Conditions will change, the destination stays the same.

Tom Stelzer

Hi, I'm Tom Stelzer from Live Wire Markets and I'm pleased to be joined today by Peter Bates from T. Rowe Price to discuss all the big hot modern issues facing markets right now.
Thanks for joining us, Peter.

Peter Bates

Happy to be here, Tom. Thanks for having me.

Tom Stelzer

If we're going to start with the ongoing trade war between the U.S. and China, how do you think investors should be handling the volatility coming out of that?

Peter Bates

Well, it certainly has been volatile, and we have a reprieve announced, you know, just a week or so ago, but I guess it's a 60- or 90-day reprieve. So we'll have to see whether things fully get settled.

But frankly, I think the best way to handle that volatility is by investing in companies that executed a high level and have the management bandwidth to flex as the environment around them changes. You know, we work very hard to spend time understanding our companies, but also as important to understand the people and the capability of the people running the company. At the core, all this trade war creates uncertainty. But I think people are still going to consume and we are still going to build things. And the companies that do those things today aren't really going to change, but companies that are better run are going to be able to flex and adjust their supply chains quicker and more effectively than companies that are less well managed.

Tom Stelzer

And maybe on that point, your concentrated global equity funds was 73% invested in the US market as of the end of April. Are you thinking about moving more outside of the US?

Peter Bates

I'm not for two reasons. First, roughly 70% of my primary benchmark is United States listed companies. And just like with any stock where I don't want to make one binary decision that impacts the whole portfolio. Meaning if I have one stock, that's 20% of the of the strategy that one stock is going to dictate whether I have a good year or not. I don't want to make a binary bet on or against a specific geography.

For the most part, I'm looking to own the best companies. But I am aware of those binary bets. And if I made a decision I'm only going to have 50% of the strategy in the United States and 50% of the strategy in Europe. That one decision is going to dictate my performance.

And so I care about balance. I care about not making binary bets and for the most part, I'm searching to find the best companies in each geography with an awareness of my benchmark so that I don't, you know, create kind of a big portfolio bet that overwhelms any of my stock specific decisions.

Tom Stelzer
Odds of a recession of decrease arguably recently. What do you think is the big risk though that kind of you're watching out for at the moment?

Peter Bates

Yeah. So it's funny that question of like what's priced in and what are the odds?
I think given the markets move up, I think it's fair to say that the market thinks there's lower odds of a recession. I would like to state, I don't know because really other than the trade reprieve with China to kind of reduce tariffs to a manageable level and take 60 or 90 days to continue to negotiate, nothing's really changed. And yet the market is back.

You know, the S&P is almost back at 6000. I care more about kind of what is priced in and I try to take what the market gives me. And so when the market's really afraid, I'm more interested in in maybe defending or adding two things that are cyclical. And when the market is complacent, like I would argue it is maybe a bit complacent today, I try to reduce risk in the portfolio on the margin.

When you say what is the biggest risk, I actually don't think it's a recession even if we were to have one, because for the most part banks and consumers are healthy. Most of the time when you have big recessions, it's because you have a problem with your financial institutions that they're over levered. That happened with the, you know, the GFC obviously, or people are just over levered. And that also happened in the GFC where people didn't have equity in their homes and, and they were literally handing their homes back.

None of those real credit issues exist today, or at least we don't see them. We work to try to find them. But I think the greatest risk is bond yields and DOGE is something that I think is a good thing.

DOGE, you know, the Department of Government efficiency and the efforts to cut deficits to a manageable level to kind of protect the good faith and credit of the United States Treasury market. And the recent budget proposal that was submitted, you know, just a week or two ago, that extends some of the tax breaks and actually adds on some of the state and local tax deductions, which, you know, create a tax break that basically increases the deficits. And I think that the rough data is we've been running $2 trillion deficits annually and it started with Trump and then Biden continued it. So $16 trillion of debt added to the, you know, to the US balance sheet over the last eight years. And with the release recent tax package submitted to Congress, the deficit stay well north of a trillion and are potentially 2 trillion. And we've seen bond yields start to come up. And I think the, the world and our bond buyers are saying, you know, whoa, I this is not, this is not what I signed up for. And so I think deficits leading to higher rates is a concern.

