Mike Reed: 00:04

Hello, and welcome back to Unlocking Markets, the RBC BlueBay* podcast, where we bring you experts from across our firm, providing opinions on markets, global policy and macroeconomics, whilst highlighting how these feed into our investment decisions. I'm Mike Reed, Head of Global Financial Institutions.

Today I'm delighted to welcome back Habib Subjally, Head of our Global Equities team. Habib last appeared on the show in June 2024, and an awful lot has happened in the subsequent nine months. After a strong finish to 2024 itself, the inauguration of President Trump appears to introduce uncertainty to global markets. I'm hoping Habib can give us some fresh insights into what is driving this volatility, and how he's navigating his portfolios through it. Habib, welcome back to the podcast.

Habib Subjally: 00:53

Mike, thank you for having me on. We live in interesting times.

Mike Reed: 00:57

We do indeed. To kick off, Habib, since President Trump arrived back at the White House, he has implemented widespread tariffs on the goods from a broad range of countries, both friends and foes. How is this uncertainty stemming from the trade wars influencing investor sentiment as you see it?

Habib Subjally: 01:17

Tariffs have been…..we haven't really had serious tariffs at this level for decades. This is uncharted territory for many, and certainly for developed markets. Tariffs and other policy announcements create uncertainty. This level of uncertainty leads both consumers and businesses to delay consumption and investment decisions. This is only natural. We see this in consumer sentiment data. We see this in conversations we have with business leaders, that everyone is slowing down their big investment decisions, whether that's building a new factory, or some new technology project. All of those things are just being slowed down. Certainly, for now, sentiment is much more cautious.

In terms of how we think about tariffs, so we've obviously been through the portfolio with a fine toothcomb. Tariffs have many consequences, but the big three that I would point out are:

Tariffs impact goods and not services. If you are Ford or General Motors, you are really worried about what's going on with tariffs in your supply chain. If you're Netflix, you're sitting there saying, "Well, yes, I'm sure it has some impact, but nothing directly to our business."

The second big impact that tariffs have is that it impacts consumers, just in terms of their disposable income, what money buys.

The third thing that it leads to is cost increases and potentially inflation.

In terms of how we think about those things, we examined our portfolio very carefully for businesses with complex supply chains. Obviously, industrial companies that, if you have a factory in Mexico, you're stuck with this. There's nothing you can do about that. Thankfully, we don't have anything like that.

But we do have some businesses that buy components from many different parts of the world, some of which will be Mexico, Canada and China. This time around, it means there will be a cost increase, but you won't get a, like in the pandemic when you had that shortage of semiconductors, production lines came to a halt, this won't lead to that, but you will have some cost increases coming through. Supply chains will also impact businesses like retailers and distributors. They are in a better position to price up and pass on those increases.

Supply chains is the first thing; go through businesses and look at their supply chains and see who's resilient. Second is, be careful about the low-end consumer. They are going to get impacted around the world, and particularly also the emerging markets consumer. Thirdly, it's about pricing power. A lot of people, a lot of businesses, are going to be impacted by rising costs. Can they pass that on? That pricing power becomes crucial in maintaining your margins and your cashflows.

Mike Reed: 04:52

I can see there's a lot of uncertainty there feeding into businesses and creating caution there. On a personal level, I'm glad to hear that my Netflix subscription is not going to go up any further. Going back to when we chatted last year, I asked you about the outperformance of US stocks and those of the rest of the world, and in particular, by the group of tech stocks have been dubbed the Magnificent Seven. Since the start of 2025, we have seen a reversal of this trend. Are we seeing an end to US exceptionalism? If this is so, is this going to be reflected in your investment decisions?

Habib Subjally: 05:26

Yes. Well, it certainly is the case in the short run that when you look at what's happened, this uncertainty that we spoke about a few seconds ago, has led to a reversal of many of the trends that were well-established trends in the market for many years. The US equity market is down 5% year-to-date, Europe is up almost 16%, Hong Kong is up almost 18%. This is following many years of US being essentially the only market that outperformed the collective world, everything else underperformed. Also, things like technology, IT is down 9%, the Magnificent Seven are down 14%. Something like Tesla is down 42%.

