––––Contents of the video––––

00:00 Welcome and Introduction

02:42 Macroeconomic and Market Updates

09:22 Tariffs and Inflation

14:18 Three Legs of the Stool: Valuation, Leading Indicators, Sentiment

27:38 Themes on the Market

53:05 Conclusions

54:44 Q&A

Transcript:

Mark Wambolt (00:04): Good afternoon. We thank you all for joining us. Welcome to Eventides Q1 2025 quarterly call and what good timing. I know the beginning of the year is always an interesting time to reassess everything, and this is a particularly interesting one as we head into an administration change. Next week we’ll talk more about that. We do want to note that this webinar is for informational purposes only. And on this next slide, some of you investors have been with us from the very beginning. We’re so grateful for it and for many of you, this will be your first time joining us. So welcome to subscribe to Eventide Updates. Please go to eventideinvestments.com where you can subscribe to all of our regular updates.

(02:02) So I just want to encourage everybody, if you go to eventideinvestments.com/cioupdate, you can access all of these slides. And finally, with that, it is my pleasure to hand it off to Dr. Finny Kuruvilla, our Co-CIO and Founding Member at Eventide who has the opportunity to give everybody his quarterly update on the three legs of the stool as well as a very interesting look at some changes we’re looking at on the horizon in regards to major themes and policies with the incoming administration and how that might play out at the economic level and from a portfolio level. So with that, I’m happy to hand it over to you, Finny.

Finny Kuruvilla (02:39): Hey, thanks a lot Mark and happy new year to everyone. It’s really great to have you join us on the call this afternoon. So I’m going to begin by just giving some high level macro updates. As Mark just shared, the focus is going to be on the year as a whole on 2025 as a whole and how we can be positioning our portfolios in the light of the new administration that will be inaugurated just next week. Pretty much all of us know that the S&P 500 has had strong returns. It had more than a 20 plus percent year in 2024. However, there was a recent correction in December and even this year it has been somewhat of a halting market. Why is that what’s going on? One of the things that I did in my last call back in October was I showed you from the betting markets as well as the stock market that even by October the market was telling us who the winner of the election was going to be.

(03:41) And I told you back then that the market said that Trump was going to be the victor and indeed the markets were correct while this was going on, as it was figuring out that Trump was going to be the incoming president. You can see that inflation expectations rose, and that is because there is a widely held view that because of Trump’s tariffs that inflation will go higher. And so you can see inflation expectations. This is a five year break even moved from 1.9% annually to around two point half percent annually. So a 60 basis point increase in inflation expectations as the markets prepared for Trump as the new president. This is why the 10 year yield has been moving higher over the last quarter. You can see it had a very strong move to the upside and in fact it was quite a bit stronger than most people suggested here.

(04:39) So this kind of upward move almost back up to five, not quite up to five, was partly a result of anticipating higher inflation. And also some concerns about the deficit widening even further as Trump promised a lot of tax cuts, for example, for tips for overtime workers, etc. And people said, well, wait a minute, can the deficit really be sustained here and thus maybe we need to bid up the 10 year yield. And so what you can see here is December’s losses were not evenly distributed. You can see that the S&P lost a little bit more than 2%, however, the equal weighted lost a lot more large cap value lost more. And the Russell 2000, which represents small caps, lost almost 10%, 8.3%. So a very significant loss there. And we saw really a resumption of large cap growth doing well, some of that early leadership that we experienced in 2024.

(05:42) So this was the market basically saying, oh, if we’re going to go back to that high inflation scary environment, let’s go back to the comfort food if you will, which happens to be the Mag 7 and some of these large cap growth companies. So putting it all together, the market started to see Trump as winning the election back in September, the decisive victory temporarily sent the market off to the races, especially small caps and a lot of asset pockets that were underperforming in 2024. But then fears about tariffs moved inflation expectations higher, which then moved the 10 year yield higher. And you can think about the yield as basically a combination of inflation expectations and growth expectations. And then when the 10 year yield moved higher, the stock market moved lower. The yield and the market were in a sense enemies. And so the question is how should we be positioned given Trump’s policies?

(06:42) We’ve got four years now ahead of us of an individual who we know has an America first set of policies that he wants to lay out. And because he was president before, we have at least a rough idea of some of the expectations that we ought to have going into the next four years. So we’re going to be exploring that in this call. The good news is that CPI inflation, the consumer price index has been coming down, although it’s not coming down as quickly as it rose. You can see here the darker line is headline CPI, the yellow line is core CPI core is at 3.2 CPI is at 2.9. They are coming down, but there is some stickiness there. What is that stickiness? Why is it not coming down quite as fast? Well, we can look at that. This is the same curve, but now you can just see the breakdown of all the various components in inflation.

(07:35) I’m not going to spend a lot of time on this. I’ve done that in previous calls, but what you can see is those blue bars are the ones that aren’t moving down and that’s the services component of inflation. And the big piece in that that is sticky is housing. And again, we’ve talked about this quite a bit in previous calls. So there’s this lingering issue that we have of how to resolve the high price of housing, which is exacerbated now by the higher interest rates as a result of the higher inflation and the stronger than expected economy, the market is now predicting only one or two cuts from the fed in 2025. You can see that here by looking at the axis on the right, this is how many cuts the market is predicting and then you can see here by what date. And so you can see by year end 2025, the market is anticipating somewhere between one and two cuts and you can see what the interest rate would be in that event and then really cuts not again until 2026.

