Latest / Merryn Talks Money / Reasons to Put Your Money in a ‘Fragile’ Europe

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Reasons to Put Your Money in a ‘Fragile’ Europe · Merryn Talks Money

• 0:03
  Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
• 0:10
  Speaker 2: Hello, it's Maren Sumset Web Pierre. We have got another
• 0:13
  Speaker 2: great episode for you this week. Daniel Avigad, portfolio manager
• 0:16
  Speaker 2: for the European Long Only strategy at Landsdam Partners, joins
• 0:20
  Speaker 2: me to talk about his approach of making long term
• 0:22
  Speaker 2: investments in European equities. We don't talk about European equities
• 0:26
  Speaker 2: enough on this podcast, so today we are making up
• 0:28
  Speaker 2: for it. There's lots of great value out there. Stay
• 0:30
  Speaker 2: with us and we will talk about it in a minute.
• 0:33
  Speaker 2: But first, as always, senior reporter and author of the
• 0:35
  Speaker 2: Money to Show newsletter, John Steppeck is with me. John. Hello,
• 0:38
  Speaker 2: Now listen on this election stuff. It's really getting going now.
• 0:43
  Speaker 2: And if you're not worried about your personal finances and
• 0:45
  Speaker 2: your investments, now's the time start getting worried, right, And
• 0:48
  Speaker 2: if you're not worried about taxes going up, now is
• 0:51
  Speaker 2: also the time to start getting worried. Despite the fact,
• 0:52
  Speaker 2: of course, taxes have gone up so much over the
• 0:54
  Speaker 2: last decade, it's almost ridiculous. They're very probably going to
• 0:58
  Speaker 2: go up more. One of the things we keep hearing
• 1:01
  Speaker 2: is promises from each party this tax isn't going up.
• 1:03
  Speaker 2: That tax isn't going to go up. I'm not going
• 1:05
  Speaker 2: to put in compact tax. I'm not putting a be
• 1:06
  Speaker 2: an eye blah blah blah. But we know that there
• 1:09
  Speaker 2: are all sorts of stealthy things they can do that
• 1:13
  Speaker 2: a lot of people won't notice immediately. They'll only notice
• 1:15
  Speaker 2: when it begins to really hurt. And John, I know
• 1:17
  Speaker 2: you've been writing about this. Where do you think the
• 1:20
  Speaker 2: risks lie?
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  Speaker 3: Yeah, well, what I was looking at was the potential
• 1:24
  Speaker 3: taxes on savings, on pensions and iss And the thing
• 1:29
  Speaker 3: that really strikes me actually is not so much you
• 1:32
  Speaker 3: know where they're going to raise them, but the fact
• 1:35
  Speaker 3: that the tax systems now becomes so complicated that if
• 1:38
  Speaker 3: you pull on any given thread, you're going to end
• 1:40
  Speaker 3: up upsetting a big enough group of people that it
• 1:43
  Speaker 3: makes it incredibly difficult to actually do anything. So like pensions.
• 1:50
  Speaker 3: So the first thing is obviously the lifetime allowance coming back.
• 1:55
  Speaker 3: So Jeremy Hunt scrapped that earlier this year, tried to
• 2:00
  Speaker 3: scrap it on the basis that it's kind of making
• 2:04
  Speaker 3: many to his doctors retire early basically, but actually unraveling that.
• 2:09
  Speaker 2: We should interrupt briefly decay that the reason they retire
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  Speaker 2: early based on the lifetime allowance on pensions is because
• 2:15
  Speaker 2: they have very big pensions, just in case we need
• 2:17
  Speaker 2: to come back to that later, John Carroll.
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  Speaker 3: Yeah, and absolutely, I mean, this is it, you know,
• 2:21
  Speaker 3: because the pencils are so large, and it's not just doctors,
• 2:23
  Speaker 3: it's you know, things like head masters and senior police
• 2:26
  Speaker 3: and things like that as well. So you know, it's
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  Speaker 3: you're being forced into early retirement because you've got a
• 2:32
  Speaker 3: huge pension for you. And if it wasn't for the
• 2:34
  Speaker 3: fact the public sector workers, you know exactly, people would
• 2:37
  Speaker 3: be saying, oh, well, let's get the violins out. But
• 2:40
  Speaker 3: that's the reason that he did it. Unraveling that has
• 2:43
  Speaker 3: proved a nightmare in the first place, and the idea
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  Speaker 3: the labor are going to come in and reintroduce it
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  Speaker 3: is then not only creating all this confusion for you know,
• 2:54
  Speaker 3: basically everyone, but it also means that whenever you reintroduce it,
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  Speaker 3: you're going to have to put in a whole load
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  Speaker 3: of new life legislation to cover the fact that there
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  Speaker 3: was a period when people didn't have a lifetime allowance
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  Speaker 3: and they may have made decisions with that in mind,
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  Speaker 3: and then you still get the outstanding problemly, well, what
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  Speaker 3: are you going to do about the public sector workers
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  Speaker 3: for whom this was originally implemented. So I think that
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  Speaker 3: I mean Steve Webb, the ex pensions guy, who was
• 3:20
  Speaker 3: actually quite a good minister, said to the City by
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  Speaker 3: the other day that I think the only solution, realistically
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  Speaker 3: that they'll come in with is they'll just come back
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  Speaker 3: and reinstate the LTA, but they'll put it in at
• 3:34
  Speaker 3: a much higher level, and that means that it won't
• 3:37
  Speaker 3: catch the people that they don't want it to catch,
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  Speaker 3: but it also avoids most of the legislative hassle that
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  Speaker 3: they would have if they wanted to do things like
• 3:46
  Speaker 3: carving out certain jobs or that sort of thing. So
• 3:51
  Speaker 3: I thought that was interesting just because it shows that
• 3:56
  Speaker 3: regardless of how zealously and new government wants to impose
• 4:02
  Speaker 3: taxes on certain groups of people, it's actually starting to
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  Speaker 3: become extremely difficult.
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  Speaker 1: Yeah, we know.
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  Speaker 2: That pensions are somewhere that they're going to want to
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  Speaker 2: go though, because that's where the money is, right it
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  Speaker 2: seems incredibly unlikely that a new government isn't going to
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  Speaker 2: look at that vast amount of money sitting in private
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  Speaker 2: pensions and say we really want to have some of that,
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  Speaker 2: So how are they going to get it? Well, that's it.
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  Speaker 3: I mean, it's not going to be easy. I mean
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  Speaker 3: the other big point.
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  Speaker 2: How about the twenty five percent, the fact that it's
• 4:30
  Speaker 2: not actually twenty five percent anymore, it's twenty five percent
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  Speaker 2: of the previous LTA.
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  Speaker 1: How about that?
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  Speaker 2: That seems to me like an absolutely obvious place to
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  Speaker 2: go to say, actually, do you know what it used
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  Speaker 2: to be? Twenty five percent? Now it's a set amount,
• 4:43
  Speaker 2: and it's just going to go down and down and
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  Speaker 2: down and down. You're actually going to end up paying
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  Speaker 2: tax on everything year that you withdraw from your pension.
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  Speaker 3: They can start doing that.
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  Speaker 1: You know what.
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  Speaker 3: That has an impact on the defined benefit pension schemes
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  Speaker 3: as well, and that means the public sector was because
• 4:56
  Speaker 3: immediately taking the hit too. And that in ton means
• 4:59
  Speaker 3: that you're editing in the unions at a time when
• 5:02
  Speaker 3: the doctors are already on strike. I mean, I don't
• 5:06
  Speaker 3: you know, I think you're writing. I think they will
• 5:08
  Speaker 3: find start. In fact, I think probably getting ready the pensions.
• 5:12
  Speaker 3: Inheritance tax treatment is an obvious one because.
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  Speaker 2: That that is simple that is, and.
• 5:17
  Speaker 3: That only applies to define contribution people, so you're not
• 5:21
  Speaker 3: going to get the public sector aspect in it. But
• 5:24
  Speaker 3: that's what I mean. The public sector thing is also
• 5:26
  Speaker 3: the problem with because I mean, remember what when George
• 5:29
  Speaker 3: Osborne was still chancellor, in fact before Bresit it was
• 5:34
  Speaker 3: there was they were almost certain that he was going
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  Speaker 3: to get ready taxually on higher rate pensions because obviously
• 5:43
  Speaker 3: it's quite expensive and you could raise quite a lot
• 5:45
  Speaker 3: of money from that, and it never actually ended up harpening.
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  Speaker 4: That's interesting because a lot of people couldn't understand what
• 5:50
  Speaker 4: it didn't happen, because it seemed like an obvious thing
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  Speaker 4: to get rid of giving giving people paying higher rate tax,
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  Speaker 4: to stop giving them tax release at forty five forty
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  Speaker 4: scandard forty five per centers it would be today, and say,
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  Speaker 4: do you know what, it's not fair that you get
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  Speaker 4: at the higher rate and people paying lower rate tax
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  Speaker 4: only get twenty percent.