These are violent moves that have taken place. This is over a period-- well, it's early March when we're speaking. This is, we're talking about 9 to 10 weeks the year. This has been a very powerful move. The real question is, how long will this continue? It's hard to say if this level of policy uncertainty begins to settle down, if this is the worst, this is we are over this, this is the bottom. We then get some tax cuts and the budget deficit, and then you also get cost cutting from the government coming through so the budget deficit doesn't get out of control, and a bit of stability can lead to recovery. So much depends on that backdrop.

In terms of how, you asked me the question, I'm not ducking it, about how we're dealing with this. Over the last couple of years, the last year or so, we've been getting a bit nervous about how extreme things were becoming. Let's be clear, these Magnificent Seven (or the mega caps), these top 10 companies that we look at, these weren't there by fluke. These are great businesses. They are phenomenal business. They have innovated, they have executed, they delivered phenomenal service and generated revenues, and earnings, and cashflows to justify their position there.

After so many years of success, these mega caps are also the most expensive part of the market. We had been steadily reducing our exposure there. We were underweight the mega caps, we were neutral weight the rest of the US, and we were marginally overweight the rest of the world. Again, especially in the mega caps, your valuation disciplines have to be really careful there.

Ultimately, that's what's going to protect you, because you have to be aware that while these are great businesses, no business stays great forever. Trees do not grow to the sky. That's why I think a degree of scepticism and caution was necessary. Maybe we went there a bit too early, but I think we've been gradually inching towards the door over probably the last 10, 12 months.

Mike Reed: 08:53

Touching on something you just said there was cost cutting, and within the US budget. One of the ways that they've talked about doing this around the world is the use of artificial intelligence to help them there and make things more efficient. It was a major theme, AI, artificial intelligence was a major theme for investors last year and drove a lot of investing, and was responsible in part for the performance of a number of stocks, particularly NVIDIA, which is very much highlighted.

Then earlier this year, we've had the arrival of DeepSeek, which was a bit of a shock to the markets, the cheaper Chinese version of ChatGPT. This has raised questions to a number of investors I've spoken to, in their minds, as to the invulnerability or sometimes we talk about the moat of certain companies to competition. Do you see potential risks from new entrants in other areas of the market?

Habib Subjally: 09:47

Yes. Do you mean about artificial intelligence, about new entrants?

Mike Reed: 09:52

There are a number of companies that have done very well, and they're rated on the back of that. With artificial intelligence coming in, are there other companies or areas you think might be exposed to a new entrant coming in, something we haven't seen as yet?

Habib Subjally: 10:07

Yes. I think, artificial intelligence is really interesting because it is a phenomenal enabling technology. It is a little bit like when spreadsheets first came around, or when mobile phones first came around. Spreadsheets, if you remember, were created, you and I will probably remember those…it was IBM with Lotus 1-2-3, and Computer Associates with SuperCalc.

Mike Reed: 10:39

I'm still using Lotus 1-2-3.

Habib Subjally: 10:41

[Laughs] I thought it didn't exist anymore. The key thing is that IBM and Computer Associates didn't make much money out of it, even though they were the pioneers. The real people that made money out of it was Microsoft with Excel. More importantly, people like us, and all of your listeners, everyone who used Excel and spreadsheets to improve their business and improve business decisions and productivity. The same way with mobile phones; Nokia, Ericsson, all the Vodafones of this world created that. Without those pioneers, none of this would be possible. Where are they now?

Arguably, most of the benefit from mobile phones have come to other businesses who have created apps, and users and consumers who have otherwise benefit from productivity. So, I think we think of AI in the same way; that of course, there are the pioneers, like the NVIDIA's of this world, who are phenomenal, and without which we wouldn't be talking about AI. As we look forward, who is going to use AI? Who's going to utilise AI to create competitive advantage in their own business, to take market share, to reduce their costs, to improve customer satisfaction?