(08:43) Now I will caution you here, the market has been generally dead wrong with its ability to predict how the Fed is going to be cutting the pace and the timing. We have learned over the years that this is not an easy thing to predict and thus I am not putting a lot of stock in this. It would not surprise me at all if there were no cuts or even potentially a rate hike. If the economy continues to strengthen, we just don’t know. So because of the volatility of these predictions and because even the Fed is reacting and is very data dependent, we just don’t know. And so we don’t want to bank a lot on whatever the Fed is going to be doing on a particular date. What we do want to be much more careful about and much more disciplined about is thinking about tariffs and inflation because I told you before the story of the market over the last couple of months has been now that Trump has won, he’s going to increase tariffs, which is going to increase inflation, thus the 10 year yield goes higher and thus the stock market goes lower.

(09:47) So we do need to have a data driven disciplined approach to understand this question, how are we going to do this? And I want to stress how important it’s to be data-driven. There are a lot of people on both extremes. There are some people who just adore Trump and can’t really see any flaws. There are other people who have so-called Trump derangement syndrome and think he’s this very evil person who’s going to destroy democracy. We’re investors here. We want to be rational. We don’t want to fall into emotional extremes. We want to be those who can soundly use data to help us make good decisions. What I want to do is I want to use as a setup to think about this question in a disciplined way. I want to look at some examples of goods and how under trump’s previous term, how things changed with respect to imports.

(10:42) Okay, and I want to focus on vacuum cleaners. I know it’s a little bit odd, but it’s a good example here. So if you look at vacuum cleaners, you can see when Trump started his administration back in 2017 when he was inaugurated vacuum cleaners, we were importing about 95% of our vacuum cleaners from China. Well now you jump forward to 2024 and it’s about the same. Nothing has really changed there and it’s for good reason because if you look on the right hand graph here at vacuum cleaners and you say, what percent of global vacuum cleaners does China make? You can see it is enormous. You can see that China makes almost 90% of vacuum cleaners in the world. And look at number two, the number two country makes a pittance in terms of percent vacuum cleaners in the world. So what does this tell you?

(11:34) This should tell you here that to just slap on a bunch of tariffs onto vacuum cleaners doesn’t make a lot of sense because where else are we going to get these vacuum cleaners from that would just increase the price without being able to alternatively source. If we were to try to build vacuum cleaner plants in America, of course that would take many years. And so this is the kind of thing that Trump knows and he is much more skilled than I think a lot of people give him credit for. He understands this dynamic and understands that there are certain categories where it just doesn’t make sense to slap on tariffs because that will unnecessarily put inflation on and he doesn’t want to be the guy who has a legacy of high inflation. So we can do this in a careful way. And the other thing that we ought to be doing is building models here.

(12:26) And so this is a model from one of the sell side firms that did a really good job of saying, okay, let’s look at the different categories here. And we’re not going to spend a lot of time on this, but let’s look at the different categories. Let’s look at the different countries, China, Mexico, EU, globally, and let’s think carefully about the types of goods that we import, where tariffs are currently, what they could potentially go to and then legal authority to do so. And again, we’re not going to go through this in a lot of detail here. There are certain things that we learned from his previous administration. So for example, level four goods from China. So this would be things like iPhones had no tariff imposed on them. He recognizes that people don’t want to have to pay a markup on their iPhones. However, when you talk about things like steal, that’s in a lower list and that is exactly the type of thing that Trump would want to put tariffs on.

(13:25) So what you can do is in a discipline manner, take these lists, you can find them online from the CBP, and you can do lots of good work here. And I’ve put a lot of time into this myself. And the conclusion that you will come to, I think if you use reasonable modeling assumptions there is that under a base case scenario, inflation might go up somewhere around 50 basis points or so. And that is, if you remember roughly what the bond market was telling us, it went up about 60 basis points. So we can get good conversions from looking at what the bond market has said and then looking from a bottom up manner at looking specifically country by country at groups of lists and say, you know what? 50 basis points is a reasonable idea. It might be more, might be less, but that’s a good base case here.

(14:16) Not catastrophic, not something that is something that we cannot deal with. So given that what I want to do is now move into the three legs of the stool, and then I’m going to transition to talking about some themes. So for those who are new to our call here, the three legs of the stool are an approach that we’ve used for many years to help us interpret and position our portfolios in order to do well in the current macro environment. So the three legs of the stool, as you can see are leading indicators, valuation and sentiment. So I’m going to walk through each of them one by one and then make conclusions. Let’s start with sentiment. This is the sentiment indicator that we use consistently. This is just a poll of the sell side asking what percent should their clients be allocating into equities? And it’s a contrarian indicator.

(15:10) So when the sell side is saying to put a lot of money into equities, you actually get worse forward returns and then vice versa when they’re saying to get out, that’s actually when you should be buying for all the obvious reasons there that Warren Buffet’s famous saying that, be greedy when the market’s fearful and be fearful when the market’s greedy. What you can see is when you look now at sentiment from the sell side, it’s still in this neutral range, but it is getting close to over bullish. So the red line is plus one standard deviation above the rolling average. And we’re not quite there yet, but we’re getting close. And this is another reason why there was I believe a selloff that happened in December is that people just got very exuberant and got ahead of themselves. And whenever you see a lot of exuberance, it’s a setup for a pullback.