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  Speaker 2: Not right, So let's find a middle way. And I
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  Speaker 2: remember there was lots of conversation about how it was
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  Speaker 2: going to be thirty percent. Everyone would get effective tax
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  Speaker 2: release thirty percent, which meant that people in lower tax
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  Speaker 2: bands would get a nice little bump up to their pension,
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  Speaker 2: and people in higher tax bands.
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  Speaker 1: Would suffer a little.
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  Speaker 2: So you know, that seemed like a reasonable way through,
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  Speaker 2: and it just didn't happen.
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  Speaker 3: Yeah, And I mean there's a logic to it, and
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  Speaker 3: actually the logic to it has actually become probably even
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  Speaker 3: greater now because if you think about it, if you
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  Speaker 3: put if you flattened the tax releaf to say thirty percent,
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  Speaker 3: now everyone in the private sector has got an auto
• 6:43
  Speaker 3: rolled pension, and suddenly the auto n old pension becomes
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  Speaker 3: a lot more attractive. And the young people who you know,
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  Speaker 3: we keep talking about how they're know interested in their stuff,
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  Speaker 3: they'll suddenly wake up to the factor. Way a minute,
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  Speaker 3: I'm actually getting more n than I get paid now
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  Speaker 3: because when you get an extra bump in tax relief,
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  Speaker 3: that actively gives you more money.
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  Speaker 2: Yeah, constant top ups. Wonderful.
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  Speaker 3: Yeah, exactly. So it would almost possibly be a good
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  Speaker 3: idea now, except that again they define benefit pensions will
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  Speaker 3: get hit and the fact is that now so many
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  Speaker 3: I mean what I mean is it what twenty years
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  Speaker 3: ago or something like that, it's like almost no nurses
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  Speaker 3: for forty percent taxpayers, and now one in six is,
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  Speaker 3: so you're talking about even the rank and file rather
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  Speaker 3: than the rich. NHS workers will get pulled into a
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  Speaker 3: position where they are because of the way they define benefit.
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  Speaker 3: Pensions are not funded, but entitlement to them is done
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  Speaker 3: because they have to make contributions from their salary too.
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  Speaker 3: So either you have to pay more out of your
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  Speaker 3: salary to get the same entitlement, or your entitlement's going
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  Speaker 3: to go down. So any government that tries to change
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  Speaker 3: the tax relief on pensions is again picking a big
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  Speaker 3: fight with the public sector unions. And I don't think
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  Speaker 3: that even a landslide labor government would be can they
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  Speaker 3: do that?
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  Speaker 4: Well.
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  Speaker 2: It's also a labor government that has an awful lot
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  Speaker 2: of senior people who have really only ever worked inside
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  Speaker 2: the public sector one way or another. So it's hard
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  Speaker 2: to see them turning on the public sector in that
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  Speaker 2: crucial first six months when it would actually be possible.
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  Speaker 2: Hard to see them doing it. So the other place
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  Speaker 2: where there's an awful lot of money sitting around doing
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  Speaker 2: nothing that you might want to go after is in
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  Speaker 2: the property market. And you know, we've talked about that
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  Speaker 2: a lot, and today the well this week the Tory
• 8:26
  Speaker 2: party have said that they're not going to change stamp duty,
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  Speaker 2: they're not going to put CGT on primary homes, but
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  Speaker 2: a new labor government might look at that, right. I mean,
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  Speaker 2: I don't think you can realistically put stamp duty up
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  Speaker 2: any further without destroying the property market in its entirety,
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  Speaker 2: but you could put a low level of index CGT
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  Speaker 2: on primary homes.
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  Speaker 3: You could, and I think probably before that if you've
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  Speaker 3: got ready stamp duty. The tricky thing is obviously the
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  Speaker 3: hosing market is second only to the NHS in terms
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  Speaker 3: of its secretness to the voters in this country.
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  Speaker 2: And it's sacred us to politicians who live in London.
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  Speaker 3: Of course, Oh yeah, absolutely. And also I mean I
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  Speaker 3: suppose the other tricky thing is encouraging downsizing. If you
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  Speaker 3: won't encourage downsizing, but you introduce CGT or in the
• 9:14
  Speaker 3: gains that the downsizes have made, then you know, I
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  Speaker 3: think you get some interest and interactions there much as
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  Speaker 3: I'm basically for it. So I think everything is defficult
• 9:25
  Speaker 3: because we'll now at the point where whatever you tax
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  Speaker 3: is going to hot sufficient numbers of people that is
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  Speaker 3: not going to be popular.
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  Speaker 2: Okay, so we get we get back to where we
• 9:36
  Speaker 2: often get to, which is that we're really really glad
• 9:39
  Speaker 2: that neither of us is going to be Prime minister
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  Speaker 2: next time, because it's an awful lot harder than you
• 9:42
  Speaker 2: think it is. Welcome to Maren Talks Money the podcast
• 9:51
  Speaker 2: image People who know the markets explain the markets. Here's
• 9:53
  Speaker 2: my conversation with Daniel Abergad, portfolio manager of the European
• 9:57
  Speaker 2: long only strategy at Lansdown Partners.
• 10:04
  Speaker 1: Daniel, thank you so much for joining us today. Very
• 10:06
  Speaker 1: nice to have you with us.
• 10:07
  Speaker 5: Thanks very much for allowing me to join me. Now.
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  Speaker 2: We haven't talked about Europe much on this podcast. We've
• 10:11
  Speaker 2: done a lot of UK, we've done a lot of US.
• 10:13
  Speaker 2: What we haven't really done is sat down and talked
• 10:15
  Speaker 2: about why you should be invested in Europe, because interestingly,
• 10:19
  Speaker 2: we're very focused here. We're very focused on the UK
• 10:21
  Speaker 2: being ridiculously cheap, and we're very focused on the US
• 10:24
  Speaker 2: being being rather overshadowed by those few big tech stocks,
• 10:27
  Speaker 2: by the Magnificent seven, etc.
• 10:28
  Speaker 1: But actually Europe isn't doing too badly, is it.
• 10:31
  Speaker 2: You look at an equal weighted index, for example, Europe
• 10:34
  Speaker 2: has been up forming an equal weighted index of.
• 10:36
  Speaker 1: The US right so a, it's not so bad.
• 10:39
  Speaker 2: So let's talk about where it's not so bad, and
• 10:41
  Speaker 2: let's talk about to why you're invested there, where it's
• 10:43
  Speaker 2: your favorite market, and why it might get better.
• 10:45
  Speaker 1: So started why Europe.
• 10:47
  Speaker 5: I mean, the first thing I'll avoid is saying the obvious,
• 10:50
  Speaker 5: which is something I don't feel very comfortable with, which
• 10:52
  Speaker 5: is I don't think Europe from a macro perspective is
• 10:55
  Speaker 5: especially exciting. Structurally, there's a cyclical rebound come potentially, and
• 11:00
  Speaker 5: that's possibly why we're seeing some of the improved performance
• 11:04
  Speaker 5: of late But that's okay.
• 11:06
  Speaker 2: By the way, we're very clear on this podcast that
• 11:08
  Speaker 2: GDP growth is not the same thing as good stock
• 11:11
  Speaker 2: market performance.
• 11:11
  Speaker 1: Perfect so we can get there out of the way.
• 11:14
  Speaker 2: We don't mind, but we would like talk actually about
• 11:16
  Speaker 2: some of those structural problems in Europe before we get
• 11:18
  Speaker 2: into the market.
• 11:18
  Speaker 6: Maybe that's exactly right.
• 11:19
  Speaker 5: I would first admit what the structural problem is and
• 11:21
  Speaker 5: then think about how to invest in the solution providers.
• 11:24
  Speaker 5: You know, the structural problem for me ultimately in Europe
• 11:26
  Speaker 5: is the lack of natural resources. I mean, we just
• 11:29
  Speaker 5: in this region don't have very many relative to the
• 11:31
  Speaker 5: relative importance of the continent.
• 11:33
  Speaker 6: So for the economy from which.
• 11:34
  Speaker 5: We were building, there isn't much by way of resources.
• 11:38
  Speaker 6: There's not many people even, Yeah.
• 11:40
  Speaker 2: Although we daring to argue about that, because when you
• 11:42
  Speaker 2: come down to resources, one of the greatest resources for
• 11:44
  Speaker 2: an economy is as people. And of course Europe is
• 11:46
  Speaker 2: good in a demographic crisis exactly.
• 11:48
  Speaker 5: So you know, total, if you really take the biggest
• 11:51
  Speaker 5: number we can, we'd be six hundred million. Maybe that's
• 11:54
  Speaker 5: about the right number, but it's not growing. Let's take
• 11:56
  Speaker 5: in Dear or China. Each of those would be well
• 11:58
  Speaker 5: over a billion. You know, if you think about and mass.