Here we have been shifting our emphasis away from this hardware layer of TSMC and NVIDIA, towards more software companies who are going to improve the productivity of users, both corporate users, so that our employers are prepared to pay another $20, $30, $40 a month, so that we can have AI tools on our desktops. As well as us as consumers, that we are either prepared to pay $10, $20 a month subscriptions to some of these things, or we are prepared to tolerate more advertising to use these things, because it makes our lives better.

Artificial intelligence is, we think, is going to enter a new phase. It's not just about, "Wow, aren't these large language models amazing?" And they are, but how are we going to use it, and how are we going to create amazing commercial outcomes out of this? That's where the emphasis has to change.

I do think, when you look at the engineering profession, the architecture profession, the financial services industry, the medical industry, the drug discovery industry, all of these industries will be able to utilise artificial intelligence in different ways, shapes and forms.

There will be winners and losers. Those people who lag behind, don't have the right adoption, will go out of business, others will gain market share, create new business models. There will be an enormous amount of wealth destruction and wealth creation from this.

Mike Reed: 14:03

I would like to add, in case my IT head is listening today. I don't actually use Lotus 1-2-3. I am fully conversant in Excel.

I want to move the podcast to a darker place now. One word that I've heard quite frequently recently is ‘recession’. This time, last year, people were talking about Europe flirting with recession, but now it's not Europe, it's the US. How does one, or how do you, should I say, position your portfolios to mitigate the risks associated with an economic downturn and protect your investments from potential market corrections?

Habib Subjally: 14:43

Look, this is a difficult one, especially in these circumstances. Normally, recessions are induced by monetary policy, by central banks, by raising interest rates, or other external events. You can analyse those. Everyone then starts thinking about when the central banks are going to start cutting rates to induce a recovery. That is something that markets can analyse, and are much more predictable and understood by markets.

This is unusual in the sense that this policy uncertainty has come from, let's say, from a policy perspective, from a government perspective, from a fiscal perspective. It's that uncertainty that has created this economic slowdown. Now, whether it results in a recession or not, but it seems pretty clear that the economy in the US is slowing. We don't know what the mechanisms will be to reverse that trend. You do know, a recession is not going to last forever. It's the timing that is hard.

As ever, the principles are to have businesses that have strong balance sheets, that have resilient business models, that have great management teams that are nimble and pragmatic. More importantly, businesses that take advantage of recessions and slowdowns to take market share, to build customer loyalty, to actually build those relationships, and do the R&D, that when the economy actually recovers, they are in a better position to capture a disproportionate amount of market share and value when you come out of the recession.

Mike Reed: 16:43

It's always a challenge going into a recession. This one, as you say, if it happens, obviously, we're not there yet, it's caused by different influences. It's less predictable than the past. On that, touching on Europe, I said, in recent weeks, there's been a seismic shift in the European outlook with the newly-elected German Chancellor Friedrich Merz proposing to abandon the German debt break, as it's known, and massively increase state borrowing and spending. This feels like a once in a generation change. I would love to hear your thoughts on how you and your team are looking to invest in this new paradigm.

Habib Subjally: 17:21

Again, this is a really interesting topic, and we've spent quite a lot of time discussing this. These seismic shifts come from announcements, like, you remember back in the global financial crisis that ‘whatever it takes’ moment. Central banks can do that because they have a very clear implementation strategy. When politicians make these big statements, great, I get the intent. I really do. I can see the numbers, and the numbers are huge, and then there's a multiplier effect.

But how do they get this done? There are so many political, and sociopolitical, and socioeconomic impediments ahead of them. You first have to get these laws passed. You then have to get, let's call it, shovels in the ground. How long does it take for the planning permission, for the various different agreements to be made, before it actually starts having an impact on the on the broader economy? When do the production lines start actually get up and running? When do people get employed? When do loans start getting taken out?

That can take a lot longer than it takes. Will we change? Will Europe change their attitude towards regulation and planning? Will they drive productivity? How will this flow through in a pan-European basis? Will the different countries be able to collaborate with each other and win a little, lose a little? That remains to be seen. Markets have moved incredibly fast. This narrative that is being created is that this is the Renaissance of Europe, and they're going to have this enormous productivity boom driven by the fact that Europe is now incredibly focused on defense.

