Latest / Merryn Talks Money / Why Europe’s Banks and Energy Stocks May Lead the Next Rally with Blackrock's Helen Jewell

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Why Europe’s Banks and Energy Stocks May Lead the Next Rally with Blackrock's Helen Jewell · Merryn Talks Money

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Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
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Speaker 2: Welcome to Mern Talks Money, the podcast in which people
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Speaker 2: who know the markets explain the markets. I'm join Stebecks,
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Speaker 2: senior reporter of Bloomberg and authoring the Money Distilled newsletter.
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Speaker 2: Today I'll be covering from MERN for this special episode
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Speaker 2: of the show, recorded live from the Edelmand Smithfield Investors
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Speaker 2: Summit at the London Stock Exchange. With me, it is
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Speaker 2: Helen Jewel, International Chief Investment Officer of Fundamental Equities for
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Speaker 2: emir at Blackrock. Helen is over twenty years of experience
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Speaker 2: in financial services, starting her career as an investment banker,
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Speaker 2: following a training route into equity research at Goldman Sachs
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Speaker 2: and then moving to Blackrock in twenty fifteen. Now we're
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Speaker 2: speaking at the start of December, and it's been a
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Speaker 2: fascinating year for equity markets in general. AI in US
1:03
Speaker 2: tech stocks have still hogged the headlines, but when you
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Speaker 2: look at major global market performance in the year to date,
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Speaker 2: he'd actually, in most cases have been better off invested
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Speaker 2: in anywhere but the US. So I wanted to grab
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Speaker 2: a chat with Helen to get a sense of what's
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Speaker 2: caught Harraie this year and where she thinks the best
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Speaker 2: opportunities might be for twenty twenty six. Helen, Welcome to
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Speaker 2: me Earned Talks Money.
1:22
Speaker 3: Thanks for having me.
1:23
Speaker 2: It's very nice to have you. So, yeah, as I
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Speaker 2: was just saying there, it's been I mean I was
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Speaker 2: actually looking at the figures and it's actually really been
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Speaker 2: a spectacular year for markets. I really don't think that's,
1:34
Speaker 2: you know, over exaggerating. I think the Footsie one hundred
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Speaker 2: is seen its best performance, and I mean I know
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Speaker 2: that's not saying much for the foots of one hundred.
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Speaker 2: It's done its best since two thousand and nine. So
1:44
Speaker 2: what's kind of stood out most to you so far
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Speaker 2: this year?
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Speaker 4: I'm glad you said that, actually, John, because often the
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Speaker 4: first question people ask me is this year it's all
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Speaker 4: been about us and AI again, and I have to
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Speaker 4: remind them that actually over eighty percent of major indices
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Speaker 4: have reatten turned double digit returns this year, including as
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Speaker 4: you say, the foot Sea, which is or the foot
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Speaker 4: Sea one hundred close to twenty percent, which is incredible.
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Speaker 4: I mean that is really really strong returns. And so
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Speaker 4: the thing that has been really incredible this year is
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Speaker 4: firstly the diversification of those returns, both across markets, but
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Speaker 4: also across sectors as well. Again, I think most people
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Speaker 4: think that the tech sector is the one that has
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Speaker 4: performed the best, and it has performed very well, but
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Speaker 4: you've also seen utilities perform well. In fact, you've seen
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Speaker 4: pretty much every major sector post very strong returns, and
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Speaker 4: again that has been a key detail for the market
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Speaker 4: this year. The second thing I think is worth mentioning though,
2:44
Speaker 4: is that we have seen quite a number of quite
2:46
Speaker 4: significant pullbacks. If we go back to the start of
2:50
Speaker 4: this year, in January, we had what was termed the
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Speaker 4: deep Seek moment, when suddenly people thought that maybe AI
2:56
Speaker 4: wasn't the only story in town, and there was a
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Speaker 4: realization we had to be really thoughtful about what that meant.
3:02
Speaker 4: We then, of course had Liberation Date in April. We
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Speaker 4: then saw pullbacks in the summer, which was a painful
3:08
Speaker 4: summer for many of us, and then even November saw
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Speaker 4: a bit of a degrossing and a rotation. So the
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Speaker 4: second thing that has been remarkable in the markets is
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Speaker 4: the number of quite significant pullbacks that you've had, but
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Speaker 4: they've always been followed with a by the dip moment,
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Speaker 4: and that is not something I have remembered for a
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Speaker 4: long long time, if ever in my career.
