Kristen Kozlowski

Hello and welcome to another episode of PineBridge Insights. I'm Kristen Kozlowski of PineBridge Benson Elliot, and we thought you might enjoy listening to this recording from our 2025 Annual General Meeting. This session was a discussion between Marc Mogull, the Chief Investment Officer here at PineBridge Benson Elliot and Hanni Redha, Pinebridge’s Head of Strategy and Research for our Global Multi-Asset Strategy. Listen on to explore the trends impacting the future of commercial real estate.

Marc Mogull

Hani Redha runs research and strategy for the multi-asset side of PineBridge, and I've introduced him before. He's, in my view, the smartest guy in the organization, but I won’t embarrass you there. What I'd like to start you've heard my comments, you've heard Nick's comments, give me your perspective on the market today and putting it in perhaps the context of some of the things that I was talking about. Just if you could lead us off.

Hani Redha

Absolutely, first time I heard Nick speaking, and that was brilliant, and it will link a lot with what I was about to share as well. And if you think that what Nick was describing is going to play out, I have a specific investment recommendation for you as well. But let me zoom out, so in terms of the market regime overall that we've been describing, and I spoke about this last year, we're continuing to see confirmation of what we've formed as the core building blocks, and that is summarized in what I would call a higher nominal world, which means that we think inflation is going to have what I call “a higher resting heart rate” but at the same time, growth is going to be solid overall at the global level as well. 

So, you end up with higher nominal growth, and with that, you get higher equilibrium interest rates. And it goes along with everything that Nick was describing in terms of deficits and debt, as one of the key drivers of that that's not going away. We think deficits are here to stay for at least the next few years, if not decades. But what I would add to the mix there is that we're in an environment that is effectively an investment boom happening at the global level. 

There are a lot of different dimensions to it. The one that there's a very big focus on right now, which we will touch on Marc I think is this whole build out of AI capex, a lot of technology capex that's going on. But I would add to that, a lot of spending on defense. That's another manifestation of that political fragmentation that we see globally. There's spending on climate that's still going on in the background.

And all of these are investment needs that were really not there in the last cycle. This is new activity that has a lot of non-economically sensitive motivation, right. Defense. It's got nothing to do with economic motivation. It has to happen regardless of where interest rates are. They're just going to do it. Climate, same thing, it doesn't matter what's going on with interest rates. They have to do it, so it puts a baseline level on growth.

Marc

A baseline level on spend? 

Hani

…Yes… 

Marc

And my question for that would be, so private sector investment, public sector spending, you're saying yes. And I put up these charts with the BoE forecast of inflation in the UK, and I think was like 15 months time, and the ECBs forecast. And I think the B0E was something like 2.2, 2.3% and I think that the ECB was something like 1.7 or 1.8, comfortably down on both of them from where we are today, the UK today at 3.8. Are you buying “the over” or “the under” for doing the football pools?

Hani

I'll take the over. So I think your presentation was labeled, ‘normalization’, right? I totally agree with that. That's exactly how we see what's happening right now, we're coming off those peak inflation levels that were driven in large part by a lot of supply side, supply chain disruptions. That was a big one off. I don't think we're going back to those kind of high, single digit, even double digit inflation rates, because that was a disruption-led situation. 

So, I see inflation coming down from those peaks, but we're not going back to 2%. 3% is the new 2% let's put it that way. The central banks are not going to formally change those inflation targets, but effectively, we're just not going to see those 2% levels again.

Marc

What about growth in the euro area and in the UK? If you're trying to, you must internally or when you report to investors to put numbers on it. Where do you see over the next two years we're going to get to, does it stay, if I can say as disappointing as it is now?

Hani

So, if I take Europe first, Europe's going through an interesting change, particularly focused on Germany. You say Europe, but for me, it's mainly a German story, where this real change in attitude, let's say, towards fiscal spending and the debt break, that shift that's happened is a real fundamental one, and it's here to stay. It's a long-term thing, and it is going to be stimulative to growth at a time when Germany desperately needs it. It is the sick man of Europe right now, and so that, to us, means that you're going to see at least a percentage point higher growth in Germany than you've seen before. 