(15:58) So in some ways it’s not surprising or unexpected that we saw the degree of pullback that we did back in December and even into early January because of this, we’re going to still score sentiment as neutral. It’s still in that neutral zone, but I would say skewed towards the negative direction, skewed towards being over bolus, which is not good for the markets, it’s actually bearish for the markets. So neutral with a negative bias there. Let’s now look at valuation. This is looking at the S&P 500’s valuation and it’s looking at the S&P according to a wide variety of very time tested valuation metrics. You can see those on the left. So you can see things like here, trailing PDE and forward PDE and schiller’s PDE. You can see where we are currently. We can also see the historic average and whether or not we’re above or below that average.

(16:55) And it’s very easy to tell that we are well above the averages there. So this is not the most encouraging slide unfortunately, we just have to say the S&P looks expensive. In fact, it’s in the upper decile in terms of percentiles. When we look at historic valuation patterns, we can also ask how does it compare relative to fixed income? And the equity risk premium is the preferred way to do that. There’s a couple of ways of looking at that. By one measure, stocks look a little bit expensive relative to bonds, and by calculating the ERP in a different way, they actually still look relatively reasonable. It’s a bit mixed there. The total though is that when we look at the S&P 500 as a whole, it’s not a particularly attractive picture. These are the definitions of those terms that I mentioned before.

(17:51) When we look at small caps, however. So we want to have a good healthy view of the whole picture of the market and do a very similar exercise. In fact, the identical exercise, looking at a variety of metrics here where we are currently in the average. So you can see here trailing PDE is within 2% of the historic average for PDEs within 3%. So you could say maybe a little bit overvalued, but certainly not in that nosebleed section that the S&P 500 happens to be in right now. And you can also look at this when you just simply look at the PDs of large cap compared to small cap. So when this number is high, it means that small versus large, that small is more expensive. When it’s low here it means that small is cheap relative to large. And so here we are at very on a relative basis, we are at very cheap levels here.

(18:44) We haven’t seen this since the late nineties. So small caps are cheap relative to large. And then we can ask the question, so what does that mean? And there’s a great exercise that I think is just something everybody should understand, which is you can simply take the PDE ratio and then ask for a given PDE ratio over the next 10 years, what were the annualized returns of this particular asset class? So if we look here at the Russell 2000 at these small cap companies and you plot the PDE and say, okay, or here for example, when the PDE ratio was looks like around eight, what were the next 10 year returns going to be annualized? You can see almost 18%. And then on and on it goes. You can see here when the Russell has a very high PE, close to 20, it’s much lower returns and you can then fit a line to that and it’s actually a pretty good fit for our industry at least it’s a pretty good fit.

(19:41) And you can then ask the question right now based on where PDE ratios are, what’s the predicted next 10 year annualized returns? And the answer is 9%. If you were to do this exercise with the S&P 500, the prediction is 1% annualized. So that again, fits what I said before, that small relative to large looks comparatively attractive. So when we think about summing up our valuation leg of the stool, we want to say again, it’s mixed, large, does look expensive. I think there are pockets that are interesting, particularly when we think about equal weight and some different areas there. But on the whole index as a whole does look rich. Small looks more like where it’s run historically and thus comparatively attractive. Okay, now let’s look at the leading indicators. This is the most famous of the leading indicators. This is from the conference board.

(20:35) It’s published every month and you can see it is still on a decline. So this has been now basically a three year decline of the LEI or the leading economic indicator. And this is one of the reasons why a lot of people forecasted a recession would be imminent. If you’ve been on our calls for some time, you know that we did not make that call. And the argument that I gave was that there were too many distortions from COVID that we just couldn’t say this was anything like typical. And I felt that it was not prudent to bank on a recession, particularly given there were other crosscurrents. It seemed much more bullish. And in fact, I think the best explanation was what, according to the term, ed Ardini uses a rolling recession that this was showing weaknesses, but not across the whole of the US economy.

(21:26) And these rolling recessions have hit different segments from time to time. Now, this is where it gets really interesting when we think about leading indicators, we want to look at estimates of future earnings and what’s going to happen when we look at small compared to mid compared to large. And the first thing that we observe here is when we look particularly in 2023, look at how earnings got hit on small cap side. I mean this is a huge downdraft here. 20% hit in earnings. This is the kind of thing that the LEI was predicting. You can see, mid did better and large did a lot better. And so through this period here when the LEI was declining large in general, held up much better, which is one of the reasons why large cap has outperformed small. However, when you look now here we are in one Q1 2025, something is at least predicted to be shifting, which as you can see that the prediction is that small caps will have a rebound in earnings.