Tom Stelzer

And what would you say the knock on effect potentially for equities would be there?

Peter Bates

Well, you know, obviously there's this concept of an equity risk premium. And if bond yields are 5%, I think the 10 year today is like 4.6 or something. You know, if equities are trading at 20 times, that's almost a 5% yield. So there's barely any equity risk premium. And normally the equity risk premium is 100 to 200 basis points. And so if bond yields go north of 5%, I struggle to see the S&P continue to trade at 20 times. You would expect the multiple to fall to, you know, something lower.

Tom Stelzer

So the MAG 7, that's an area of the market that investors like to seek a bit of shoulder. What's your view on those stocks?

Peter Bates

Yeah, I think they're all great companies, but I think at present you have more potential divergent in performance going forward because some of the risks that exists for the MAG 7 and I'm specifically referring to some of the DOJ litigation risk that is impacting App Store fees that they're allowed to charge as well as the Google TAC fees that they earn for directing search. And I'm also thinking about Google where you have these AI models that have really kind of come out of nowhere and Google has a great AI model in Gemini, but so does ChatGPT and so does Perplexity and so does Grok.

And as more and more people are using these models to do searches, they are doing less searches on core Google. And we all know that Google search is a monopoly. And I'm sure it's actually just two days ago Google at their IO conference announced we are integrating Gemini into our core Google search to kind of get people used to doing all these AI searches, you know, that are more generative on Google.

But they have to shift the monetization where they have a monopoly with Google search. They aren't going to have a monopoly with generative search because I already mentioned four or five models that exist and I just think they're great technology company. They will continue to exist and continue to make a lot of money. They'll just go from having a monopoly position in search to a market where they share it with three or four other people, which I think creates risk for the stock.

Tom Stelzer

We just moved on to gold. That's been one of the stand up performers in 2025. What do you think that's telling us about markets?

Peter Bates

Yeah, you can't fool gold. And I also think it's interesting that Bitcoin, you know, is back above 100,000. And, you know, it's like gold has drawn a lot of attention because maybe the move in gold has been greater. But I think it's a function of two things.

First, I've read reports and that China has been buying a lot of gold and they're buying gold to really almost like Bretton Woods there, but provide a collateral to the RMB so that they can transact more globally in RMB.

And for countries that might not necessarily want to transact in RMB, China's kind of using gold to say, take our dollars and if you ever want to exchange them for gold, we've got a big gold reserve. So it tells you that gold is a valuable commodity.

I also think it tells you with Bitcoin and gold moving up and it ties back to like US deficits that that we talked about earlier where, you know, the US dollar is going to have to fall relative to commodities and other things if the US doesn't correct its deficit spending.

And I think gold is almost a reserve currency. I think Bitcoin is almost like digital gold. And so I think the moves in those currencies is people wanting a store of value and something that won't be diluted by closet inflation, which is triggered by massive budget deficits.

Tom Stelzer

So getting back to your Concentrated Global Equity fund, you have three style buckets that you use with that funds. Can you just tell us a bit about how that you know influences your approach to strategy?

Peter Bates

So I am a core manager and my primary benchmark is a core benchmark.

But rather than just own a bunch of stocks that fit a core or steady growth definition, I really like to own, as you refer to, three buckets because it allows you to own the best of the market to drive the most alpha for investors.

I'll start with that steady growth bucket where often these companies are unglamorous. It's never your best stock, it's never your worst stock. But if you can own good businesses that grow earnings at 10 or 12 annually, pay a couple dividend and consistently execute, all of a sudden in five years it's a double. And if they can continue to do it again, it's a double again. That means it's a quadruple and that bucket will beat the market. I don't like to just focus there because obviously there are extreme winners and a more aggressive growth bucket. I like to label that disruptive growth and I think NVIDIA is a perfect example of the value that can be created by purchasing, you know, aggressive growth companies, but while they're still early in the S curve Inflexion and then the last bucket would be more of a value or turn around bucket. And I think there are solid examples and, and maybe the one that comes to mind is General Electric, that General Electric was kind of a forgotten stock in a forgotten company with awesome technology because they are the market leader in aviation engines. And you had a management change several years ago and the new management has created tremendous value and GE has been one of the best stocks in the market the last three or four years.