3:28
Speaker 2: Just on that point, I mean, you're absolutely right, because
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Speaker 2: I mean I suppose one of the reasons a voice
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Speaker 2: surprised when God was looking at the figures is you
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Speaker 2: do have this abiden memory, particularly of April and Liberation Day.
3:39
Speaker 2: I guess everyone thought at that point that, well, that's
3:41
Speaker 2: we're going to get a bit of market now. It
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Speaker 2: finally looked as if you know what, the EI story
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Speaker 2: was kind of dead in the water. It's very interesting
3:49
Speaker 2: it's come back. Have you got any thoughts about what
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Speaker 2: is driving that kind of by the Depp mentality. Is
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Speaker 2: it just been hammled inty investors heads that it's been
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Speaker 2: the right thing to do for a boott in years now?
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Speaker 4: Yeah. I mean the most important thing with the buy
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Speaker 4: the dip is it is being supported by actual fundamentals.
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Speaker 4: And this is why when we think about AI, and
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Speaker 4: a very common question I get asked is is there
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Speaker 4: an AI bubble? These are real earnings of real companies
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Speaker 4: with real cash behind them. And I think that is
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Speaker 4: the key reason that people are staying invested in this
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Speaker 4: market is that they actually see true returns from companies
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Speaker 4: that have got the capital to invest, and the AI
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Speaker 4: story is going to be a multi year story. I mean,
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Speaker 4: we're really really just at the beginning of it. The
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Speaker 4: amount of capital that's currently being deployed is half a
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Speaker 4: trillion dollars. That is an incredible amount of capital, about
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Speaker 4: half percent I think of global GDP and again being
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Speaker 4: supported by companies with real cash behind it.
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Speaker 3: So we're just at the start of that.
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Speaker 4: I think there is a second reason though, and let's
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Speaker 4: be honest, there's a little bit of whether you want
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Speaker 4: to call it fomo in the market or players in
4:54
Speaker 4: the market, whether it's retail investors of course, indexer investors,
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Speaker 4: you've got the podshat who have capital that is invested
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Speaker 4: based on momentum, et cetera. And these participants also are
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Speaker 4: participants that support the market and the construct of the market,
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Speaker 4: and I think it's important that we recognize the influence
5:13
Speaker 4: those participants have, particularly after you've seen multi period returns.
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Speaker 4: So if I've made twenty percent and then twenty percent
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Speaker 4: again and another twenty percent, if the market pulls back
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Speaker 4: by five percent, I'm not as bothered as if I'm
5:26
Speaker 4: starting from point zero. So the amount of capital that
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Speaker 4: is in investors' pockets is also that little bit higher.
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Speaker 2: That's that's quit a big, almost psychological flow beneath the market.
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Speaker 2: I'm not just a money.
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Speaker 4: Flow exactly, and I don't think that it's very difficult
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Speaker 4: for us as investors to really put a number on
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Speaker 4: what that means. I mean, ultimately, John, the market is
5:47
Speaker 4: two things. It is the earnings that a company is
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Speaker 4: going to make, and it is the multiple that people
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Speaker 4: are willing to pay for that earnings going forward. The
5:55
Speaker 4: first of those, it's our job as fundamental investors to
5:57
Speaker 4: try and figure it out. I mean, that's what I've
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Speaker 4: spent twenty five years of my career trying to understand.
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Speaker 4: The second, though, at the end of the day, is
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Speaker 4: what people are willing to pay. And this is the
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Speaker 4: question for the S and P five hundred. When it
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Speaker 4: was at twenty two times, we thought is it too high?
6:14
Speaker 4: Then it goes to twenty three, Well, what is the
6:16
Speaker 4: right number for that multiple if it continues to deliver
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Speaker 4: for investors?
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Speaker 2: Yeah, I mean that's that's a good point. I mean,
6:23
Speaker 2: I must have spent a lot of my my owing
6:26
Speaker 2: career looking at the cape ratio and kind of more
6:29
Speaker 2: recently stressing about who he is in the US, but
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Speaker 2: that doesn't seem to have certainly not a timing too.