(22:26) And you can see how profound that is where these estimates signal more than a 20% gain in earnings in small caps. So again, this is constructive for at least that side of the US economy. One of the reasons that we were also more bullish than the consensus was a variety of ways to estimate what would happen with GDP. And frankly, GDP has just been a monster. It has been much stronger than people have thought it has been just bulldozing ahead despite all of the bearishness. You can see here what is real GDP, here’s inflation. And then when you add real plus inflation, that gives you nominal GDP and you can see how incredibly strong inflation has been. The dotted line separates estimates from actual, and now we’re still looking, even though it’s on the decline, we’re still looking at what looks to be a pretty strong GDP when we’re talking about real GDP of two to 3%.

(23:33) That’s certainly quite compelling. The consensus is closer to two than three, but this is one of the reasons why we can feel relatively good about the economy here. One of the reasons why GDP has held up is because of real wages. Okay, so real wages means you take the money that people get in their paychecks and then you subtract away the inflation component and you say, okay, how are they doing? Is inflation eating away at their wages? And what you can see is if you go back into 2023, in fact real wages were negative, that wages weren’t keeping up with inflation. However, that inflected higher and now real wages are positive. And when people have positive real wages, that is good for the consumer because however much inflation there is, it’s not eating away their paycheck. Now of course there are different aspects of the economy, particularly lower wages where they’re not doing quite as well.

(24:35) But this is looking at aggregate statistics here because these aggregate statistics are so strong and because the US is driven roughly 70% of the economy by the consumer, this is overall bullish. I want to make sure that we have a balanced perspective and as we consider the S&P 500, we remember both upside as well as downside risks. I think so much of being a skilled investor is being able to say both sides like you mean it, and really not being dismissive of either position. It’s when one is overconfident on either side, that one can get into trouble. There is upside on the S&P with greater M&A. I’m going to talk about that on a later slide. Certainly lower inflation. We saw this on Wednesday on just yesterday when the CPI numbers came out better than expected and the S&P rallied quite nicely.

(25:32) Deregulation, this is one of the promises that Trump has made that is certainly a positive for the S&P 500 tax cuts potentially. I’ll give a caveat on this. And then animal spirits, certainly this is something that I’ll talk about later as well, that has been lacking. There has been a lot of pessimism, and if we can truly get those animal spirits ignited, then that would be positive for the markets. On the downside, policy uncertainty, there are a number of questions, for example, about what exactly will the tariffs be? What’s his geopolitical stance going to be with respect to Russia? We don’t really know. We have some ideas there, but we’re not completely sure what’s exactly going to be his policy on deportations. We don’t know. So there is some uncertainty there. I think there’s actually more clarity than people think, but there is still uncertainty.

(26:25) Higher inflation. This could be if the economy does better than expected or if for whatever reason inflation is just stickier, say that service component really can’t be dealt with, then there’s fewer fed cuts. The market doesn’t like that a higher 10 year yield right now, as I said, there’s this battle going on where the bond market is really opposed seemingly to the stock market. And when that yield goes higher, the stock market sells off, tax cuts could potentially hurt the deficit. And there are a group of people who are called the bond vigilantes. And so the vigilantes are those who, this is a term from the 1990s who complain about high deficits and basically take the policy that if deficits get too high, they’re going to sell off their bonds, which then drives up the yield and then that could potentially hurt the 10 year yield, which then hurts the market.

(27:22) And then I’m talking about this before of course, market valuation. When we look at the S&P 500, it looks historically rich. So I think these are a lot of the, not all, but these are a lot of the upside and downside risks. If I could put another one on there, I would say geopolitics is another risk mostly to the downside, but certainly something to watch. Okay, what I want to do over the next 20 to 25 minutes now is offer to you 10 themes on the market. So here we are again, right at the precipice of President elect Trump’s inauguration next week. And I want to offer to you 10 themes on the market that we’re collectively excited about and that we are investing in our various portfolios here at Eventide and invite you to consider these and to think about them as you position your own portfolios, not just for the next year, but really over the next four years.

(28:17) Okay, theme number one is US dominance. One thing that we forget this, I think we forget this too quickly, is how well the US market has done compared to other markets. I think this is just astonishing. So if we go back and look from March, 2009, which was lot of you remember that moment, this was the depths of the great financial crisis, the GFC, and asked the question, how did the US perform with respect to just the market? And you can see 17% annualized returns. Wow, that is amazing. Next is India at 13% good demographics. That’s certainly a strength that India has non-US developed. Markets not so good here. Stepping down euro at 9% emerging markets here at eight, and then China only at 7% annualized returns. So the US market has had just a spectacular run since March of oh nine.

(29:21) I think this is an impressive chart here. US GDP is by far the highest in the world. I mean, look at the gap between the us, China, and here. When we look at European countries, I mean it is just very, very wide gap. This has made even more impressive when you look at per capita GDP. So the Latin word for head is cap. And so per capita means per person. So we take the US GDP and divide it by the population of America. You can see here how the US fares and quite a bit ahead of European countries. And then when you look at China and India, despite their high total GDP, the GDP per person is much, much lower than it is in the United States.