Tom Stelzer

You're looking a bit more longer term. What are the sectors and themes that you think will produce the big winners in the next, say, 5 to 10 years?

Peter Bates

Wow, that's that's a long time.

I tend to think of things in two to three year forward buckets, but I always, you know, have a longer term view in mind. And it's like, why not own something that I really like it for the next two years. But there is a long-term theme here that means we could own it for the next two years, in the next two years, in the next two years.
And so I'm going to share. It's funny when you, you mentioned that like 3 things come to mind and because these are longer term, you're asking for longer term things. I'm going to share 2 growth stocks and, and one value stock.

The growth stocks 1 is a company called Sartorius. They make really all the equipment you need to manufacture biopharmaceuticals. And I'm not a scientist and I'm only reiterating what I've learned from our analysts. And this is way dumbed down, but biopharmaceuticals are, are almost grown and cultured like you would beer or cheese, where it's a fluid in a vac, it's got to be temperature controlled and like humidity controlled. And there's various pumps and filtration equipment involved. And you insert an enzyme to create a reaction and then you're monitoring the reaction. And at the end, you're filtering things down to the usable substance.

They're much more complicated to make than small molecule drugs, which are more kind of chemistry based. But they're more effective and they can be more targeted to specific types of people with specific gene types and whatnot.

And so when you look at where Healthcare is going in terms of treatments and how much money is spent on these biopharmaceuticals today versus how many biopharmaceuticals are launching through phase two and phase three trials. Basically the industry is shifting from 75%, you know kind of small molecule chemistry type pills and only 25% biopharmaceuticals today to the inverse because 75% of what is going through phase two and phase three trials is biopharmaceuticals.

And Sartorius is one of four or five companies globally that makes this equipment and they are as close to a pureplay as exists. And the market cap, I think is too small for its role in this growth industry.

So that's one. A second name that comes to mind is a relatively new addition and it's Cyber Ark. It's a cybersecurity company. Sadly, cybersecurity is a growth industry because you have lots of people trying to do bad things and hack networks. And I think Cyber Ark is unique because they focus on personnel access management and it basically becomes a very complicated problem to solve if companies are monitoring, OK, Tom's an employee, he should be in our network. But Tom shouldn't be allowed to do anything he wants in our network because you basically have the hackers or the, you know, the bad guys creating fake people to replicate Tom.

And so it's almost like you have fake Tom's being created and penetrating networks. So it becomes very important to monitor who's doing what in the network and who has authority to do what in the network. And it also ties to physical access points that Tom is accessing the network through a physical point that we're not aware of. That's a red flag.

So it's a very complicated web, but this company has a pretty good solution. And I think it's a growth industry and it's certainly not cheap, but I think it's a big addressable market that is that is growing for years to come.

The last stock is Steel Dynamics, which is definitely more of a value stock. But really with tariffs and the way kind of things are changing around globalisation that I think it could have a great 5 to 10 year run as there is reshoring in America and America is short steel. If we consume roughly 100 million tonnes, we only make 80 million tonnes. We do import steel largely from Canada and Mexico, but with tariffs you kind of protect that those imports aren't going to be dumped specifically coming from Asia, because over the years steel has been kind of dumped into America. And what that does is just kind of raise the floor price for steel. And steel's an important commodity.

Steel Dynamics has a system for making new steel out of recycled steel. And so they've kind of turned a highly volatile fixed cost business into a more stable spread business where they're buying raw material inputs that fluctuate with the price of steel, but they're doing it in a cost efficient way to capture the spread that exists between recycled steel and new steel.

And I think it's a very well managed company. And if we do in fact get more CapEx and infrastructure, fixed asset investment into America, Steel Dynamics as well as other steel companies are going to benefit significantly.

Tom Stelzer

That's all we have time for. Thanks for joining us today, Peter.

Peter Bates

Great. Thank you, Tom.

Tom Stelzer

Thanks for tuning in.

If you want more great market insights, be sure to check out the Live Wire YouTube channel.

Cheers.