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Speaker 2: But one thing I would say, which I think, again
6:40
Speaker 2: going back to what we started with, this has kind
6:43
Speaker 2: of been the year where we've seen the rest of
6:45
Speaker 2: the world catch up with the US. And I'm just
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Speaker 2: wondered on what you think is driven that, as in
6:51
Speaker 2: way have we seen that switch and do you think
6:54
Speaker 2: that's going to continue or do you think those sectors
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Speaker 2: are perhaps getting too expense of themselves, Like the defense
7:01
Speaker 2: story is an interest and one to me because that's
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Speaker 2: kind of rocketed, but that is also a saense to
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Speaker 2: know that maybe Germany is not going to be able
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Speaker 2: to deliver. Maybe, so I'll let you take that.
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Speaker 4: Yeah, So why is it caught up? First off, I
7:14
Speaker 4: think really goes back to that deep seek moment. That
7:17
Speaker 4: the deep seek moment was the moment that we realized
7:20
Speaker 4: that the US was not the only story in town.
7:23
Speaker 4: Twelve months ago I was here. I think we were
7:26
Speaker 4: talking about US exceptionalism all the time, and it's because
7:28
Speaker 4: the US had delivered and nothing else had. And I
7:31
Speaker 4: think what happened with the deep seek moment is it
7:34
Speaker 4: was this realization of oh goodness, maybe when it comes
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Speaker 4: to AI, it's not just about the US, and maybe
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Speaker 4: in my portfolios I should have a bit more diversity
7:43
Speaker 4: other than the US. The best thing you could have
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Speaker 4: done at the start of the year would have been
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Speaker 4: underweight US and overweight China Tech for that.
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Speaker 3: Month of January.
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Speaker 4: So that realization has meant that people have looked elsewhere
7:55
Speaker 4: and you've been in again this unusual situation where you
7:58
Speaker 4: have so many markets into double digits. So the starting
8:02
Speaker 4: point has been investors looking for other opportunities outside of
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Speaker 4: just that US AI bubble. And where have they looked, Well,
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Speaker 4: they've looked at generally two things, which is what investors
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Speaker 4: look at. They look at firstly, where do they think
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Speaker 4: that the earnings growth is going to come from? And
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Speaker 4: that's the defense story, right, the investors saying, we believe
8:23
Speaker 4: that there's going to be this flow of capital and
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Speaker 4: from the German government from Europe into defense that is
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Speaker 4: going to support the earnings, so I am going to
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Speaker 4: buy there. And the second area they look at is
8:34
Speaker 4: areas they think valuations look really interesting, so they go, okay,
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Speaker 4: what looks relatively interesting, And in Europe, the banks has
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Speaker 4: been the key area that that has been true for
8:44
Speaker 4: They look relative to their history pretty cheap. We think
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Speaker 4: these are really strong, good companies that restructured post the
8:50
Speaker 4: financial crisis. They're going to return capital to shareholders. Let
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Speaker 4: me go there, And it's just what you would do
8:56
Speaker 4: if you're buying a house, right, if you're buying a
8:58
Speaker 4: house from an investment perspective, you either want to go
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Speaker 4: somewhere that looks pretty cheap and really good value, or
9:04
Speaker 4: somewhere where you think is really up and coming and
9:06
Speaker 4: there's going to be future earnings. It's the same mentality.
9:09
Speaker 4: So then that goes for where next, where it's the
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Speaker 4: same mentality still, where do we think the earnings are
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Speaker 4: going to be and where it still looks good value
9:17
Speaker 4: now earnings wise, the defense maybe has a bit further
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Speaker 4: to go, but it's probably not the dominant story to me.
9:22
Speaker 4: The dominant story in twenty six is going to be,
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Speaker 4: you know, the energy solution providers, and that's where Europe
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Speaker 4: can actually be really, really good.
9:30
Speaker 2: That's interesting so because obviously you know, looking at we
9:35
Speaker 2: ad highs like this year, energy does come up, although
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Speaker 2: I'm assuming that that is mostly the force or fuel said,
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Speaker 2: because I think clean energy's done reasonably well this year,
9:45
Speaker 2: so weird as it you think the money's going to
9:48
Speaker 2: be cheasing next year.
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Speaker 4: Yeah, So three things, And actually, interestingly, the energy stocks
9:53
Speaker 4: have not done badly this year.
9:55
Speaker 3: The oil price.