So, that's actually a positive, and it's needed in infrastructure and defense. I mean, the defense part maybe not so productive, but the infrastructure side, Germany needs that too. And I think at a global level, when I kind of mentioned that to my colleagues in the US, they're kind of baffled that Germany needs an upgrade to its infrastructure, but it does, and I think that's going to be quite productive.

The UK. I'm less optimistic about and exactly what Nick was talking through, what we see exciting in the US, we're seeing the opposite happening in the UK. In the US, there's a push towards deregulation, innovation, support for this kind of technology sector, and even to the point where the state's getting involved. I mean, that's a little bit concerning, but you can see that they are very adamant about supporting that innovation. The UK is going down a different route, this month, we're going to see more taxes, no cut to spending, no real progress on the regulatory side, it’s really tough to see a shift in higher in potential growth rates. The OBR is going to be reducing its productivity assumption. So we see that as kind of something that weighs on bond yields…

Marc

…which is why you talked about where we thought yields would settle out when we're in the conference room, you were marginally higher…

Hani

…marginally higher. I definitely think so. Like cyclically, this budget is likely to suppress yields. I actually see gilts coming lower off of the recent highs of four and a half or so. But again, it's going to be very difficult to bring yields down materially when you've got a kind of tax and spend type of environment.

Marc

A lot of that spending, obviously, and we saw it in my chart on what's driving the equities market in the US. You spoke about it at the outset is this whole AI thing, right? And yet, when I had the conversation with you about whether we had to go long on data centers, in theory, if we could afford one, you were cautious for us about whether we should be going out and going long data centers, and talked about what you were doing on the equity side of the business. It would be helpful if you kind of replay that conversation.

Hani Redha

Yeah, sure thing. So, this technology sector, one of the things that is shaping this entire regime for us is this kind of exponential technological change that's happening? It's real, and I would take it very seriously. I mean, in our teams now, every single investment we look at, question number one is, so that we don't forget to ask the question, question number one is, how is this going to be affected by let's call it technology more broadly.? Right now, more specifically, it's about AI. How is this going to be affected? 

I know obsolescence has been a key issue that you've been focused on as well in your sector, we're looking at that across the board, not necessarily obsolescence, but threats and opportunities created by this technology, because I would take it very seriously. This is not hype, and it's the reason why these “hyperscaler” companies are literally investing trillions. Because right now, I don't want to get too technical, but when you look at the actual models, the progress they're making is exponential. 

So, what they're trying to do right now is, you know how when you use chat GPT, you're doing little prompts, and it comes back with a quick answer. And more recently, you've seen this like, think harder type of button that they put. So, then it goes off, takes a bit more time, does a bit more analysis, comes back with a longer more detailed answer, right? 

So, imagine extending that where you set this AI model, a detailed task, something you would assign an analyst to do, or something even a portfolio manager might be working on, and it goes off for hours and comes back to you with full detailed analysis. That's what they're doing. So, there are tests which show the number of hours that the model is able to work autonomously, and then come back to you, is doubling every seven months. Okay, so by the end of roughly next year, we will have an AI model that will be able to work autonomously for a full eight hours, a full working day. 

You start to get an idea of where we're going with this capacity…. 

Marc

…computing capacity…

Hani

…exactly. So, the investment is needed, and as a result of seeing this progress so far, it looks like that progress is continuing. No reason to say, “Oh, we're going to run out of actual breakthrough” and so the capex to us is actually justified as an equity investor…

Marc

…I was going to say, your credit guys. You don't want them…

Hani

Absolutely. My credit guys and my real estate guys, I tell them beware, because the hardware going into these data centers is quite short lived. So, I just described the progress we're seeing on the software side right the models. We're seeing similar kind of progress on the hardware side, the actual chips themselves. Now, Nvidia, for example, is coming up with a chip almost every year, and they're exponentially better than the last chip. And so you've got real obsolescence risk if you're the one housing this hardware as well, and in an illiquid asset class, whereas you've taught me Marc, you know the exit is all important… 

Marc

…Right… 

Hani

…Otherwise, you're going to clip your coupons, but then your residual value is just going to kill the entire investment, right? So I think illiquidity and being the one that is really hosting this stuff without the upside, right? Just being a great host, I would worry about that, but as an equity owner, I want to differentiate that as an equity guy, we've been fortunate to have taken this stuff seriously and been very long, a lot of exposure to the sector as equity and you guys have seen how equity markets have performed. We've seen this as not something like a bubble and so on. I would just ignore this bubble talk, at least for now.

