inclusion of technology into businesses in Europe, which is a significant difference than it is in the United States. You look at your second point on geopolitics. Geopolitics impact on on economy in Europe is much larger to your point of than it is in the United States. And the impact of things like war and sanctions on supply systems and stuff like that is is something that impacts countries like. Germany in a huge way as opposed to much more closed economy like you said for the United States. And then with you, if you look at demographics, the age difference isn't huge but any little bit. I mean, Democrat demographics play such a huge role in the long term potential of an economy and the median age in Europe is almost 45 years and the median age in the United States is slightly under 39 years. Might only be six years difference, but it does have an enormous impact at the end of the day indeed. So maybe we could just shift a little bit here away from the framework and talk a little bit about what the potential investment implications are of this. And I'm happy to start with some rates conversation. Yeah. So if we look at what's going on in our global portfolios as it relates to ration positioning, generally we are neutral duration relative to our benchmark. But what's really interesting is that actually masks a lot of divergence that's underneath that where we do want to take duration. From where we don't want to take duration and the difference between resilient economies and more fragile economies. So currently we are underweight the United States and to a greater degree underweight Japan. Those are both resilient countries. Their economies are growing quite well and with Japan changing policy and taking yield curve control off, we think that's gonna put upward pressure on interest rates in Japan and similarly in the United States like we talked about already a very resilient economy. And as the Fed has really pushed fairly hard on the aggressive expectations of rate cuts, that could also put pressure on on rates in the US. Offsetting that where you are overweight Europe and marginal overweight to the UK, both fragile economies and if you look at a fragile economy and both the Bank of England and the European Central Bank coming out and saying that they're now in restrictive territory. With their policy rates, they've really opened the door to policy rate cuts going forward. And then finally, we think that yield curves are going to steepen, particularly in the US and that's likely some combination of the Fed actively cutting rates and potential upward pressure on longer term rates due to concerns over things like fiscal spending and treasury issuance.