Viewpoints with Burkhard Varnholt - A global markets podcast (Ep. 64)

Hi everyone, Dan Cassidy here. Welcome back to the Viewpoints podcast series here on the UBS Market Moves podcast channel with my colleague Burkhard Varnholt. Burkhard, welcome back.

I know it's been a few weeks since you and I last spoke. A lot, of course, has taken place. Markets continue to rally.

That, as you've always expected. Recently published as well, an impressive Global Family Office report, which has attracted a lot of attention. We'll cover that.

And bond markets as well remain nervous about inflation, debt and deficits. So let's touch on all three of these topics today, Burkhard, beginning with your recent Global Family Office report. Can you share with our listeners some of the key takeaways in it?

Well, absolutely. And thanks for having me again, Dan. It's a great pleasure to be here.

Look, it's a very large report. Let me just take away two out of its many, many observations. For one, we asked all the family offices we know and speak to about what they think are the key risks that worry them most.

Interestingly, the risk list was led by number one, geopolitical conflicts. Number two, concerns about government debt and deficits. And third, they all mentioned this eerie question, will this all end badly?

The second observation, which I found interesting, was to which asset classes family offices are considering allocating more money this year. I found that interesting for two reasons. One, it's kind of contradicting what they risk as their key risk perceptions.

And two, these answers absolutely correspond to the one on one feedback I regularly receive from family offices all around the world. So here are the three. First, they said on average, family offices hold 34% of all their assets in private markets.

Interestingly, most of them want to raise this ratio. Second, most family offices want to also raise their exposure to AI and tech. That's interesting because it kind of contradicts their fear about the tech bubble, which basically I don't buy into, as you know.

And third, most of them want to raise exposure to infrastructure assets. And I think that's a great intuition because, you know, as the world faces more conflicts or like all this stuff still going on around Hormuz and what have you, you know, countries and companies around the world are ramping up their infrastructure investments left, right and center. And, you know, by the way, talking about this, while the Gulf States are all busy building pipelines to deviate oil and gas supplies through the desert, China is leading the world's electrification and energy infrastructure transition, both domestically and through its unrivaled tech exports.

By the way, this is just a side remark. The Saudi and UAE pipelines, maybe three years from here, once they're done and fully functional, they'll be a boon to the world economy because once I've been running for the first time in history, they will offer a direct competition to the Strait of Hormuz and obviously require Iran to promote itself as a reliable partner and guardian, if you will, of all shipments through the Strait of Hormuz. And that can only be good for competition, as it always is for prices and what have you.

And meanwhile, LNG demand in Asia in particular is declining. You know, the global LNG market can go from famine to feast very quickly, or as it may sound, at least in my view, we could be we could be moving into an LNG glut even not a shortage once this conflict and the blockade of the Strait is over, of course. Anyways, those were just a few thoughts from the report and my own contributions to it.

Burkhardt, from listening to that, very fascinating takeaways. Thank you for sharing those. And I'm sure that the report must be in high demand by our family office clients around the world.

But I want to dig deeper into their concern, as you mentioned, if this could all end badly. Now, as markets keep rising, don't you think, Burkhardt, that the concern, are we in an A.I. or in a tech bubble like the late 1990s, carries some validity? Well, you know, I hear you.

I hear clients saying that here's what I would say to those who fear that we're already there. You know, I think we might be getting there, but we're not there yet. I think we're far away from it, years away from it.

We're not like in the late 1990s. Actually, the 1990s bull market lasted 12 years from 1987 to March 2000. You know, the late 1990s, they were driven by the obvious form of the fear of missing out and by a very thin tech leadership, as we remember.

But this time around, I think this is different. I disagree with the notion that we're in irrational exuberance land, just as much as I disagree with the notion that this market is so thin it's a one trick pony. My view is this.

I prefer what I call the famous narrative over the former narrative. So famous then for the fabulous earnings momentum, whereas former obviously for the fear of missing out. And my view is this.

You know, let's recap where this bull market started. It started in October 2022, as I pointed out many times. And back then, so three and a half years ago, the forward earnings per share of the S&P 500 were 230 dollars.

Today, they're 360 dollars. And by the end of this decade, they could easily be at 500 dollars. And what this shows us is that most of the bull market so far was really driven by broad based productivity gains, which we expect to continue.