I get the narrative. But how long does that narrative take to come into action and actually deliver economic growth, so that companies and consumers can feel that in their in their wage packet and their revenues and orders? I think that we remain slightly sceptical about that.

Mike Reed: 20:04

Yes, I think when I was in the market we used to call it the flash-to-bang time. There might be a period between the two. We've spoken about the US and now Europe. Let's complete the globe, or the main parts of the globe that you can invest in, and move to Asia, where we've seen increasing tensions between the US and China, and that's creating geopolitical problems, particularly with respect to the security of Taiwan. In addition, we have witnessed rising inflation in Japan, which is something we haven't really seen in a long time. It's a broad question, but where do you see the opportunities in the region currently? How concerned are you about these well-publicised risks?

Habib Subjally: 20:50

Look, the risks are there, and you can't avoid them. Of course, you have to be concerned with them. These risks have been there for a while and will continue to be there. I think what seems to be happening in Asia is that new trade corridors are opening up, new interdependencies are starting to get created. We see trade among ASEAN, with China, with India. Even China and India are now trading more with each other.

We talk about this defense insecurity that is impacting Europe. You see something very similar in Japan. No doubt, I'm sure there will be similar conversations taking place in Korea and many other countries. I think that this same sense of urgency that is having an impact in Europe, and we are paying so much attention to that in Europe, Japan has also committed to doubling its defense budget. I think there are things can perhaps happen a bit faster, more quickly.

China is changing. The government there is changing its attitude towards wealth creation and entrepreneurialism. I think there has been a simmering tension there amongst the wealth creators. You've seen with DeepSeek and things like that, that there's no shortage of human capital in China, and the ability to innovate and execute. Those markets had multi-year depressed results there. We are certainly looking more closely at those markets.

Mike Reed: 22:51

Yes, I know it's a lot of moving parts. I've spent a lot of time today asking you about the big picture and macro and economic trends. I know you and your team spent a lot of time, or most of your time, I would say, thinking about the basics and the bottom-up. That's how you drive a lot of your investment decisions. Corporate earnings and stock valuations form the bedrock of investing in equities. With the current economic and political backdrop, which sectors do you feel, if you can help us, will perform best over the coming months?

Habib Subjally: 23:25

It goes back to a macro call, in terms of sectors, because if the economic slowdown continues, then the discretionary and technology will clearly be impacted by this. People aren't going to rush out to buy new cars or new homes, or all the stuff that you put into a new home. That will be impacted. Certainly, companies and capital goods companies, if they're not rushing out to build new factories, that will be impacted. You can see that there is the shift towards more defensive, more stable, more reliable businesses with recurring revenues.

But as a long-term, bottom-up investor, I think this is also a period where you have great opportunity to find businesses that are going to take advantage of this. When everyone else is cutting costs and firing people, there's someone else who is prepared to step up and really innovate or look after their customers. There is going to be when we look back on this, this will be a period where market share was gained and lost, new winners emerged, and old winners just faded away and never came back.

That for us is a real challenge, is to meet management teams and to assess individual strategies. Who is prepared to, in a very safe and controlled and risk-controlled manner, who's prepared to get onto the front foot and actually grow the business and lay the foundations for future growth? We forget how long it takes to create a new brand, to build a new hotel, to create a new factory. These things take four, five, six years. The market moves in days and weeks, or if not, minutes and seconds. This for us is the great opportunity.

Mike Reed: 25:32

Yes, I guess that's the Warren Buffett model of investing, which is ‘buy good businesses at the right prices.’

Habib Subjally: 25:38

Absolutely. In many respects, the sales have started. [laughs]

Mike Reed: 25:43

It sounds easy…it does…but it's obviously incredibly challenging, incredibly difficult. Thank you, Habib. As you say, we live in interesting times. It was great to get your perspectives on global equities. You and your team have such deep knowledge across really a broad range of countries and economies. It was fantastic to hear your insights. The next 12 months promise to be fascinating, and I look forward to having you back on the show again soon.

Habib Subjally: 26:10

Any time. Thanks, Mike.

*RBC BlueBay Asset Management (RBC BlueBay) is the brand under which RBC GAM conducts business outside of North America.