• 12:00
  Speaker 5: Actually Europe's WoT very small in the concept reto some
• 12:04
  Speaker 5: of the big economy. I mean, I think actually that's
• 12:07
  Speaker 5: probably why so many wars have happened in Europe over
• 12:09
  Speaker 5: the centuries, is because of this fundamental deficit problem in
• 12:12
  Speaker 5: the resources that are needed by the population.
• 12:15
  Speaker 2: So maybe a smaller population is a great thing, and
• 12:17
  Speaker 2: we should be thrilled that the fertilitorate is collapsing across Europe.
• 12:20
  Speaker 2: I do take our population down to three hundred Maybe
• 12:23
  Speaker 2: that's not going to war.
• 12:24
  Speaker 5: Possibly, but if one shrinks the size of the market
• 12:26
  Speaker 5: normally increases competition within the players within the market, which,
• 12:30
  Speaker 5: unless it's structured well, can be anarchic. So I think
• 12:35
  Speaker 5: a lower risk, long term solution would be to become
• 12:38
  Speaker 5: more productive of what resources we already have.
• 12:41
  Speaker 2: Yeah, well, this is a problem across the border in
• 12:42
  Speaker 2: the West, isn't it, biz ore lack of productivity that
• 12:46
  Speaker 2: we have in the UK. WI productivity has gone up
• 12:48
  Speaker 2: what zero point four percent or something decade a year
• 12:51
  Speaker 2: when it should go up very significantly more than that.
• 12:53
  Speaker 2: And I know UK product productivity is particularly bad, but
• 12:57
  Speaker 2: Europe can't exactly sit on it's laurels I they can it.
• 13:00
  Speaker 5: And I think some of that is structural. But normally
• 13:02
  Speaker 5: productivity is linear, not exponential. So that means that every
• 13:08
  Speaker 5: incremental invention stacks on top of the history of other
• 13:12
  Speaker 5: embedded inventions in the economy. There's no multiplier effect, it's
• 13:16
  Speaker 5: just additional. And you know, the law of big numbers
• 13:21
  Speaker 5: means that over time the percentage growth rate and productivity
• 13:24
  Speaker 5: and an economy will therefore naturally slow.
• 13:27
  Speaker 2: Yeah, but then occasionally you get massive productivity bursts when
• 13:30
  Speaker 2: you have something Usually historically that's been a new form
• 13:32
  Speaker 2: of intense energy, right, that's when we've had these big
• 13:34
  Speaker 2: bursts of productivity, and we talked a lot about how
• 13:38
  Speaker 2: we can have non energy related burst of productivity. You know,
• 13:41
  Speaker 2: we thought the Internet would do there, didn't we And
• 13:43
  Speaker 2: now we think digitalization might do it. But of course
• 13:46
  Speaker 2: we have this other problem here where we're beginning an
• 13:48
  Speaker 2: energy transition to use a less intense form of energy,
• 13:51
  Speaker 2: and that's not necessarily helpful for productivity.
• 13:54
  Speaker 6: Yeah, I think that's right.
• 13:54
  Speaker 5: So the question is I mean, looking at the academic evidence,
• 13:57
  Speaker 5: at least from the papers that I've seen, looking over
• 14:01
  Speaker 5: two to three hundred years of history, so it's quite
• 14:03
  Speaker 5: a lot, and looking across as many countries as possible.
• 14:06
  Speaker 5: I think the data spans about fifty eight countries, both
• 14:09
  Speaker 5: advanced and emerging. I mean, what we've seen historically is
• 14:13
  Speaker 5: almost always the productivity that is added to the economy
• 14:17
  Speaker 5: is linear, it's not exponential. So very few breakthroughs are
• 14:22
  Speaker 5: what you could call a general purpose technology, the GPT
• 14:25
  Speaker 5: of chat GPT.
• 14:27
  Speaker 2: Okay, so when we talk now, which pretty much everybody does,
• 14:29
  Speaker 2: and we're guilty on this podcast of doing it as
• 14:31
  Speaker 2: well of saying it's going to be fine, digitalization and
• 14:35
  Speaker 2: AI are going to drive a productivity revolution which will
• 14:39
  Speaker 2: save us, save us from our democratic crisis, save us
• 14:42
  Speaker 2: from our debt crisis, etc. You don't think that's going
• 14:44
  Speaker 2: to happen.
• 14:45
  Speaker 5: I pose it a different way if I may. How
• 14:48
  Speaker 5: I would pose it is as follows. The supply growth
• 14:50
  Speaker 5: potential in the economy is a function of the growth
• 14:54
  Speaker 5: in the labor force and the growth in productivity, and
• 14:58
  Speaker 5: the labor force growth cyclicarly is very high today, but
• 15:01
  Speaker 5: I think ultimately structurally has some headwinds against it, not
• 15:06
  Speaker 5: least the ones you remarked upon earlier, which was population
• 15:09
  Speaker 5: growth is slowing and the labor force is going to
• 15:12
  Speaker 5: grow slower than population growth because of the aging effect.
• 15:16
  Speaker 5: In addition, normal productivity growth is slowing because of the
• 15:19
  Speaker 5: law of big numbers. So just to keep the same
• 15:22
  Speaker 5: supply potential expansion in the economy as we have today,
• 15:26
  Speaker 5: we need AI to kick in. In fact, we need
• 15:28
  Speaker 5: AI to sort of double the current level of productivity
• 15:31
  Speaker 5: growth just to keep the economic growth of today into
• 15:34
  Speaker 5: the future.
• 15:34
  Speaker 2: There is actually, historically there is precedent for falling populations
• 15:39
  Speaker 2: forcing productivity right, and there have been great grains gains
• 15:42
  Speaker 2: in productivity after bad stuff like black death, for example,
• 15:45
  Speaker 2: huge gains in productivity after that, and huge rises in
• 15:48
  Speaker 2: dudpeep ahead the extent that we can tell lotly a
• 15:50
  Speaker 2: long time ago. So there's some hope there, and that
• 15:53
  Speaker 2: a falling a falling population can drive sudden fast innovation.
• 15:58
  Speaker 5: Yeah, A completely agree. Typically, when labor inflation is very high,
• 16:04
  Speaker 5: the break even economics of technologies that otherwise were too
• 16:08
  Speaker 5: expensive to invest in as substitutes isn't attractive. So you know,
• 16:13
  Speaker 5: that break even point is hard judge to judge, But
• 16:16
  Speaker 5: it could be that we get through that point and
• 16:19
  Speaker 5: then we get a sort of natural productivity kicker for
• 16:21
  Speaker 5: some years, you know, will it happen? Hard to know.
• 16:26
  Speaker 5: I'm not actually bearish, per se. I just think that
• 16:29
  Speaker 5: the underlying economy is perhaps more fragile in its supply
• 16:33
  Speaker 5: potential than is understood, Which isn't to say that the
• 16:36
  Speaker 5: benefit from AI couldn't be more than compensating for it.
• 16:40
  Speaker 2: Right, So let's talk about Europe. Now, what makes this
• 16:43
  Speaker 2: market attractive to you? And which bits of this market
• 16:45
  Speaker 2: are most attractive to you?
• 16:47
  Speaker 5: I think again, structurally, the really interesting areas are those
• 16:50
  Speaker 5: which are going to create productivity growth. Okay, And you
• 16:54
  Speaker 5: know where natural resources are most scarce, the turn on
• 17:00
  Speaker 5: marginal productivity is greatest, and I think Europe is the
• 17:04
  Speaker 5: region where that is indeed been the case for many years.
• 17:07
  Speaker 5: But if I think about the solution providers to sustainability
• 17:11
  Speaker 5: and scarcity, you know, I think that is best viewed
• 17:15
  Speaker 5: from the prism of engineering faculties. So you know, if
• 17:19
  Speaker 5: the last twenty or thirty years, the way as an
• 17:20
  Speaker 5: investor to invest in growth has basically been in America, well,
• 17:25
  Speaker 5: software engineering, which is America a Silicon valley. But the
• 17:29
  Speaker 5: question is aren't there other engineering faculties who are going
• 17:31
  Speaker 5: to become increasingly valuable in the next twenty or thirty years.
• 17:34
  Speaker 5: And I would say mechanical materials engineering will become very important.
• 17:39
  Speaker 5: I think electrical engineering are both is also going to
• 17:41
  Speaker 5: become very important and actually where the sort of global
• 17:44
  Speaker 5: excellence hubs are are more distributed for those types of technology.
• 17:49
  Speaker 5: In fact, in Europe we have to in my view,
• 17:52
  Speaker 5: the first one related to mechanical materials engineering is in Scandinavia.