(30:08) The US labor force is the most productive labor force in the world. So when you look at how with all of the technology and infrastructure and talents that we have here, the US is such an impressive place. When you think about productivity, our higher education institutions are also the best in the world. So this is from a ranking from an organization that looks globally and asks the questions, what are the 10 best universities in the world? And you can see they have Oxford, MIT, Harvard, Princeton, university of Cambridge, Stanford, Caltech, Berkeley, Imperial College, London and Yale. Seven out of the top 10 in the world are in the us. We forget how valuable these institutions are. A lot of it because of their research that comes out of those institutions. When I was a student, I didn’t really appreciate how much, especially the institutions on the screen are basically research institutions with the school attached to them. These are multi-billion dollar institutions in terms of research firepower. And the quality of the innovation is absolutely breathtaking. US R&D spend is also the highest in the world. And this just widens the moat every year. You can look at the US compared to China, which is number two than Japan, Germany, and again, look at how much stronger the US spend is with R&D.

(31:40) This is an interesting one. How many tech companies have a profit of more than a billion dollars? So look at this gap here between the United States and other countries. I mean there’s nowhere else that’s even close to having these kinds of large technology companies. And of course these are our ecosystems that are self-reinforcing, that are positive feedback loops that attract more and more talent. Another fascinating graph. So look at this. This is looking at the plot of GDP, and then you can see of course there’s this big dip that happens in the middle. This was Covid, right? So we took a hit there. There’s only one economy that has come back, one major economy that has come back to its trend line, and that is the United States. Look at how other countries got knocked off of their growth from Covid and never have gotten back. Yet even here we are now in 2025. There’s a lot of reasons for this, but we don’t appreciate the dynamism that exists in the us.

(32:45) You can start a new business, you can fire employees. I’ve spent quite a bit of time in India. I was in India twice over the last year and I was talking to somebody there and says, if we fire employees, we’re going to get sued. And it’s so difficult. The government is just all over us. It’s just very, very difficult to let go of underperforming employees. We take it for granted how in the United States we have this ability to dynamically position our businesses because the bureaucracy is much less here and it’s much more expected. That is not the case in many other countries in the world. So for a host of reasons, the US is back on track and look at the contrast here between the United States and these other countries like China and others. I also want to point out that a lot of people are like, oh, the s and p’s at all time highs or just recently at all time highs.

(33:32) What’s going to happen? Okay, so this is just an average and there’s certainly plenty of examples, but you can see here that roughly 75% of the time when the market has an all time high in a year, it follows through and has pretty good returns, 11 to 12% the following year. And if there’s no recession, it’s even higher. So okay, I also have given the caveats about valuation, et cetera, but we want to remember that just because things are hitting all time highs doesn’t mean that that’s a sell signal. All that I looked at before means that we can align this and say, let’s see what people are saying. This is just the consensus from all the strategists that are out there. So there’s a lot of smart people at JP Morgan and Merrill Lynch and Goldman Sachs and places like that, and they come together and they make their estimates on the S&P, and you can see that their average is 6,500.

(34:34) So they’re forecasting about a 12% gain on the S&P in 2025. Here’s the number of strategists here, and here’s the earnings estimates. This is very difficult. I know a lot of people like to poke fun at this exercise because it’s not easy to do, but on the whole’s value in this and this kind of rough gain of 12% is in line with the previous chart that I showed you. So when we think about this theme, the US is just the place to invest, and it is not a surprise to me that the US has done as well as it has, and for this reason, we continue to favor the US over other countries. Theme number two, artificial intelligence impact broadening. Okay, this is a great framework. I covered this in a previous call that I did, but I want to repeat it because I just think this is incredibly helpful.

(35:24) So this is from Ryan Hammond who says phase one of AI was just the attention on Nvidia, this chipmaker that got a lot of people excited. Phase two, which we saw a lot of last year was the excitement broadening and going out into utilities and data center equipment. Phase three, which I would make the case we’re entering into that now is enabled revenue. So it’s companies with business models that can incorporate AI into their products to boost revenues. And then finally, phase four is productivity gains broadly. So lots of industries that it can improve their efficiencies, costs and service. This is also happening. So phase three and four are not sequential, they’re interlinked here. And I want to make sure that everybody knows this term here. It’s a term that is used within technology a lot. The term is hyperscaler. And so basically the hyperscalers are these large tech companies that operate these huge farms, these huge data centers that drive industry growth with cloud computing.

(36:28) And so if you’re starting a business and you’ve got a thousand visitors to your website a day, and then you’re going to hopefully scale to 10 million visitors a day, are you going to buy a bunch of computer servers and put them in a room in your office? No. The way you do it today is you outsource that to these hyperscalers. And so the big hyperscalers include Amazon’s AWS, that’s Amazon Web Services, Azure by Microsoft, Google Cloud, IBM Cloud, Oracle Cloud. These are massive organizations and they are investing heavily in their data centers as well as in ai. So this is work that we have done internally. An analyst here in the firm has done this where he took just what some of these large companies are saying in terms of how much they’re telling Wall Street, they’re going to be spending on CapEx with these data centers.

(37:21) And you can see how huge, these are hundreds of billions of dollars when you add up companies like Microsoft and Google, etc. here. So they’re telling us, they’re saying they’re going to be spending massive amounts here. Now, I know a lot of you’re going to say, wait a minute, this looks like a bubble. How are they spending all this money and is this all going to go anywhere, et cetera? Well, when you then ask the question, is this reasonable for how much the companies are making? And the way you can estimate that is just by saying what percent of their CapEx is this? When you look at percent CapEx divided by revenue and you can see it’s actually flat. So they’re actually basically saying, we’re just going to keep investing at a constant pace. So this is not an unsustainable amount of investments that we’re talking about.