Marc

But from our sector's perspective, if you've got guys in the Financial Stability team writing research papers now on financial stability risks associated with the investment in the bricks and mortar, they may not be completely wasting their time.

Hani

Oh, for sure. So look, I just laid out where the technology itself is going, and you know where I think the end game looks like. But as we saw in the late 90s, there can be a timing mismatch…

Marc

…Right… 

Hani

…Meaning that, look, you have to invest in this. If you're one of these companies. They see this as an existential risk to them if they fall behind their competitors… 

Marc

…Right… 

Hani

…And so that is going to motivate them to spend like crazy, and even if they need to burn a few 100 billion dollars along the way. Mark Zuckerberg from Meta has said, “I'm okay with that”, because the alternative of falling behind, it's game over, because you will not be able to compete, right. 

So, what that sets up is a potential for an overbuilt and then the fallout of that, even if the technology works out at the end, you can have a period where the market has just priced all of that in. It takes too long for the market's patients to come through in the technology, and so you can get a destabilizing move in the markets. I think that's entirely possible. You could even say it's probable. It's very difficult to line up the supply and the demand perfectly when you're moving at such fast speed. 

So things can break along the way, but for now, and that's part of the reason why, if you're trying to get exposure to these investment themes, which are very real, I would do it in liquid form, where you can own upside, as opposed to being ancillary to this and being left holding a bag.

Marc

I remember, it reminds me of when I did that one term in public service, when Clinton was President, because I moved from Goldman to the European Bank for Reconstruction and Development, and all these hoteliers were coming through my office to build hotels in Central and Eastern Europe and places where the math at the time made no sense. 

We could run the spreadsheets, and I finally had a conversation with Jay Pritzker. He explained to me it's really simple, whoever plants their flag first wins, and they're only going to be a certain number of flags planted. We've got to get it in, and we'll take the short-term losses, because long term, we think these are markets we need to be in. 

I want to ask you one other question, because it's really critical to what we do. It's about that chart I showed with gold and bitcoin. And I remember some time ago, you said to me that you had your folks actually reasonably significantly invested in….

Hani

… gold…

Marc

…yeah. And you know because of the link between gold and our sector and whatnot, it'd be interesting to hear your thoughts on that.

Hani

…Sure and this is where… 

Marc

…because it's run up fast… 

Hani

…it has, it has. And so, yeah, we bought gold in 2022, and so we're happy customers right now. But this links a lot with everything that Nick was saying, and I take it one step further. So, what we see happening is essentially a breakdown of trust. I think that's the common theme across everything. It's a breakdown of trust across the board. If you start with politics, there's a breakdown of trust in politicians, right? The actual conduct of actual individual politicians in the parties and the system itself. 

You know, a lot of people feel it's just rigged to use someone's words, and they don't see it working for them, and it has led to extreme inequality as well. That inequality itself breeds a lot of resentment and distrust, and both parties have contributed to it. We see this globally. I mean, I just flew back from the US. It's all anyone can talk about right now. It's the extreme inequality, and how is that going to resolve? Today, we're going to have mayoral elections in New York City, where, you know, a communist is going to be the mayor of New York City, right?

Marc

He won't last long, give him one term…

Hani

…yeah, maybe one term. But let's see, this is an expression of a manifestation of that breakdown of trust in the existing system. This is what I'm saying, that breakdown of trust needs to be taken seriously, because even if the solutions that are being offered are very misguided, young people in particular have had enough with the existing system. They're going to try and see what else they can try. That's what's happening here. 

