Nothing is cheap but there's no systemic crisis, Australia is going OK

I’ve been fortunate to be in the orbit of Schroders’ Head of Multi-Asset, Sebastian Mullins, quite a bit recently. We’ve both been presenting at the ASX Investor Days (don’t miss Sydney this weekend), and I was able to catch up with him for lunch whilst he was in Melbourne last week.

Mullins is a hardcore market nerd (he wouldn’t mind me saying that) just like me, and being Head of Multi-Asset, he is across everything – he has to be. It is what makes him the perfect person to talk to when there are numerous push/pull factors impacting different aspects of the global economy and financial markets.

So, against that backdrop, I hit record on our lunch session. Below are some of the highlights of the wide-ranging conversation.

From optimism to uncertainty: the evolving macro landscape

Mullins entered 2024 with a broadly constructive macro view: “US growth would be above trend, and the rest of the world would be catching up.”

Strong consumption, wage growth, low unemployment, and supportive corporate spending pointed to resilience. However, trade tensions and unexpected tariff hikes quickly changed the picture.

“Trump came out of the gate at 25%, then went to 30%,” Mullins said of the US administration’s trade policy, adding, “Suddenly all these tariffs… real wage growth is hit, corporate margins are squeezed, and sentiment deteriorates.”

This policy shock raised fears of stagflation. “Our base case of stagflation last month is now just a risk,” Mullins noted, crediting the administration's swift backpedalling for stabilising sentiment. Nonetheless, he now sees US GDP slowing from 2.5% to around 1.7% this year.

“It’s not a disaster,” he said, “but a sign that activity is slowing overall.”

Regional rotation: beyond the US

While US equities remain dominant, Mullins sees better risk/reward elsewhere.

“US valuations are expensive. The earnings outlook is stretched. Europe, Japan, and emerging markets are far cheaper.”

He suggested capital may rotate to these regions as rate cuts and fiscal stimulus kick in. “If they’re cutting rates and their economies are improving, there might be a shift in capital.”

The end of the “TINA” (There Is No Alternative) era is reshaping allocation mindsets.

“There are alternatives now, not just in equities, but in certain bond markets too,” he explained.

While the US boasts strong brands and robust corporate margins - “The Mag 7 average margins are 20% vs. 10% for the S&P” - he noted that global investors are rethinking home bias. “There’s the rest of the world that [investors] haven’t even thought about for 15, 20 years.”

Near-term, US equities may continue to rally on technical momentum. “If the equity market keeps rallying, all the systematic traders…will have to risk back in. That could be the final push higher.” But for investors, this may present an opportunity: “That’s when you probably want to start diversifying.”

Bond markets, US debt, and emerging market opportunities

Turning to fixed income, Mullins was cautious on US long-duration bonds.

“Bond yields are still too low… we think they should be at 5%,” he said, adding that a sharp rise could cause volatility.

Instead, Schroders is “short long-dated US treasuries,” favouring local opportunities.

“Australia’s 10-year yields are at parity with the US but out fiscal position is far healthier, so that’s attractive.”

Emerging market debt is also appealing: “Brazil has 7% real yields, 15% cash rates - it’s a nice carry just to sit and forget about.” EMs are benefiting from improved fundamentals: “They’ve become more fiscally conservative than the developed world…they know not to have too much foreign currency debt.”

Mullins expressed concern about the US fiscal outlook but struck a balanced tone. “Yes, the debt is scary - it could be 200% of GDP by 2050 - but this isn’t Argentina.” He sees the most likely path forward as financial repression.

“They’ll try to run the economy hot and run inflation high. That’s the easiest way to inflate away the debt.”

Still, there are limits. “If yields blow out again, central banks may have to step in with yield curve control.” This could mirror Japan’s experience: “230% debt-to-GDP, the BoJ owns half the bond market, but there are no riots in the streets.”

The real risk in mega-cap tech isn’t earnings – it’s regulation

Mullins remains cautious but pragmatic when it comes to the valuations of the so-called Magnificent Seven. While acknowledging their dominant market positions and healthy margins, he doesn’t see an imminent crash.

“On current earnings expectations, the Mag 6 (ex Tesla) is trading around 24 times forward earnings,” he noted. “That’s about fair. The question is, are earnings going to be that strong if the economy’s slowing? Probably not.”