Meanwhile, the valuations average ratios haven't really gone through the roof. They've risen from 19 times to now just about 22 times. That's not cheap, but it's a far cry from the irrational valuations of the late 1990s, in my view.

And now, you know, if you think that EPS could grow to 500 dollars by, let's just say, 2030, which they may well do, then multiplying 500 with today's valuation multiple of 22 years, 11000. And that's not a rational exuberance. That's an earnings driven bull market, not a valuation driven one, which in our view is like to run.

And then Burkhard, what about the issue of narrow market leadership? What's your take on that? I think this argument is also flawed.

Let me just mention three reasons why I think it is flawed. For one, you know, just look at this recent earnings quarter, which is just recently closed. More than 88 percent of all S&P 500 companies in their investor calls signaled that they're expecting higher earnings for the rest of this year.

For most, they're even expecting earnings growth to be double digit. That's a pretty broad distribution of earnings growth and not just a one trick pony, a tiny market leadership. Two, let's take semiconductors because they're all the rage these days.

I know they command something like 45 percent of the total capitalization of the S&P's IT sector. And some people think that's outrageous, but when you compare that to their earnings share, they actually their earnings represent 49 percent of the total earnings in the index. So their capitalization is lower than their earnings.

Now, granted, earnings might decline in the future, but you know, the way I look at this, this is inconsistent with the notion of irrational exuberance. And my third argument is a global perspective. You know, from a global perspective, I think we haven't seen such a broad bull market in decades since last year.

So since January 2025, emerging markets and European stock markets have finally picked up steam. We've been waiting for that for long. And they've been outperforming U.S. markets in nominal terms, plus through their stronger currencies.

And they're still trading mostly at discounts to both history and to U.S. markets. So, look, this is not this is inconsistent for me with the irrational exuberance of the late 1990s. Well, Burkhardt, from hearing your perspective, very helpful and perhaps dampening some AI bubble or tech bubble concerns which are out there.

Now, one more question I must raise again is on bonds. Now, while the 10-year Treasury yield softened a bit, bond investors remain nervous. They sniff inflation as the Strait of Hormuz remains blocked, and they dislike the amount of government debt borrowing as conflicts around the world are proliferating.

Well, two thoughts on this. For one, I still expect the Strait of Hormuz to be open for business again pretty soon. I can't predict any date, but everyone involved in this wants it to be open.

And while only time will tell, of course, I remain firmly in the camp of those who see today's inflation as temporary. That's because my view is proliferating innovation remains our best line of defense against inflation because innovation only perseveres if and when it makes things cheaper or better or both. And, you know, I remember so well as an economics student, I was taught that, you know, in my introduction to economics courses, there are three fundamental factors of production.

I think even Karl Marx wrote about them a hundred years ago, land, labor, and capital. Now, I think this old dogma urgently needs to be updated to the 21st century because there's a fourth production factor in addition to land, labor, and capital, and that fourth factor is data. The way I look at the world economy, data or call it intelligence or calculating power or call it AI are often even more powerful as a production factor than land or labor.

IT nowadays is more than 50% of all corporate capex investments. And so as the cost of data has been collapsing in the last two years and for sure will continue to collapse, the key factor of production is becoming dramatically cheaper. That's the big picture because if one key factor of production is dramatically cheapening, that will continue to raise productivity and weigh on prices and inflation.

Oh, and on top of this, China keeps exporting deflation. Why? Because China's excess capacity depresses almost all prices for things they export like cleantech, EV, AI, electronics, and much more.

I think that's the big picture. The argument remains essentially the heart of our roaring 20th scenario and that makes it a powerful driver for today's big bull market driven by productivity, the collapsing cost of data, earnings, wealth, consumption, and investments. So this bull market will continue to roll and investors should stay invested at all times, I believe.

Burkhardt, as always, very insightful. I always enjoy our brief market talks and we packed a lot into 12 minutes in this episode, which is great. And I'm sure, as always, there will be more to cover next time when we speak next week on Viewpoints.

Until then, Burkhardt, stay well and enjoy the beginning days of the summer season. Thank you, Dan. Always a great pleasure to catch up with you.

This is a nice way to fork pocket. Thanks a lot and speak again soon. Take care.

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