(38:07) What this means is that we’re going to have hundreds of billions of dollars that are pouring into the whole realm of AI and data centers. That is going to be a huge frontier for many different capacities. And by that I mean phase two, phase three, phase four, phase one as well. It certainly benefits Nvidia. Now I told you about these baskets. Phase one was nvidia, phase two was the infrastructure. Phase three is the companies that can directly use AI and phase four as general productivity, and you can actually make baskets of companies and say, how are they doing compared to the S&P 500? And what you can see here is that indeed infrastructure, which is phase two, has done pretty well. Phase three is really starting to tick up even more. Phase four hasn’t quite got going yet, the general productivity yet to some degree it has.

(39:03) But what we are trying to do at Eventide, and I think this is an important theme, is to say we don’t want to take some kind of really high binary bet on one specific niche component on one specific architecture there where maybe you can make a lot of money, but it’s man, it’s a very risky business. We would rather invest in a more sustainable way into broader baskets of high quality companies that will do well as AI generally does well, and we feel very, very good about our positioning there. Theme three, power demand is inflecting. So this is looking at data center demand. So I just told you there’s all this investment that’s happening into data centers. And look at this, this chart here from 2023 going out to 2030, you can see a base case and a conservative case. This is from McKinsey, a well-known consulting firm.

(39:56) They’re saying their base case is four and a half times greater power. Their conservative case is three and a half times. I mean, that’s just staggering to think about how much power these data centers will be consuming. And so you say, okay, well how does that fare relative to total US power? Well, we’ve been basically flat for a while, so we’ve been growing our power by around 0.1% PAs per annum per year. But you can see largely because this magenta color here is data centers that is going to be inflecting higher, taking up the power demand on the grid. I’ll also note transportation. Think about EVs. Those are going to be an increasing source of load on the grid, and so we’re going to have a significant growth in power here, and we believe that careful modeling and building DCFS has found plenty of good opportunities even here.

(40:59) Number four, grid modernization. Okay, so now there’s data center investments. There’s a need for more powers that’s going to help utilities. Well, how are they going to get the power from point A to point B? The answer is to the grid. Our grid is unfortunately quite old and needs a lot of modernization. This is from a company that believes, and I think this is roughly in line with consensus, that there will need to be a rough doubling in investment year over year in order to get to where we need to do to support all of this grid investments and electrifying things. And this happens at so many levels. This happens at the level of transmissions. You think about the transmission that happens outside and even in garages. I mean there’s now as people have more EVs airports, I mean, what’s it like when you go to an airport and you can’t find some ways to plug your devices?

(41:48) I mean, there are so many ways in which electrification is penetrating so many places that it hasn’t before. Theme five, deregulation with higher oil and gas volume. So Trump very famously, he’s very well known to be an avid advocate of deregulating in order to unlock the natural resources that are found in the United States. And this is supported by Scott Cent who is in fact today beginning his proceedings here. As we think about him being deliberated, he will almost certainly go through and become the Secretary of the Treasury and he has a very interesting policy. It’s called the three three policy where he is hoping for 3% GDP growth. Okay, that’s a lofty expectation. Consensus is more like 2%. We’ll see, he wants the deficit to be 3% of GDP. This is a great way to measure the deficit is basically to say, when the US is having to pay back all this debt, we want to ask the question, what percent is the deficit running over?

(43:04) The denominator is our GDP and his goal is to have it be 3%. Right now it’s around six and a half percent of GDP. Personally, I think this is going to be not well impossible to accomplish. Of course, Elon Musk and Vivek Ram Swami are head of the so-called Doge department, department of government efficiency to take the deficit roughly half of where it is right now in terms of percent GDP, without touching entitlement spending, which at least thus far they’ve said they don’t want to do. To me seems very difficult. So we’ll see how this goes. And then increasing US oil output by 3 million barrels per day. That’s a lot. The US is already in the number one producer in the world of oil, but to ramp it up by 3 million barrels would be something that is very impressive. But this is the agenda that Trump invested have, but there are the resources in the US to do something like this.

(44:01) When you look at production in the Permian Basin, so this is a large area in the western part of Texas, and you can see how production has gone in terms of gas and oil and how powerfully this has grown over the last few years. And so we are blessed with tremendous natural, natural resources here, and this is a goal of Trump. Number six, manufacturing recovery. So manufacturing has been hit pretty hard as that leading economic indicator has gone down. Manufacturing has its own flagship indicator, which is called the ISM, the Institute for Supply Management. And what they do is one of their surveys is called the PMI, the purchasing Manager index. They go around and they poll companies and they say, okay, is your spending going to be higher, lower, or the same as it was the month before? 50 is the neutral point where you’re keeping the same.

(45:00) Less than 50 is you’re spending less above 50 more. And you can see we have been less than 50 for a couple of years now, and a lot of us are like, oh, it’s going to go up. It’s going to go up. And it hasn’t gone up. It’s just been stuck in the mud here. I wish we could talk more about this. There’s a lot I would love to say on this. In the interest of time, I’ll just say that there are good indicators that this can turn around, and one of them is that small business optimism has just rocketed post the election. Small businesses seem to be unlocking some of those animal spirits here. There’s other indicators as well that point to a potential resumption in manufacturing growth. Theme number seven, the rise of automation and robotics. Okay, robots are not sci-fi. They are being used today in lots of applications.