• 17:56
  Speaker 5: It's the consequence I think of the old mining economy
• 17:59
  Speaker 5: and of Sweden. I mean, if you thought about what
• 18:02
  Speaker 5: is the analog to OPEK in Europe, it's Norway. If
• 18:05
  Speaker 5: you thought, what's the analogue to Australia for iron or
• 18:08
  Speaker 5: it's Sweden. And I think the very abundant and cheap
• 18:11
  Speaker 5: energy inn in Northern Europe, combined with long term family
• 18:17
  Speaker 5: capital structures, has created a sort of network of real
• 18:22
  Speaker 5: excellence in a vertically integrated way in mechanical and materials engineering,
• 18:28
  Speaker 5: so capital goods. And I think perhaps with France, which
• 18:32
  Speaker 5: is perhaps surprising it was to me. Yeah, I think
• 18:35
  Speaker 5: that's where they're sort of excellence for electrical engineering actually resides.
• 18:39
  Speaker 5: And perhaps that's a consequence of I don't know. My
• 18:42
  Speaker 5: guess would be it's about defense. I mean, after centuries
• 18:45
  Speaker 5: of wars with neighbors, it eventually becomes important to think
• 18:49
  Speaker 5: about how to be self sufficient in cheap energy. And
• 18:52
  Speaker 5: I think the original focus on nuclear has created a
• 18:55
  Speaker 5: whole industry vertical that leads a number of companies wants
• 19:00
  Speaker 5: to be global champions in electrify in the electrification wave.
• 19:04
  Speaker 2: It's interesting, isn't it, because there is going to be
• 19:06
  Speaker 2: there's a there's a deficiency of companies operating in this
• 19:09
  Speaker 2: area because for decades are global demand for electricity or
• 19:12
  Speaker 2: demand for electricity in Western countries anyway, basically flat, nothing
• 19:15
  Speaker 2: happened at all. Electricity demand state flat, and there were
• 19:18
  Speaker 2: people kept saying, well, it'll go because there's a little
• 19:19
  Speaker 2: go because of that kind of did and now, of
• 19:21
  Speaker 2: course it is demand is rising incredibly faster across the
• 19:25
  Speaker 2: West and here in the UK, for example, it can
• 19:27
  Speaker 2: take years to get connected to the grid.
• 19:29
  Speaker 1: If you have a project that requires connection.
• 19:31
  Speaker 2: There's incredibly lengthy weights.
• 19:34
  Speaker 1: So suddenly we.
• 19:34
  Speaker 2: All need equipment and ideas that we haven't needed for decades.
• 19:38
  Speaker 5: And I think the trick is to recognize a what
• 19:41
  Speaker 5: you just made, the point you just made, which is
• 19:43
  Speaker 5: there is a step up in the demand function for
• 19:45
  Speaker 5: the electrification industry. Yeah, that is probably quite protracted, and
• 19:52
  Speaker 5: then be fined within that electrical industry value chain, the
• 19:56
  Speaker 5: niches where the barriers to entry for new capacity to
• 20:00
  Speaker 5: respond to that increased demand is quite restrained for whatever
• 20:03
  Speaker 5: moat that exists, and it can be many different modes.
• 20:06
  Speaker 2: But I think it took us through some of those
• 20:08
  Speaker 2: niches and some of the companies that are operating that.
• 20:11
  Speaker 5: I mean, the sort of key learning is sort of
• 20:12
  Speaker 5: twenty years ago in Germany, you know, there was major
• 20:16
  Speaker 5: subsidies to try to create a domestic solar industry, and
• 20:20
  Speaker 5: actually the subsidies were structured in such a way that
• 20:23
  Speaker 5: in the end what happened was that capacity flooded the
• 20:26
  Speaker 5: market from China at a much lower cost than domestic.
• 20:29
  Speaker 6: Producers could compete against.
• 20:30
  Speaker 5: And despite the inflated demand because of the subsidies, the
• 20:33
  Speaker 5: supply over responded and everyone went bankrupt.
• 20:36
  Speaker 2: Yeah, and Germany never developed its own industry exactly.
• 20:39
  Speaker 5: Yeah, and you could say that today we're suffering the
• 20:42
  Speaker 5: consequences of that indirectly. But I think, you know, if
• 20:47
  Speaker 5: you've sort of thought about it from well, where are
• 20:49
  Speaker 5: the barriers to entry much higher? I mean there were
• 20:51
  Speaker 5: plenty actually, but their niches. It's not so much sectors,
• 20:54
  Speaker 5: and you know, targeting those I think is probably the
• 20:56
  Speaker 5: most optimal way to do it. And those barriers are
• 20:59
  Speaker 5: typically to answer your question directly, normally it's related to IP,
• 21:04
  Speaker 5: so sunk IP after many years. I mean, if you
• 21:07
  Speaker 5: think about the model for the future, it isn't sort
• 21:10
  Speaker 5: of so much. The question is are we moving from
• 21:13
  Speaker 5: a business where business models where who have the IP
• 21:17
  Speaker 5: that solve the sustainability crisis the world is probably facing,
• 21:21
  Speaker 5: whether whether the price they sell their products up will
• 21:25
  Speaker 5: reflect their IP or just their cost of production. And
• 21:28
  Speaker 5: I think in the last ten twenty years it's reflected
• 21:29
  Speaker 5: the cost of production, and I think in the next
• 21:31
  Speaker 5: ten to twenty years it's probably going to reflect the
• 21:33
  Speaker 5: value to the customer through the IP that they alone
• 21:37
  Speaker 5: or very few others can provide.
• 21:39
  Speaker 1: Okay, so that'll be a huge change for a few companies.
• 21:42
  Speaker 5: Yeah, So it's moving from basing pricing off raw materials
• 21:44
  Speaker 5: to basing pricing off the technology.
• 21:46
  Speaker 1: And I'm going to ask you to give us an example.
• 21:48
  Speaker 5: Sure, you're avoiding it, kind of, let's take the time.
• 21:53
  Speaker 5: I mean it can be as So, what I'm not
• 21:55
  Speaker 5: saying is that the really interesting opportunity is investing in
• 21:59
  Speaker 5: venture capital or very early staged deep tech in Europe.
• 22:03
  Speaker 5: It might well be. That's not my point, it's not
• 22:05
  Speaker 5: my expertise. What I'm actually saying is that there's some
• 22:09
  Speaker 5: companies out there which have been investing for two hundred
• 22:11
  Speaker 5: years in an industry that looks like it's commoditized and
• 22:14
  Speaker 5: boring but actually is enjoying a structural shift in its
• 22:17
  Speaker 5: demand function that they alone because of their IP investment,
• 22:20
  Speaker 5: sunk investment in R and d over many decades that
• 22:23
  Speaker 5: have replicated can disproportionately benefit from.
• 22:28
  Speaker 6: Example would be.
• 22:29
  Speaker 5: The tire industry, so car tires, you know. The idea
• 22:33
  Speaker 5: is that historically that you could sell your tire to
• 22:37
  Speaker 5: reflect the cost of rubber, and the Chinese new entrants
• 22:41
  Speaker 5: into the industry have been able to produce those rubber
• 22:45
  Speaker 5: tires at a cheap enough level, given their cost advantage,
• 22:48
  Speaker 5: to undermine the pricing ladder in the West, and they've
• 22:52
  Speaker 5: been taking market share. Now today, I think things are changing.
• 22:54
  Speaker 5: In fact, some of the domestic European producers who have
• 22:58
  Speaker 5: really invested heavily in trying to improve the energy efficiency
• 23:03
  Speaker 5: of the tires, are starting to be able to price
• 23:07
  Speaker 5: their tires at different levels to the very low value
• 23:10
  Speaker 5: added imports. And that's because, for example, the electric vehicles
• 23:14
  Speaker 5: are much heavier because of the battery than the traditional
• 23:18
  Speaker 5: combustion engine cars and therefore need lots of different performance
• 23:24
  Speaker 5: attributes from their tire in order to meet the safety standards,
• 23:27
  Speaker 5: the energy efficiency standards that the regulators are increasingly and
• 23:31
  Speaker 5: restrictingly imposing on the industry.
• 23:34
  Speaker 2: Go we go back to you mentioned earlier when we
• 23:36
  Speaker 2: were doing at Scandinavia. You mentioned that one of the
• 23:39
  Speaker 2: things that kept these companies going with long term family
• 23:41
  Speaker 2: capital structures is that something you look for companies with
• 23:44
  Speaker 2: a family element to them.
• 23:46
  Speaker 6: Yeah, look, I think it's a subset.
• 23:48
  Speaker 5: I mean, in my view, the really what we're looking
• 23:52
  Speaker 5: for is companies whose management structures align with the incentives
• 23:58
  Speaker 5: of long term providers of capital. So in effect, what
• 24:02
  Speaker 5: we're looking for is principle like behavior from company managements
• 24:07
  Speaker 5: as opposed to agency like behavior. One subset of the
• 24:10
  Speaker 5: universe of management teams that have that mindset are founder owners.
• 24:17
  Speaker 5: And you know that's because they've got skin in the
• 24:19
  Speaker 5: game and for them it's a it's a project that
• 24:23
  Speaker 5: should exceed their lifetimes. Now there are others. It's just
• 24:29
  Speaker 5: a case of finding management teams. I think like that.