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Speaker 4: You've seen a separation between the oil price and energy stocks,
9:58
Speaker 4: which is pretty interesting. Part of that is geopolitics, but
10:02
Speaker 4: part of that is also the recognition that actually demand
10:05
Speaker 4: is going to be more resilient than people thought for
10:07
Speaker 4: the fossil fuels. So fossil fuels have done okay. Clean
10:11
Speaker 4: energy has already started to do well, but definitely has
10:14
Speaker 4: got better. But let's put it into three camps. If
10:16
Speaker 4: you need energy, and you need energy.
10:19
Speaker 3: A lot of it is driven by AI.
10:20
Speaker 4: So so much from the AI perspective is AI need
10:24
Speaker 4: energy to work. There's also things like air conditioning, but
10:27
Speaker 4: AI seems to be the only thing we talk about
10:29
Speaker 4: that is the dominant, dominant driver.
10:32
Speaker 3: So what do you need?
10:33
Speaker 4: You need companies that can provide the energy, and it
10:35
Speaker 4: doesn't matter where that energy.
10:37
Speaker 3: Really comes from.
10:37
Speaker 4: It can be fossil fuels, it can be clean energy,
10:39
Speaker 4: but you need energy. Number two, you need that energy
10:43
Speaker 4: to be efficient. So companies that are supporters of energy efficiency.
10:48
Speaker 4: And thirdly, you need the energy to get to where
10:50
Speaker 4: it needs to go, so network companies. So that's three
10:54
Speaker 4: buckets which are all kind of part of the energy infrastructure.
10:57
Speaker 4: Anyone who provides the nuts and botds for wind turbines,
11:01
Speaker 4: anybody who provides solutions for energy efficiency, and anybody who
11:07
Speaker 4: provides the network for actually getting the energy to where
11:09
Speaker 4: it needs to be. And of course the data centers
11:12
Speaker 4: for storing the energy where it needs to be. They
11:14
Speaker 4: are going to be the real winners energy. I think
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Speaker 4: John is going to be the real constrainer for AI
11:19
Speaker 4: in twenty six.
11:20
Speaker 2: Yeah, I mean, yeah, that makes an awful lot of sense.
11:23
Speaker 2: There's a limit to him in the specific company. But
11:26
Speaker 2: what's a good example of a company or an area,
11:31
Speaker 2: like an example rather than rather than a TEP as
11:34
Speaker 2: it will.
11:34
Speaker 4: Yeah, So a good example is in the German industrial space.
11:38
Speaker 4: So the German industrial names have got some really interesting
11:42
Speaker 4: names within their semens energy for example this one, and
11:45
Speaker 4: it's done very well. So again these are not these
11:47
Speaker 4: are kind of about having more. Again from a network perspective,
11:51
Speaker 4: you've got names like Ebadrola in Spain, SSEC here in
11:54
Speaker 4: the UK recently did a capital race. These are really
11:57
Speaker 4: interesting names and interesting companies because they are providing a
12:01
Speaker 4: solution to something that the world needs right now and
12:05
Speaker 4: ultimately bringing it back to one oh one. And as
12:07
Speaker 4: you said at the start, I spent a couple of
12:09
Speaker 4: years in training, and in training, what you were kind
12:11
Speaker 4: of telling people is, look, this isn't This is about
12:14
Speaker 4: looking at companies that have earnings. Earnings is revenue less costs.
12:18
Speaker 4: Revenue is driven by providing things that people need, Things
12:22
Speaker 4: that people need or want, is solutions, solutions that solve
12:27
Speaker 4: things that people are looking for. And right now we
12:30
Speaker 4: have got a need for more energy, driven by AI,
12:33
Speaker 4: driven by air conditioning, driven by just the way we're
12:36
Speaker 4: living our lives.
12:36
Speaker 3: At the moment, we're.
12:54
Speaker 2: Going back to the EI because and talking about the
12:57
Speaker 2: capital spend. And I radther very interesting piece from calf
13:01
Speaker 2: Cal a couple of weeks ago, and it kind of
13:04
Speaker 2: made a point I must have I hadn't really thought
13:06
Speaker 2: about because everyone kind of lazily compares this to the
13:09
Speaker 2: dot com bubble. And one thing that this chat was
13:13
Speaker 2: making the point was that, well, I say the dot
13:14
Speaker 2: com bubble, once these companies were established, the marginal you know,
13:19
Speaker 2: cost of sales was basically free and so everything went
13:23
Speaker 2: to pure profit, whereas AI seems to have this ongoing
13:26
Speaker 2: capital intensity where you know, you're trying to keep up
13:30
Speaker 2: with your rivals, you need to buy the next hot
13:32
Speaker 2: in the video chip, that sort of thing. Is there
13:35
Speaker 2: a point where we kind of run out of road
13:37
Speaker 2: slightly and you know, it's good, We're building out all
13:40
Speaker 2: this infrastructure, but then everyone goes, oh wait, I'm where's
13:44
Speaker 2: the actual money coming from to pay for all this.