(45:53) There are plenty of places all over the world where you will see humans and robots side by side working to accomplish different tasks. Here’s a photograph of such an example, and you might say, oh, this is like some really extreme high-end place. In fact, robot installations for the last three years in a row have exceeded half a million per year, and they’re getting more and more sophisticated. A lot of investments are happening here in machine vision in how these robots are able to operate. This is going to be a really interesting growth area and can enhance the ability of next gen manufacturing to occur. I will point out this has a lot of implications for the labor force. Maybe we can get to this in the Q&A if we have time. It has implications for many different slices. So people immediately think of factory workers and their jobs are at risk.

(46:49) And to a degree that is the case. I will also point out that the wave that we are in has actually made it difficult for the graduates from top schools, top MBA programs. So you can see Harvard, MIT, Stanford, you can see how many of them are unemployed three months after graduating. 20, 25% of people are just unemployed. I would love to talk about this again if there’s time in the questions about how the economy is pivoting. It’s hitting a lot of different segments in surprising ways. Theme number eight, e-commerce continues to gain share and the strengthening of the transportation supply chain. So fascinating chart here. So this is looking at what percent of total retail is done on e-commerce via the internet. And you can see it’s basically been a very steady line of increase. And then covid happened, and of course there was a big jump higher.

(47:48) You can see how much e-commerce took off then. And then here we are now post covid. It’s resumed that growth trend. I was kind of surprised. You look at the Y axis here, and we’re not even at 20% yet, but it goes to show that there’s a lot of the world that is underpenetrated with e-commerce. It has changed my life. My wife does all of the grocery shopping, pretty much all the grocery shopping using an e-commerce online app. And this app shows you how many hours of time you have saved over the last year. And my wife has saved in the hundreds of hours. And I just think, what a deal. And we’re never going to go back to that old pushing the cart down the aisle again except for rare occasions. That’s one small example. But e-commerce is going through a steady increase with a lot of supporting technologies.

(48:37) When we think about FinTech, when we think about cross-border payments, when we think about supply chains, there’s a whole ecosystem that needs investments in order to support continued growth. Higher theme number nine, insurance in a world of natural disasters. Right now, unfortunately, there’s the terrible fires that are happening right near where I grew up in Southern California. Natural disasters have been strenuous, and you can see insured losses have exceeded a hundred billion for the fifth consecutive year in a row with climate change. And a lot of the things that are going on, this is likely to continue. So what needs to happen here? This is a fascinating way to look at this. So this is looking here at the s and p 500 and its performance compared to a few different slices of the insurance market. So PNC stands for property and casualty. And what you can see here is let’s just focus on PNC.

(49:37) Those insurance companies have underperformed the S&P 500 by quite a bit. However, the category that has done exceptionally well are the brokers, the people who match those who have insurance needs with the insurance providers and the brokers. They don’t take downside risks. They, because they’re doing the matching, they participate in the transaction and the a fee on that, but they’re not actually having to underwrite the losses themselves. And one of the things that we have seen, and again, this recent California fire is a good example, is that those losses can be devastating. And so this is a very attractive area within the overall market. And we think here at Eventide, we have a very talented analyst who we think has identified some of the best in class work here that we’re participating in and some of our funds. Okay, the final theme here is m and a normalizes in biotechnology.

(50:32) This is a topic of course of great interest to me personally as a physician. When we look at m and a across industries in general, it is well under the trend line here. So you can see how there’s this trend line and how we’re well under it. We have been in somewhat of a slump for m and a, the combination of higher interest rates with an FTC commissioner who has been hostile, generally speaking to m and a, has really thrown a wet blanket over m and a. We know from Trump’s policies and the incoming cabinet that he has appointed that this is almost certainly going to change, which is very bullish for the industry. There was a large biotech company that tried to buy a smaller one. Amgen tried to buy Horizon, and the FTC went after them, and that really did put a chill in the industry.

(51:24) This is crucial right now because large pharma is facing a massive deficit in their pipeline as we have patents that are going to expire here. I’m not going to walk through this in a lot of detail, but these are some of the largest pharmaceutical companies in the world. So Johnson and Johnson and Pfizer and Lily and Bristol Myers. And you can see how much patent expiry they’re facing over the next few years, which means what they have to do is they need to buy smaller companies in order to replenish their pipelines. And we are overdue. We are below trend here, and I think this is going to be one of the most important dynamics in the market. Biotech in general has not performed well over the last couple of years. I would say this is the value section of the market. Now, not all of biotech, but there are many pockets and many companies that are very undervalued.

(52:20) And for those who believe in value investing or devalue investing, I think this is a great area to be in and to keep that in balance with other areas that are growthier and more expensive. But I think this is a particularly interesting area where you have significant undervaluation now with a tailwinds of a favorable administration, particularly with M&A. So summarizing the biotech section, higher M&A, enhanced by the need from large pharma companies. And again, I wish we had time to go into this in more detail, but people will be living longer lives. Our treatments are going to be getting vastly better of chronic disease. And as people live longer, this actually increases in medical utilization because you consume a lot more healthcare when you’re older compared to when you’re younger. Alright, in conclusion, Trump’s victories has put tariffs and inflation in the spotlight.