• 24:32
  Speaker 5: But I do agree that family ownership in general is.
• 24:36
  Speaker 6: A good is a good place to look.
• 24:38
  Speaker 5: The one thing I would say, however, and it I
• 24:40
  Speaker 5: wouldn't say all family owned companies are the right place,
• 24:44
  Speaker 5: because you know, what we typically have found in the
• 24:47
  Speaker 5: past with with such with such management teams is that
• 24:51
  Speaker 5: the constraints are often less, which means that you know,
• 24:55
  Speaker 5: the risks from an the risks can become more more nonlinear,
• 25:00
  Speaker 5: more quickly, and that can be either positive in a
• 25:02
  Speaker 5: virtual circle or negative and a vicious circle. So it's
• 25:05
  Speaker 5: very important to discern between the two and recognize that
• 25:08
  Speaker 5: that risk is also there.
• 25:11
  Speaker 1: So let's move on them from electrification. What other areas
• 25:14
  Speaker 1: interesting to you?
• 25:15
  Speaker 5: The other issue is probably the aggregate indebtedness of developed
• 25:19
  Speaker 5: economy developed economies, you know, summing up both private and
• 25:24
  Speaker 5: public debt relative to GDP.
• 25:27
  Speaker 1: What has fascinated find out how we invested in the
• 25:29
  Speaker 1: solution to that.
• 25:30
  Speaker 5: Call me naive, but what I'm amazed by is if
• 25:34
  Speaker 5: you compare total economy debt ratios versus just before the
• 25:38
  Speaker 5: COVID crisis. So that's a clean, clean period, let's not
• 25:42
  Speaker 5: think about the noise in between. But now and before
• 25:44
  Speaker 5: the crisis, total economy debt ratios haven't fallen in most countries,
• 25:49
  Speaker 5: despite the huge inflation shock that you know was viewed as.
• 25:54
  Speaker 1: Brought it down in real time.
• 25:55
  Speaker 5: Well, that's the most politically expedient way to reduce in debtedness,
• 25:58
  Speaker 5: and it hasn't as of yet worked. Large amounts of
• 26:02
  Speaker 5: debt create fragility in economies. I guess there's a smaller
• 26:07
  Speaker 5: range in which the economy can evolve without it causing ruptures.
• 26:12
  Speaker 5: I think it probably pulls a bit at the social
• 26:14
  Speaker 5: fabric of a society, and then it's quite hard to
• 26:17
  Speaker 5: see how that would evolve over time productivity growth. I
• 26:21
  Speaker 5: think shrinks in.
• 26:22
  Speaker 1: Such environment seems to effect growth.
• 26:24
  Speaker 6: I mean, it was really interesting.
• 26:25
  Speaker 5: I looked at some polls, again at some academic papers
• 26:27
  Speaker 5: that I've seen, maybe there's others, but the level of
• 26:30
  Speaker 5: trust between citizens has basically collapsed since nineteen sixty. The
• 26:34
  Speaker 5: level of trust in governments has collapsed since nineteen sixty.
• 26:38
  Speaker 5: So you know, if governments are spending more and more
• 26:40
  Speaker 5: money but people don't trust it, then I presume over
• 26:42
  Speaker 5: time they will eventually start saving. And you know that's
• 26:46
  Speaker 5: probably in the because they think taxes are going to
• 26:48
  Speaker 5: have to rise because the investment return on this spending
• 26:51
  Speaker 5: isn't going to yield its cost of capital, and so
• 26:55
  Speaker 5: I think that slows things down, and that's potentially the issue.
• 27:00
  Speaker 5: Sort of the activist in the room isn't so much
• 27:03
  Speaker 5: the providers of capital, it's actually governments and other stakeholders.
• 27:07
  Speaker 5: And I think that's an important point because that means
• 27:10
  Speaker 5: that if you're investing in corporates over the long term.
• 27:13
  Speaker 5: Part of the job is to avoid the things that
• 27:15
  Speaker 5: are going to face that problem, which is that you
• 27:18
  Speaker 5: know the state is going to need more money.
• 27:21
  Speaker 1: Okay, so you have to avoid the areas where you
• 27:23
  Speaker 1: know the state is going to go.
• 27:24
  Speaker 6: Yeah, I think so, So how do.
• 27:25
  Speaker 1: We find areas where the state is not going to go?
• 27:28
  Speaker 5: So that comes down to the solution providers, And you know,
• 27:31
  Speaker 5: I think the solution providers are I would define it
• 27:34
  Speaker 5: as areas that are likely to retain their relevance in
• 27:39
  Speaker 5: the future economy, where I would define relevance as able
• 27:43
  Speaker 5: to grow as much as the economies to which they're exposed.
• 27:47
  Speaker 5: But with one caveat, it has to be in hard currency,
• 27:49
  Speaker 5: so it has to be in dollars or something like that, okay,
• 27:52
  Speaker 5: and economically not that sensitive. We're going to need an example,
• 27:56
  Speaker 5: So the examples there would be it's niches, not sectors.
• 28:00
  Speaker 5: Again the old days is sort of utilities, telcos, media, retail.
• 28:05
  Speaker 5: You know, maybe it's pharmaceuticals. I think that's hard to
• 28:08
  Speaker 5: invest in big size because they're losing relevance relative to
• 28:12
  Speaker 5: the economy because of disruption, because of regulation, because of technology,
• 28:17
  Speaker 5: because of consumer habits, shifting the areas where you can
• 28:20
  Speaker 5: invest a specific pest control, industrial gases, low cost airlines,
• 28:25
  Speaker 5: data services, infrastructure.
• 28:28
  Speaker 2: I'm missing something. Why would these particular sectors escape a
• 28:33
  Speaker 2: load of government regulation and escape perhaps taxation that other
• 28:38
  Speaker 2: sectors would suffer.
• 28:39
  Speaker 5: First of all, we need them the Second of all,
• 28:41
  Speaker 5: they're not in the public eye. Okay, they're not directly
• 28:46
  Speaker 5: regulated in the same way as let's say a telecom
• 28:48
  Speaker 5: company or a utility. I mean, let's take telecoms for
• 28:52
  Speaker 5: an example. You know there's a sort of three telecom
• 28:55
  Speaker 5: networks in China, three in India, three in the US,
• 28:59
  Speaker 5: and Europe's got a hundreds hundreds, So how come and
• 29:04
  Speaker 5: they're not able to earn a fair return. But we
• 29:06
  Speaker 5: need them to invest because every industry to be competitive
• 29:09
  Speaker 5: globally needs high speed digital infrastructure merge, I would say,
• 29:14
  Speaker 5: we do. But the obstacles to them being able to
• 29:16
  Speaker 5: scale up are that there's a lack of alignment in
• 29:20
  Speaker 5: the incentives of stakeholders with shareholders. So although capital providers
• 29:25
  Speaker 5: recognize that there is a need to merge, it's not allowed.
• 29:30
  Speaker 5: And so what you have is this sort of underinvestment
• 29:32
  Speaker 5: in a critical piece of European infrastructure really because of
• 29:37
  Speaker 5: the different the different time horizons of the different stakeholders.
• 29:41
  Speaker 5: Actually the horizons of many stakeholders is just too short term.
• 29:45
  Speaker 5: And the behavior is in my opinion, to agencies agency
• 29:48
  Speaker 5: like and not enough principle like. And I think that's
• 29:51
  Speaker 5: the constraint which leads to the large amounts of debt
• 29:54
  Speaker 5: in the economy because a large number of those decisions,
• 29:57
  Speaker 5: a large number of small decisions.
• 29:58
  Speaker 6: Like that add up to debt.
• 30:00
  Speaker 5: And so avoiding those places unless you think you're at
• 30:03
  Speaker 5: the tipping point is probably in time, the right thing
• 30:07
  Speaker 5: to do. And then entering those areas where these industries
• 30:12
  Speaker 5: are growing in relevance relative to the economy and not
• 30:15
  Speaker 5: in the line of fire of governments may be interesting.
• 30:17
  Speaker 1: Sounds me.
• 30:18
  Speaker 2: You've got like you've got an awful lot to avoid
• 30:20
  Speaker 2: If these are the criteria. Is your universe relatively small?
• 30:25
  Speaker 2: Once you've taken out everything that you're under these parameters,
• 30:28
  Speaker 2: you can't really touch how many companies you down to.
• 30:31
  Speaker 5: You know, I would say this, of course, but I
• 30:33
  Speaker 5: can see why the environment might be more favorable to
• 30:36
  Speaker 5: active investing over the next two decades.
• 30:39
  Speaker 1: So you can't exactly where I wanted you to go
• 30:40
  Speaker 1: without even having last right.
• 30:41
  Speaker 6: It's amazing you team me up.