13:47
Speaker 2: I'm just curious what your take has on that element.
13:49
Speaker 4: I mean, that is something that people worry about. But
13:51
Speaker 4: the reason I think we shouldn't worry is that. And
13:54
Speaker 4: I think it's as you say, where AI is is
13:56
Speaker 4: a little bit different to dot com. AI is transmission
14:00
Speaker 4: across many different things. It's not just about the consumer.
14:02
Speaker 4: It is about defense, for example, it is about government security.
14:06
Speaker 4: So when it comes to AI, there is the two things.
14:09
Speaker 4: There's the one that you touched on, which is that
14:10
Speaker 4: circularity of the more chips you need, or the more
14:14
Speaker 4: chips you have, the more AI can do. The more
14:16
Speaker 4: AI can do, the more chips you need. So you've
14:18
Speaker 4: got that circularity of growth in the chips, which is important.
14:23
Speaker 4: The second thing is this is bigger than just being
14:26
Speaker 4: able to buy things on your phone. This is about
14:30
Speaker 4: needing this for security from a geopolitical perspective as well.
14:34
Speaker 4: And that's probably the thing that we don't talk about
14:37
Speaker 4: quite enough. If and it's a very big it's hugely unlikely,
14:41
Speaker 4: but the hyperscede has ever decided actually tomorrow this is done.
14:44
Speaker 4: We're not spending I am confident that governments would step
14:47
Speaker 4: in that they need to, that they can't not be
14:50
Speaker 4: part of this story because this is so important. It's
14:53
Speaker 4: going to be part of defense, it's going to be
14:55
Speaker 4: part of national security as well. The AI story is
14:59
Speaker 4: much much better, bigger than just being able to do
15:02
Speaker 4: the Christmas quiz via chat GPT absolutely answer.
15:05
Speaker 2: So I see your business in there's a kind of
15:07
Speaker 2: tax payer put under the sector to a certain extent,
15:10
Speaker 2: that's what that's interesting.
15:12
Speaker 3: But you're already seeing it, right.
15:13
Speaker 4: You go over to different countries and you know, we're
15:16
Speaker 4: already starting to see it here in the UK. You
15:18
Speaker 4: go in and it's face recognition at passport control, it's
15:21
Speaker 4: those things. If you're not investing in those things, and
15:24
Speaker 4: those things are all kind of the part of AI.
15:27
Speaker 4: I mean, these are all AI constructs. If you don't
15:31
Speaker 4: do that as you're going to be left behind. So
15:34
Speaker 4: it's not just about the companies, although the companies obviously
15:37
Speaker 4: are the drivers and the nuts and bolts of all
15:38
Speaker 4: of this. Again, the companies are the solution providers and
15:42
Speaker 4: and understanding who are providing the solution that people and
15:47
Speaker 4: by people. It's consumers, it's governments, it's everybody need that.
15:51
Speaker 4: That is That is our job and that's why I
15:53
Speaker 4: love it, John, That's why it's so interesting to me
15:55
Speaker 4: every single day because it's thinking who is going to
15:57
Speaker 4: be providing the solution going forward?
15:59
Speaker 2: Okay, and so in terms of the best play on
16:02
Speaker 2: AI next year, I get the film and you're basically
16:04
Speaker 2: saying the energy is a good point because it's semi
16:07
Speaker 2: decent valuations and it's definitely going to be needed. That
16:11
Speaker 2: makes a lot of sense in terms of because going back.
16:14
Speaker 4: To that in Europe, John's a little bit biased, if
16:16
Speaker 4: you don't mind me saying that. You know, I love
16:18
Speaker 4: anything that has a much bigger European tilt to it.
16:20
Speaker 4: So you know, there's some really interesting European companies in
16:23
Speaker 4: that space.
16:24
Speaker 2: That's forgivable. Giving your job title actually on that point.