(53:17) But if you carefully model tariffs under a range of scenarios, I think we can assuage concerns of hyperinflation. Trump wants to leave a positive legacy. My theory, I could be wrong here, but my theory about why he has been so interested in Greenland and Canada is he wants to leave a legacy. He wants to shape the US in a profound way. He doesn’t want the last memories of his administration to be January 6th. He wants it to be something positive, and he’s looking for wins here. He doesn’t want to be known for causing inflation. The market has been stronger than expected, sustained by real wage gains. The three legs of the macro stool suggest less gains for the mega cap companies and more gains as you move down the capitalization ladder. There are many themes, and I gave you 10 that could outperform over the next four years under Trump’s America first policies. Alright, so with that, I will give one final encouragement, which is that always remember that a balanced, long-term disciplined approach is never out of style to use those fundamentals again and again that it’s easy to forget. But this is what those of us in the industry should be reminding ourselves and being encouraged to do. So with that, I’m going to hand it over to my colleague, mark to help conclude our call here.

Mark Wambolt (54:34): Alright, thank you, Finny. Yes. So if anybody wants these slides, eventideinvestments.com/cio update, we do have dozens of questions and we are just at about time. So maybe we can run through just a few questions real quickly. Number one, you’ve been an investor for many years. Is there something in the market that you feel like the market just has it wrong right now?

Finny Kuruvilla (54:58): I would say that I still see that there is an over pessimism that has been there for the last couple of years that I think persists where because of covid, because of the GFC, because of a lot of different things, I don’t think that people can see and a number of companies and a number of asset classes, they’ve kind of lost that ability to see the upside because of how we have been traumatized in some way. And so this is why in previous years I’ve said like, Hey, consensus is for recession. Don’t necessarily believe it. There’s a lot of reasons why, and this is I think, a great opportunity where there’s a differential between market expectations and fundamentals. And so my general leaning, and it’s not across the board, is that there are very interesting opportunities for those that can have still the ability to appropriately see reality and look for upside as well.

Mark Wambolt (55:57): That’s great. Alright. In recent days, we’ve seen some interesting headlines, including that the US Surgeon General released a report on alcohol and cancer risk. How do you think about this both as a doctor and investor?

Finny Kuruvilla (56:11): Yeah. Okay. So there is a real statistically significant signal that has been observed from alcohol and cancer. I will point out that there is also another signal, which in my mind is also important, which involves the connection between alcohol and brain health. So I went to Caltech undergrad and one of the late professors was Richard Feinman who won the Nobel Prize. It was one of the most brilliant people of the 20th century. And he actually stopped drinking alcohol because when he saw the data on what it does to someone’s ability to think, he said, I can’t. I need to use my mind. And for anybody who uses your mind as a way for either your professional life or because you want to stay sharp, as you get older and older, there’s really good data there. I think there’s nothing sinful or wrong about it, but from a wisdom perspective, I think it’s good for us to be better about thinking about these risks. And I am glad that there’s more awareness that’s being put onto this because the overall morbidity that comes from alcohol is very significant. And when you look at WHO estimates and other estimates of what it does to the population as a whole, it’s a preventable cause of a lot of disease that I’m glad to see awareness around. So I’m thankful that there’s more awareness being spotlight on this issue.

Mark Wambolt (57:38): And can you speak to it as an investor?

Finny Kuruvilla (57:43): One of the things as an investor that we observed at the outset is that these companies make the vast amount of their money on a very small population. So as it turns out that Pareto principle that 80 20 is true here, where they’re 80% of their profits frankly, on the people who are the alcoholics and those who are addicted to the alcohol. And so when you think about, and I think about the person who drinks occasional glass of wine, I don’t have any problems with that. But when I think of business models that fundamentally are taking, I would say taking money away from people who are the most enslaved here, you just think, ah, do we really want to be owning that? Do we really want to be making 80% of our profits from alcoholics who really need to get out of this addiction and this bondage there? And as many of us know people who have been in bondage, there it is so sad. And to profit from that is just heartbreaking.

Mark Wambolt (58:37): Right. We’ll end with one last one. You covered 10 themes. Which of them are you most excited about as we head into this new year?

Finny Kuruvilla (58:44): Yeah. I’m a physician and I have a long history with healthcare and biotech, and so I’m the most excited about number 10. It’s not that I am not very excited about the other ones. I think there’s such dynamic possibilities and really all 10 of them. But I think that the combination of the valuations and where we’re at here with just the pessimism and the skepticism with these catalysts, I think make for a really interesting upside. And I think relating to this is, I think that now as we’re getting more and more into the substance of what it’s going to be like to deal with obesity and heart disease and diabetes, I just think the value that’s been created in the space is extraordinary. And I hope that we can all appreciate this and continue to be excited about investing in this realm.

Mark Wambolt (59:34): That’s wonderful. Well, thank you Finny, for all of your insight. That was incredible. And for all of you who’ve joined us, we are so grateful for the trust that you have placed in us. We hope that you have a wonderful year ahead and thank you very much.