• 30:44
  Speaker 5: And that isn't only because you know, the sort of
• 30:49
  Speaker 5: hit rates on these sort of large tracks of defensive
• 30:54
  Speaker 5: or historically defensive business models. Hit rate in investing in
• 30:58
  Speaker 5: those used to be two out of three you.
• 31:00
  Speaker 6: Get it right.
• 31:01
  Speaker 5: Now it's one out of three, and when you get
• 31:02
  Speaker 5: it wrong, it's far worse than when you get it
• 31:04
  Speaker 5: right in terms of the alpha you can generate.
• 31:06
  Speaker 6: So I think O.
• 31:07
  Speaker 5: Mission is going to be a core driver of alpha
• 31:10
  Speaker 5: in the same way as comission, So we'll have dual sources.
• 31:14
  Speaker 5: And I think you know, when you sort of drill
• 31:16
  Speaker 5: down into what war is Therefore the dressable market, there's
• 31:19
  Speaker 5: still a lot of companies in Europe that are really
• 31:21
  Speaker 5: well positioned, still valued as if they're European, when in
• 31:24
  Speaker 5: fact you know they're really interesting businesses, fit for the future.
• 31:29
  Speaker 1: And otherways say valued is so they're European. That's a
• 31:31
  Speaker 1: bad thing.
• 31:32
  Speaker 5: Well, yeah, I mean so much lower multiples than you
• 31:34
  Speaker 5: get in the US.
• 31:35
  Speaker 2: So I've got a list of things that you're interested
• 31:37
  Speaker 2: in here. And one of the things we touched on
• 31:40
  Speaker 2: but we didn't talk about, probably with digitalization and how
• 31:42
  Speaker 2: that might change the parameters for companies when we talk
• 31:46
  Speaker 2: about productivity and then need to cut costs and need
• 31:49
  Speaker 2: to invest in R and D, etc. Digitalization is our
• 31:53
  Speaker 2: big hope, but we haven't really talked about it properly.
• 31:55
  Speaker 5: Digitalization is probably an enabler of increased market concentration in
• 31:58
  Speaker 5: many industries, because I think the large when the investment
• 32:02
  Speaker 5: budget requirements go up, and you can sort of start
• 32:06
  Speaker 5: to see that happening in a number of industries in Europe,
• 32:09
  Speaker 5: but it's still very far away from what we've seen
• 32:11
  Speaker 5: in the US. That's all for example that the I
• 32:14
  Speaker 5: think it's the top five players in the average US
• 32:17
  Speaker 5: industry are now representing forty to fifty percent of the market.
• 32:21
  Speaker 5: In Europe, it's far far more fragmented than that. So
• 32:24
  Speaker 5: I think it's just going to accelerate market share shifts
• 32:27
  Speaker 5: over time. The real question is, you know, the GENAI piece,
• 32:31
  Speaker 5: and you know, it's very hard to know. We've had,
• 32:33
  Speaker 5: as you said, you know, two major nonlinear exponential functions
• 32:39
  Speaker 5: in terms of productivity in the last two to three centuries,
• 32:42
  Speaker 5: you know, and I think the first was related to
• 32:44
  Speaker 5: you know, the steam engine, and the second was related
• 32:46
  Speaker 5: to the computer, and is GP is this? Is this
• 32:51
  Speaker 5: the third It's it's hard to know.
• 32:53
  Speaker 1: Yeah, it doesn't quite feel like it yet, does it.
• 32:55
  Speaker 6: I mean, I think it could.
• 32:56
  Speaker 5: We certainly have the infrastructure in place at households and
• 32:59
  Speaker 5: corporate a computers and technology for it to be distributed
• 33:03
  Speaker 5: very rapidly. We have mobile phones, so you could see
• 33:06
  Speaker 5: how it could come about. But it's it's not something
• 33:09
  Speaker 5: I would add at this point, at least better on.
• 33:11
  Speaker 5: But I wouldn't be surprised if in a decade or
• 33:13
  Speaker 5: two it had major transformational impacts on lots of businesses
• 33:19
  Speaker 5: that we can't conceive of at this point.
• 33:21
  Speaker 2: I can't conceive it brings me on to ESG and
• 33:25
  Speaker 2: your overlay. There is there one How do you approach this?
• 33:29
  Speaker 5: I mean, we try to build I guess, our own
• 33:32
  Speaker 5: macro econometric model of the carbon emissions of different industries.
• 33:39
  Speaker 5: So we tried to build a sort of carbon cost curve,
• 33:43
  Speaker 5: you know, for all of the tons of carbon emitted,
• 33:45
  Speaker 5: which industries emit, what portion, and what would be the
• 33:49
  Speaker 5: price of carbon required to economically incentivize them to switch
• 33:52
  Speaker 5: to an alternative technology where carbon is not omitted. And
• 33:55
  Speaker 5: that was really interesting because it sort of led, in
• 33:58
  Speaker 5: our opinion, to sort of an implied required price for
• 34:02
  Speaker 5: carbon that wasn't affordable in the in the current economy,
• 34:06
  Speaker 5: and indeed was one where it felt like there would
• 34:11
  Speaker 5: be large levels of misalignment of incentives between various stakeholders.
• 34:16
  Speaker 5: So you know, the European Union versus sovereign states, the
• 34:19
  Speaker 5: South versus the North, the old versus the young, pensioners
• 34:23
  Speaker 5: versus students, and really a large level of misalignment of
• 34:30
  Speaker 5: incentives across a large number of axes. And so you know,
• 34:34
  Speaker 5: my view would be that ESG is inherently a sensible approach,
• 34:40
  Speaker 5: certainly for a region starved of natural resources like we
• 34:43
  Speaker 5: just described. So I understand why we're doing this.
• 34:46
  Speaker 1: But you're talking about the eye, talking.
• 34:48
  Speaker 6: About the talking about the E.
• 34:50
  Speaker 5: Mainly we can come to the others.
• 34:53
  Speaker 2: But because the E is not always compared to for
• 34:55
  Speaker 2: with the S, as you just mentioned, with miss alignment
• 34:58
  Speaker 2: et cetera of incentives outcomes. You know, we were I
• 35:02
  Speaker 2: was talking about this with people earlier, and we were
• 35:04
  Speaker 2: talking about the cost of the transition.
• 35:07
  Speaker 1: Where does it end?
• 35:08
  Speaker 2: Who picks up the cost in the end, And in
• 35:10
  Speaker 2: the end, the main for the living standards or difficulty
• 35:14
  Speaker 2: will happen at the poorest end of society in the UK.
• 35:18
  Speaker 2: For example, you know it's colder up north, people are
• 35:21
  Speaker 2: poorer up north, They're going to have the same energy bills,
• 35:24
  Speaker 2: so we'll see fuel poverty becoming much more common up
• 35:27
  Speaker 2: north as bills rise, and what does the government do
• 35:30
  Speaker 2: about that? That kind of as alignment is interesting and
• 35:33
  Speaker 2: rarely discussed.
• 35:34
  Speaker 5: Yeah as well, I mean talking in those dimensions, you know,
• 35:38
  Speaker 5: those who aren't born versus today's population, which is a
• 35:43
  Speaker 5: key one as well.
• 35:43
  Speaker 6: I mean, I think.
• 35:44
  Speaker 5: The concept is makes a lot of sense, but the
• 35:50
  Speaker 5: implementation needs to be done very very very carefully. And
• 35:53
  Speaker 5: I'm not haven't been, and I'm not convinced that the
• 35:56
  Speaker 5: way in which we try to implement this through sort
• 35:59
  Speaker 5: of top down regulatory approaches has enough granularity to create
• 36:07
  Speaker 5: favorable outcomes. I think there's a lot of unintended consequences
• 36:10
  Speaker 5: that need to be considered. To be honest. I mean,
• 36:13
  Speaker 5: I think there was what forty thousand deaths above trend
• 36:16
  Speaker 5: during the winter with the energy crisis in Europe, and
• 36:19
  Speaker 5: you know, in reality, had we have thought through the
• 36:22
  Speaker 5: energy transition policy, those could have been potentially much less,
• 36:28
  Speaker 5: And I think it's really important to think through how
• 36:32
  Speaker 5: we get to the endpoint rather than demand the endpoint immediately,
• 36:35
  Speaker 5: because it sort of disincentivizes the investments in industries that
• 36:38
  Speaker 5: are going to be required in that transition. And it's
• 36:40
  Speaker 5: sort of a difference between what you want and what
• 36:42
  Speaker 5: you can have, and that needs to really be thought
• 36:45
  Speaker 5: through in my view.
• 36:46
  Speaker 2: If you're an investor, if you have a strong feeling
• 36:48
  Speaker 2: about E or S or G, how does it happen?
• 36:51
  Speaker 2: What does the corporate activist, the investor activists look like.