The bigger issue, in his view, is their unchecked monopolistic power.

“Until someone puts a brake on their monopolistic price power, they don’t seem to suffer.” Margins of around 20% - versus a historical peak of 12% for most companies - have persisted with little regulatory challenge.

“Not one antitrust case in 20 years. They just keep buying the competition. It’s like corporate assassination.”

Mullins sees potential regulatory intervention as the primary threat. “You really want to see some big governmental antitrust break-up cases. But there’s zero political will. Trump could have been the guy… but now half of them come to his party.”

Still, even break-ups could be bullish. “Some fund managers, ours included, think some of these companies are worth more broken up. Think about YouTube or Google Maps - there’s real value in the sum of the parts.”

On AI leaders like Nvidia (NASDAQ: NVDA), Mullins sees interconnected ecosystems as a key advantage:

“They’ve made it so easy to code for their chips. Like Apple (NASDAQ: AAPL) - it’s just easier to stay in the ecosystem.” Still, Schroders prefers TSMC (NYSE: TSM): “If other chips win, they still go to TSMC to make them. It’s harder to replicate.”

Market signals suggest soft landing…for now

Despite dire consumer confidence surveys, Mullins doesn’t believe the US is entering a full-blown recession.

“Mid-April, all the survey data said we were heading into a recession,” he said. “But the hard data looked fantastic. OpenTable (NASDAQ: OPEN_old) reservations are still through the roof. People say they’re upset but they’re still going out and spending.”

He highlighted the current “muddied” environment - distorted by front-loading activity to avoid tariffs and disrupted shipping channels. “Consumption might roll over a bit, but people are still ticking along.” The real danger? A jump in firings. “We want to watch consumption and job losses. If you start to see the unemployment rate rise and consumption fall off a cliff, that’s worrying.”

However, leading employment indicators such as WARN notices (early warning of large layoffs) and Challenger job cuts have moderated.

“At one point in April, 65% of our recession indicators were triggered. Now, that’s down to 35%. Things are no longer getting worse.”

Valuations are rich, but there’s no systemic crisis

Mullins is clear-eyed about valuations: 

“Nothing’s cheap. US equities are expensive. Credit spreads are tight. There’s very little room for error.”

He’s also dismissive of overblown fears around US commercial real estate contagion. “It’s mostly regional banks, not systemic ones, lending to those office buildings. There’s a lot of noise, but not much fire.”

However, he does point to potential pressure in areas like Australian private debt and US Airbnb-driven property markets. “Florida and California have a lot of Airbnb units now for sale. If they can’t cover mortgage payments, they’ll have to sell. That might crash those local markets - but again, it’s not systemic.”

His conclusion? “The real risk is always the one you’re not thinking about. Everyone’s focused on commercial real estate. That’s not it. If something breaks, it’ll be elsewhere - and unexpected.”

Australia’s economy: stabilising but no standout

“The economy is fine, recovering,” says Mullins of Australian economy, which has bounced back from a weak patch.

Despite the turnaround, structural issues persist. Mullins warned about the lack of long-term productivity growth: “It’s going to be finance, tech, banking. It’s not high-end tech and it’s not manufacturing - we have no chance of that.”

He pointed to Australia’s abundant natural resources, but lamented high energy prices and political deadlock: 

“We’ve politicised energy. How about we take politics out of it and get experts to rebuild our grid?”

Asset class views: cautious on equities, favouring credit

On local equities, Mullins was blunt: “Equities are expensive. Third most expensive country in the world after India and the US.” He cited stretched valuations with average earnings, making it unattractive relative to other markets.

By contrast, Mullins sees more opportunity in fixed income. “Bonds we like,” he said, noting Australia offers similar yields to US 10-year bonds but with a stronger fiscal position.

Credit is especially attractive: “Aussie credit looks cheaper than US credit. We’re hiding out in higher-yielding, so tier 2 debt.” He also highlighted value in triple-B infrastructure names with reliable, inflation-linked earnings: “You’re getting paid 6.5% plus, now. Not bad.”

His overall positioning? Defensive but opportunistic: “It’s immigration, it’s debt, it’s housing prices. But the economy is recovering — it’s not going to be gangbusters, but it’s going to be trend growth.”