The markets, it's different, you know, different or difficult to understand exactly how they're positioned. Because if you look at traders in fixed income, it's different to equities. Where do you see the biggest market dislocation?
Well, the strange thing is that we, in my mind, haven't got a very big dislocation because if you had told me, you know, laid out the events, I would have thought the market should be down a lot. And indeed, it's actually up on the year. I think that's quite surprising.
It's up, it's down. I mean, does this angst not come to fruition? I mean, we look at inflation, even the latest figures from Europe, inflation could be a worry. And yet actually equities choose not to see that.
Yeah, no, I think it's remarkable because based on what's going on in the Middle East, you would expect this to feed through, you know, higher energy prices, higher food prices, fertilizer prices and so on. It is to a certain extent starting to hit Asia. We should expect it to hit Europe and the US through higher prices. And typically that is bad for the markets. But the market is really taking it in stride.
Do you worry about inflation, inflation expectations and the fact that there could be some kind of policy mistake from central banks?
Yeah, inflation is what typically gets the markets. And so that's something we really have to watch. On the other side, we have artificial intelligence and what we think is a deflationary effect. And I think that is what the market is kind of pencilling in just now.
Do you have question marks about artificial intelligence? Again, there's so much CapEx going on there that as soon as there is a little bit of a wobble like we saw with OpenAI, the market is very concerned.
Oh, absolutely. Lots of capital going in there. Now, we are basing our view on how we are using it ourselves and the effect that we are seeing on our business. We think we have taken out nearly 20% productivity gain just over the last year. We are using it to help us reduce trading costs. So it's a huge benefit for us and we are putting it in every way we can. Now whether that's now more than reflected in share prices of these companies, I think is very, very difficult to say. If it's a bubble, I think it's a pretty good one.
How do you say what I mean? I guess the bubble is fine as long as you know, until the point it bursts.
Well, that's true. But he's also putting in a lot of capital into infrastructure projects, data centres and so on, and building capacity that we do need to implement in society.
I mean, you sit on a massive fund, 2.2 trillion. Is that an asset or is sometimes a disadvantage?
Now I would say first of all that that's my money is for sure an asset. You know, when a fund is that big, you need to just think a bit differently about how it's positioned and you need to have a very strict mandate. And we have a very good one from the Ministry of Finance, which basically explains to us how we should be invested, pretty accurate guidelines for what we should be doing. And I actually think in this environment it's easier to invest in the market, to be part of the market than actually picking individual companies and sectors.
But do you sometimes feel, I mean, you can't really move as quickly? And again, is that a good thing or a bad thing?
Well, it's fine. So big like the Middle East. So it depends. Sometimes it's good to be able to move. Sometimes it's good not to be able to move. And if you look at the volatility we've had so far this year, well, I mean, the fund is up several percentage points this year. I think if you had been able to move as much as you want to do, perhaps you would have made some stupid decisions.
I mean, does that go to, you know, I guess investors' anxiousness that people maybe sometimes move too quickly? I don't know. How do you perceive risk and risk taking people?
Well, normally people move too much. There is something called an inertia analysis. And that means that you basically look at your results, what they would have been like if you had just kept your portfolio from the beginning of the year and not done anything. And then you look at your actual results, very many people subtract performance by moving things around too much. So sitting still is sometimes the most difficult thing to do, especially in volatile periods.
Absolutely. How volatile do you think this period is and will stay?
I would say it's not. I would say it's kind of medium volatile. It moves on policy decisions. It moves on geopolitics, it moves on, you know, uncertainty. It moves on wars, it moves on energy prices, it moves a lot, basically.
I mean, do you have to take a view on what happens in the Middle East? Because, again, it's very difficult. And a lot of the market positioning was towards something optimistic where actually, if you look at the geopolitics, there was no real end in sight or even a way to go down a notch.
Yeah, it's a very complex situation we have in the Middle East now and I think the outcome there is very uncertain.
Nick, talk to me a little bit about, you know, this idea that it is disinflationary.
Well, we are seeing the productivity gains from this. You can do things with a few people, you can automate more things. I think there are a lot of jobs which are going to disappear. Do we need as many lawyers going forward? Probably not. Do we need as many accountants? Probably not. Do we need as many consultants? Probably not. How is that going to make the world a worse place or a better place? Perhaps even a better place? And I think also we can stop doing things which are repetitive, which are boring, and we could just spend more time thinking.
But does that show up? And at what point does it actually show in the inflation numbers? Because we're just at the cusp on maybe in certain points in inflation seeing it, but it's not widespread enough?
It's not. No, it's not widespread, because we have the offsetting effect, which is from the energy market on the back of what's going on in the Middle East. So we have these two intersections and two events coming together.
I mean, is that why it's hard? It's because you actually have two opposing things and central banks also have to make a decision on that.
Yeah. So again, as an investor, how do these two tensions play out? Well, the way we deal with it as an investor is to be broadly diversified and very long term in our thinking. And I think that's a pretty good place to be just now.