• 36:54
  Speaker 5: Well, I think they're very different to the past, right
• 36:56
  Speaker 5: investor activism if it ever was sort of and gecko,
• 37:00
  Speaker 5: which it obviously Wasn't you know that model going back
• 37:04
  Speaker 5: to our stakeholder stack and finding an equilibrium point that's sustainable.
• 37:08
  Speaker 5: That was the problem, wasn't it, Because you had sort
• 37:10
  Speaker 5: of capital trying to extract excess share of the economic
• 37:14
  Speaker 5: value added or rent from every other stakeholder in the business.
• 37:18
  Speaker 5: You know, they were just basically firing everyone and you know,
• 37:21
  Speaker 5: trying to take all the profits up front. Let's just
• 37:22
  Speaker 5: say that was the model and leverage. You know, I
• 37:25
  Speaker 5: don't think that's the future of activism. The future activism
• 37:27
  Speaker 5: is actually different.
• 37:28
  Speaker 6: I think theture the future.
• 37:29
  Speaker 5: Of activism will be trying to get each part of
• 37:34
  Speaker 5: the stakeholder stack to behave as principles as opposed to agents,
• 37:39
  Speaker 5: which is sort of thinking about you know, government, labor, unions,
• 37:44
  Speaker 5: the consumer as sort of partners in the long run
• 37:48
  Speaker 5: success of the business and finding an equilibrium within them.
• 37:51
  Speaker 5: So that's actually not just saying committing to what a
• 37:55
  Speaker 5: company will do, but actually trying to influence the outcomes
• 37:58
  Speaker 5: of policy in a more so sstainable way. Although capitalism
• 38:02
  Speaker 5: in the GFC clearly had some part of the blame,
• 38:05
  Speaker 5: and that means that providers of capital are up against
• 38:08
  Speaker 5: it when they're trying to influence outcomes for society because
• 38:11
  Speaker 5: the perception is that you know, greed. Actually there's large
• 38:15
  Speaker 5: amounts of rest the stakeholder stack that have also been
• 38:19
  Speaker 5: guilty of thinking short term and you know, it's just
• 38:23
  Speaker 5: this longer term mindset and that's required exactly.
• 38:27
  Speaker 6: So the problem is much more than that.
• 38:29
  Speaker 2: Can we talk a little bit about your portfolio, about
• 38:31
  Speaker 2: some of the top companies of some of your favorites
• 38:33
  Speaker 2: in your top ten, So that.
• 38:34
  Speaker 5: Would be Michelan, which we've held for many years, over
• 38:39
  Speaker 5: well over a decade. And you know, they, in my opinion,
• 38:43
  Speaker 5: invented a lot of the real innovations in the tire
• 38:48
  Speaker 5: industry over the last one hundred and fifty years. And
• 38:51
  Speaker 5: though it doesn't feel like it, there's been many, you know,
• 38:54
  Speaker 5: starting with being able to replace tires. They were fixed
• 38:58
  Speaker 5: at one point, and then we moved to the radial tire,
• 39:01
  Speaker 5: and then we moved to the run flat tire. Now
• 39:03
  Speaker 5: we've moved to ev based tires, energy efficient, so on and
• 39:08
  Speaker 5: so forth, and actually, ultimately they were the principal innovator.
• 39:11
  Speaker 5: I think of many of those innovations, and the IP
• 39:15
  Speaker 5: investment sunk by that company has been you know, two
• 39:19
  Speaker 5: to three times everyone but the number two player, And
• 39:24
  Speaker 5: if actually you added the third and fourth and fifth
• 39:26
  Speaker 5: players R and D, you still wouldn't get to mischelands budget.
• 39:29
  Speaker 2: So on the verge of being able to push their
• 39:31
  Speaker 2: prices up falling dramatically, you think over next time, I.
• 39:33
  Speaker 5: Think it will reflect technology and the value of that.
• 39:36
  Speaker 1: Yes, okay, I'm waiting for another sure.
• 39:40
  Speaker 5: Hopefully so there is another which is a rental kill.
• 39:45
  Speaker 2: The control I was going to follow that up be okay.
• 39:48
  Speaker 5: So that I think is a very interesting industry because
• 39:53
  Speaker 5: pestilence is on the rise. I didn't know that it
• 39:57
  Speaker 5: is because of the growth and population and the urbanization
• 40:01
  Speaker 5: of the population. And in the principal market, which represents
• 40:05
  Speaker 5: half of the global pest control market, the US people
• 40:08
  Speaker 5: are moving to the south where it's warmer and there's
• 40:11
  Speaker 5: more pests as a consequence. So that as well as
• 40:13
  Speaker 5: the fact that the propensity to outsource to a third
• 40:17
  Speaker 5: party to solve your pest problem is it's rising.
• 40:21
  Speaker 1: But is there much a revolt. There can't anyone kill pests.
• 40:23
  Speaker 5: It's actually a network based business, so scale really matters.
• 40:28
  Speaker 5: The economic key to the industry, I feel, is reducing
• 40:32
  Speaker 5: windshield time for your pest control technician. So if you
• 40:35
  Speaker 5: have ten customers in one street, it's much better than
• 40:38
  Speaker 5: having ten customers in a city. You'll see many more
• 40:42
  Speaker 5: customers in a day if they're nearer to each other.
• 40:43
  Speaker 5: So you get the operational leverage from that, and that
• 40:46
  Speaker 5: means that you earn more. And that means you can
• 40:48
  Speaker 5: price at a discount and still learn a fair return,
• 40:51
  Speaker 5: or you can take market, or you can earn excess
• 40:53
  Speaker 5: returns and then invest it in marketing, and the trick
• 40:57
  Speaker 5: is actually to be when someone googles pest control near
• 41:00
  Speaker 5: me near the top of the list, and that takes money.
• 41:02
  Speaker 5: So the bigger you are, the more likelihood of being
• 41:04
  Speaker 5: in that position.
• 41:06
  Speaker 1: Okay, interesting, Well I hope I don't have to use
• 41:08
  Speaker 1: that one. Is there an interesting company in France.
• 41:11
  Speaker 2: In electrification which we've alway perhaps thought of as a
• 41:14
  Speaker 2: rather staid but is actually rather exciting Schneider.
• 41:18
  Speaker 5: Yeah, I'm sure you would have also in your mind
• 41:21
  Speaker 5: that is own.
• 41:22
  Speaker 4: Yeah.
• 41:23
  Speaker 5: So you know, the grid transformation is just very, very
• 41:26
  Speaker 5: drastic because when we connect renewables, they don't fit into
• 41:30
  Speaker 5: the way the grid was designed over the last century,
• 41:33
  Speaker 5: and so the grid not only has to be adapted
• 41:35
  Speaker 5: for additional capacity, it has to come from decentralized sources
• 41:39
  Speaker 5: that have different sort of production cycles to the capacity
• 41:43
  Speaker 5: that you used to have to connect, which was just
• 41:45
  Speaker 5: a gas turbine somewhere. So there's a sort of major
• 41:50
  Speaker 5: deficit I think in the electrical equipment that is required
• 41:55
  Speaker 5: to enable this. And on top of that you have
• 41:58
  Speaker 5: this sort of AI led demand for data center capacity,
• 42:03
  Speaker 5: which is sort of got a lot of electrical equipment
• 42:06
  Speaker 5: in there from companies like Schneider and so you know,
• 42:10
  Speaker 5: you have this sort of two waves of structural demand acceleration,
• 42:15
  Speaker 5: one from the energy transition and the other from the
• 42:18
  Speaker 5: AI growth dynamic.
• 42:20
  Speaker 2: Okay, a lot of electricity, a lot of cables. If
• 42:23
  Speaker 2: you were to only be allowed to invest in one
• 42:25
  Speaker 2: asset class over a ten year period, ten year period,
• 42:29
  Speaker 2: and I only gave you a choice of two asset classes,
• 42:32
  Speaker 2: one of which you may argue about whether it was
• 42:34
  Speaker 2: an acid or not. And those two asset classes were
• 42:36
  Speaker 2: gold or bitcoin.
• 42:38
  Speaker 1: Which one would you choose?
• 42:39
  Speaker 2: Gold?
• 42:39
  Speaker 1: Not a trick question. You would use gold.
• 42:41
  Speaker 5: Why you know, in the thirties they were they were
• 42:44
  Speaker 5: trading rocks. So you know, anything that is an alternative
• 42:48
  Speaker 5: to money, I think in this example would do well.
• 42:51
  Speaker 5: But it's finite supply, and.
• 42:55
  Speaker 1: People would say they're a bit that bitcoin.
• 42:57
  Speaker 5: Financially, but there's not a finite supply to the number
• 43:00
  Speaker 5: of digital currencies.
• 43:01
  Speaker 6: That can get created. Yes, and that I think.
• 43:03
  Speaker 5: Is probably the one term, the one thing that differentiates gold.
• 43:07
  Speaker 2: Okay, I agree with you entirely, but you know, not
• 43:10
  Speaker 2: all I already under did I know? Luckily, luckily we
• 43:13
  Speaker 2: have a young person in the today plan Bitcoin or gold.