And so, this run-up in gold, and what I think is an even more pure play expression of all this -  Bitcoin, which is actually precisely being driven by this breakdown of trust. So, bitcoin also brings in a breakdown in trust, in the level of debt, something else Nick touched on, if you are a young person, you say, “Listen, this debt situation is literally out of control, I don't trust the political system to put it right.” Generationally, that breakdown of trust between generations, they're not even voting the same way anymore. 

Another way of putting that is young people feel like, well, we're going to be funding the retirements of the previous generation, they've done well through asset ownership. We don't have a chance with that. And so, Bitcoin becomes the asset through which they express this breakdown of trust in the whole system.

Marc

I want to throw a specific word on the table, because it does cut across to our sector. I know from our conversations that you are long the debasement trade. Is that a fair way of putting it? 

Hani

Yes.

Marc

Right and that does cut across our sector. So can you help people make that connection?

Hani

Yeah, sure. So you know if we're going to run high deficits for the foreseeable future, not because we're in a crisis, but that's just the normal modus operandi now, there's a cost to that, okay? It means that you try to maintain standards of living, public services and so on, but you simply can't afford that, right. That's what deficits mean. Effectively, you are debasing your currency when you do that, that's the bottom line. It's currency becomes the trade. 

A lot of people sort of think about, well, what does it mean for bond yields? That's a much more difficult assessment to make. The more simple, very clear implication is you are debasing your currency, and it's ultimately very inflationary. So, what do you do other than owning debasement assets, gold and Bitcoin, you own hard assets, because those are the ones that are going to have some link with inflation, and the ones that are scarce are the ones that are going to at least retain value in inflation adjusted terms. Real estate can be one of those.

Marc

One of those, when you say the ones that are scarce, it means scarce, better buy the right assets…

Hani

…and the ones that don't become obsolete themselves… 

Marc

Right.

Hani

So, avoid those data centers and so on. But yes, they are inflation hedges, and they have some scarcity value, and that's what you need to think of the whole world through this lens of scarcity value, because fiat currencies are no longer scarce. They're just printing too much of them. And that's one of the big features of this whole cycle. It's very destabilizing, and the generation that are very focused on this debasement trade. They refer to you and I as this “Tradfi”… 

Marc

…As what?

Hani

We are called… I think everyone in this room probably is Trad-fi, as opposed to the newer generation who are De-fi people. Okay, what these are, is Tradf-i is traditional finance, right. So, we look at the world and think, why would gold be up this much in one year? It doesn't make any sense to me. What's this thing called Bitcoin, this digital thing, and people are paying more than $100,000 for it and so on. It doesn't make any sense to us, because we are Trad-fi. 

De-fi is decentralized finance, okay. That's the whole concept of digital currencies, cryptocurrencies, it’s that it's not centralized under any single authority. It's like the internet in a way. It's completely distributed, decentralized. 

And I think we need to at least understand that perspective, because I have had to go around and if you know people who are in that space, who've been active, they're insufferable. They really are and I've been a complete skeptic. I should have mentioned that right from the beginning, I'm not one of those people. They would never count me in their cool club, but I've had to go around and apologize to them for having spat on them a few years ago with this whole idea of decentralized and off-the-system, basically betting against the whole system itself, right. 

And I've apologized because I can see now that, yes, the core problems with the political systems, and now even the financial systems, with all this debt and deficits, it's not going to get fixed. So, if that is not going to happen, then you can start to see a critical mass forming around an alternative, the debasement trade. And I think now there was a lot of risk of whether that would work or not. Would bitcoin be outlawed or not? That ship has sailed… 

Marc

…for the next three years… correct? 

Hani

It is being completely endorsed, embraced, and not just in the US, but pretty much everywhere. Regulations are coming in, which means it gets legitimized. It becomes legal tender, and so, yeah, I'll leave that with you as a final thought, but I would spend some time getting to know what's going on in that world, because it is becoming part of the mainstream

Marc

Brilliant. So we're going to have to draw to a close there, Hani. Thank you for joining us and sharing your thoughts.

Kristen

Thanks again to Marc and Hani for another insightful conversation. You can always find the latest on our views of the investment market@pinebridge.com. Thanks for listening.

ENDS