• 43:16
  Speaker 7: Bitcoin.
• 43:20
  Speaker 6: I'm showing my age.
• 43:22
  Speaker 1: Tell us why Sam, come comeing from my friend?
• 43:25
  Speaker 7: Tell us what I think cryptocurrency. You know, whether you
• 43:28
  Speaker 7: like it or not, it might still be a big
• 43:31
  Speaker 7: part of investment in the future. You know, bitcoin will
• 43:34
  Speaker 7: still be like kind of the first thing to blot
• 43:37
  Speaker 7: in that, you know, crypto currency space. So I think
• 43:39
  Speaker 7: it's important that people are still always going to be
• 43:42
  Speaker 7: investing in that, and it's still worth a lot today.
• 43:44
  Speaker 1: Dam thank you and Dan, thank you.
• 43:50
  Speaker 2: John the end bit there, I put that kid on
• 43:52
  Speaker 2: the spot, a little bit sixteen year old come into
• 43:54
  Speaker 2: the obviously work experience and suddenly he's forced to choose
• 43:57
  Speaker 2: between bitcoin and gold.
• 43:58
  Speaker 1: I think you did a good job.
• 44:00
  Speaker 3: I think he did an excellent job. You give a
• 44:02
  Speaker 3: contrarian answer, and now he's famous.
• 44:04
  Speaker 2: Now he's famous.
• 44:05
  Speaker 3: What more could you want?
• 44:06
  Speaker 4: Yeah?
• 44:06
  Speaker 2: Or the warning, kids, don't don't come to work experience
• 44:09
  Speaker 2: with us unless you want to end up on a podcast.
• 44:12
  Speaker 3: They'll be queueing out the door.
• 44:14
  Speaker 2: They will be they will be an old thing. Bitcoin.
• 44:16
  Speaker 2: I'm guzzing the sixteen year olds. But well we'll find out.
• 44:19
  Speaker 2: What did you think about, Daniel? I really enjoyed my
• 44:21
  Speaker 2: conversation with him.
• 44:22
  Speaker 3: I thought it was great, and also reading the transcript,
• 44:26
  Speaker 3: I would say is one of the most dense episodes
• 44:30
  Speaker 3: that we've had one time.
• 44:32
  Speaker 1: What does that mean, John.
• 44:33
  Speaker 3: Well Information dnse. It's one of those ones I feel
• 44:37
  Speaker 3: I could probably listen to or read through twice.
• 44:40
  Speaker 2: Everyone should feel welcome to listen to our podcast as
• 44:43
  Speaker 2: many times as they like, over and over place.
• 44:47
  Speaker 6: I thought it was really good.
• 44:48
  Speaker 3: I think one of the things that illustrated is the
• 44:50
  Speaker 3: actual benefit of a good stockpicker. Yeah, because what he's
• 44:56
  Speaker 3: looking at iss easy at the end of the day
• 45:01
  Speaker 3: to talk about big trends and waft your hands and
• 45:04
  Speaker 3: all the rest of it. But he actually boiled down
• 45:08
  Speaker 3: that stuff too, and this is how it actually affects stocks.
• 45:12
  Speaker 3: So like, Michelin's a really good example. I would never
• 45:16
  Speaker 3: have thought or the R and D in tires. Will
• 45:20
  Speaker 3: tires just go on your car?
• 45:21
  Speaker 7: Don't?
• 45:22
  Speaker 3: Aren't they basically commodity products, unless you know you're a
• 45:26
  Speaker 3: boy racer who cares about these alloy wheels or whatever.
• 45:29
  Speaker 3: But clearly I'm completely wrong. And Michelin's actually a sort
• 45:34
  Speaker 3: of you know, almost pseudo tech company because it is
• 45:38
  Speaker 3: pumping this R and d money in and it is
• 45:41
  Speaker 3: getting kind of intellectual property, and it is taking advantage
• 45:46
  Speaker 3: of the electric vehicle kind of revolution, et cetera, et cetera.
• 45:50
  Speaker 3: So I think it's that kind of thing, kind of
• 45:52
  Speaker 3: connecting those dots and also looking at things like R
• 45:57
  Speaker 3: and D budgets. I remember our old colleague used to
• 46:00
  Speaker 3: do that a lot of money week. But that's you know,
• 46:03
  Speaker 3: this key thing about translating trains into moats, which I
• 46:07
  Speaker 3: thought was really interesting.
• 46:09
  Speaker 2: Well, it's the way he said, you know, every time
• 46:11
  Speaker 2: I asked him any specific questions and we talked about
• 46:14
  Speaker 2: we talked about these big trends and I said, well,
• 46:15
  Speaker 2: how do you invest in that? How do you invest
• 46:17
  Speaker 2: in that? His answer was always, well, it's pretty niche.
• 46:20
  Speaker 2: You know, it's pretty niche. He didn't say, oh, well
• 46:23
  Speaker 2: you know you're buy this this sector or that sector.
• 46:25
  Speaker 2: There's nothing about sector is just as very niche. You've
• 46:27
  Speaker 2: got to be precise and these are the few places
• 46:30
  Speaker 2: to go. I was also what I find very interesting
• 46:32
  Speaker 2: was the conversation about big government and debt and deficits,
• 46:35
  Speaker 2: and we can talk about that in a big way
• 46:37
  Speaker 2: and about how it makes economies as a whole fragile,
• 46:40
  Speaker 2: and it makes companies fragile, and then how do you
• 46:43
  Speaker 2: invest in that where you need to find companies there
• 46:45
  Speaker 2: is far away from government as possible, and companies that
• 46:49
  Speaker 2: are out of the spotlight that you know that you
• 46:51
  Speaker 2: can't people don't particularly see. And of course tires are
• 46:55
  Speaker 2: yet another example of that. He sees tires as you
• 46:57
  Speaker 2: just said.
• 46:58
  Speaker 3: Yeah, I mean I think again that point about omission
• 47:01
  Speaker 3: as well. In fact, actually think about it more than
• 47:05
  Speaker 3: anyone else. He's probably made the case against passive and
• 47:10
  Speaker 3: for active better without kind of really trying to than
• 47:16
  Speaker 3: anyone else we've had on the podcast so far in
• 47:19
  Speaker 3: practical terms.
• 47:20
  Speaker 2: Yeah, in practical terms, he's done it very well.
• 47:23
  Speaker 1: Yeah.
• 47:24
  Speaker 6: Yeah.
• 47:24
  Speaker 3: And actually even Rent to Kill, I was sort of
• 47:27
  Speaker 3: sittingly going away Rent to Kill and then it's like, well, actually,
• 47:30
  Speaker 3: you know, if the claimate's getting warmer than we're all
• 47:33
  Speaker 3: going to have more bugs annoyings. So actually there's a
• 47:37
  Speaker 3: lot of logic to that.
• 47:38
  Speaker 2: I was interested as well, by the way, what he
• 47:39
  Speaker 2: said about family companies, because I've written in the past
• 47:42
  Speaker 2: about the extent which family companies or companies where family
• 47:45
  Speaker 2: have a large stake, so you get a symbiotic relationship
• 47:49
  Speaker 2: between management and shareholder because they're the same thing for
• 47:52
  Speaker 2: once about have their tendency long term to help perform.
• 47:55
  Speaker 2: So I was interesting that's something that he picked up
• 47:57
  Speaker 2: on as well.
• 47:58
  Speaker 7: Well.
• 47:58
  Speaker 3: Yeah, and again I like loaded and also pointed out
• 48:02
  Speaker 3: that you can't just kind of blanket say family companies,
• 48:07
  Speaker 3: because some of them do have issues and it's kind
• 48:10
  Speaker 3: of it's leveraged on either say, it's like the you know,
• 48:14
  Speaker 3: they can completely ignore minority share hold doesn't. It's quite
• 48:17
  Speaker 3: possible that they founders an egomaniac control freak, and so,
• 48:21
  Speaker 3: you know, I thought it was interesting that he still
• 48:23
  Speaker 3: highlighted that he's obviously a very kind of nuanced thinker.
• 48:28
  Speaker 2: Thanks for listening to this week's Meron Talks Money. We'll
• 48:31
  Speaker 2: be back next week in the meantime, If you like us, show, rate, review,
• 48:34
  Speaker 2: and subscribe wherever you listen to podcasts, and keep sending
• 48:36
  Speaker 2: questions or comments to Merin Money at Bloomberg dot net.
• 48:40
  Speaker 2: I think we've made very clear that we do sometimes
• 48:43
  Speaker 2: drifts away from our core purpose here, so please do
• 48:45
  Speaker 2: set us straight. This episode was hosted by me Marin
• 48:47
  Speaker 2: sum set Well, but it was produced by Samasadi, additional
• 48:50
  Speaker 2: editing by Moses and special thanks of course to Daniel
• 48:53
  Speaker 2: Abaca Speak