16:28
Speaker 2: So obviously the other one that has kind of rocketed
16:30
Speaker 2: because I was looking at the Spain for example, and
16:32
Speaker 2: one thing that caught my high a couple of weeks
16:34
Speaker 2: ago when I was writing about it, and obviously the
16:37
Speaker 2: Spanish market is not one to pay a lot of
16:39
Speaker 2: attention to, but I was looking at it was going,
16:41
Speaker 2: my goodness, that is an awful lot this year. And
16:45
Speaker 2: then you can look at it and it's like what
16:46
Speaker 2: was basically the banking sector that's driving that. And it's
16:49
Speaker 2: the same way the Italian market has gone up a
16:52
Speaker 2: lot because the banks have rocketed. And even in the UK,
16:55
Speaker 2: I mean Lloyd's is up a lot this year. I
16:57
Speaker 2: think that West was up a lot kind of last year.
17:00
Speaker 2: Are the banks still or not all? Do you think
17:02
Speaker 2: what is that sort of like kind of rapen And.
17:06
Speaker 4: No, we still think the banks are on a roll
17:09
Speaker 4: and we remain overweight HSBC and again in the UK
17:12
Speaker 4: and are the big performer this year. So why are
17:15
Speaker 4: we so positive on them? Even when they've gone up?
17:18
Speaker 4: The valuations although they are higher than they were a
17:20
Speaker 4: year and two years ago, they are still not particularly
17:24
Speaker 4: excessive versus history. So that is number one. Number two,
17:29
Speaker 4: they are a set of companies that have resilience in
17:32
Speaker 4: their earnings. And people think so much just about the
17:35
Speaker 4: interest rate, And of course the interest rate might come
17:37
Speaker 4: down a little bit, but it was only going to
17:39
Speaker 4: come down a little and we're still in the kind
17:40
Speaker 4: of a good spot for banks. More importantly, for banks,
17:44
Speaker 4: it's about the loan growth. And what you're seeing is
17:48
Speaker 4: you're seeing corporate balance sheets in strong place. You're seeing
17:51
Speaker 4: consumers in a strong place, and that is really supportive
17:54
Speaker 4: for the banks. And the third thing I would say,
17:56
Speaker 4: and I don't think European banks are given enough credit
17:58
Speaker 4: for this post the finalancial crisis, they did really think
18:02
Speaker 4: about how they were capitalized and how they were structured,
18:06
Speaker 4: and as a result of that, we think in the
18:08
Speaker 4: next three years that they're able to return up to
18:11
Speaker 4: twenty five percent of their current market cap to shareholders
18:13
Speaker 4: in either dividends or share buybacks. So that's a pretty
18:17
Speaker 4: nice space, right You buy something feeling confident that you
18:21
Speaker 4: get to get twenty five percent back even if nothing
18:23
Speaker 4: else happens, and the likely it is something else is
18:26
Speaker 4: going to happen. So European banks remain a key part
18:30
Speaker 4: of our portfolios at the moment.
18:32
Speaker 2: I mean it's interesting because I would say, and I
18:34
Speaker 2: don't know what your thoughts are, but one thing that
18:36
Speaker 2: did stand doing to me about the budget recently, and
18:39
Speaker 2: I guess a positive sense, was that the Chancellor minds
18:42
Speaker 2: to resist all pressure put another tax on the banks.
18:48
Speaker 2: And also, you know, the consumer of car lawing kind
18:53
Speaker 2: of issue. Seems they have been downplayed in the way
18:55
Speaker 2: that the PPI kind of scandal war isn't. I think
18:59
Speaker 2: it almost feels as if and I don't know if
19:00
Speaker 2: you agree that the banks have kind of come off
19:02
Speaker 2: the naughty step in the last twelve months, certainly in
19:06
Speaker 2: the UK and also seems to be happening in Europe
19:09
Speaker 2: as well. So I guess maybe we've not got that
19:11
Speaker 2: same post financial crisis can anger at them to an extent.
19:17
Speaker 4: Yeah, No, I think it's certainly eased. And I think
19:20
Speaker 4: when you look at the returns that these companies have had,
19:24
Speaker 4: they're so relatively mundane versus some of the other companies.
19:29
Speaker 4: I mean, the question actually bringing it back to that
19:31
Speaker 4: AI story and kind of it's got so far that
19:34
Speaker 4: we need to get to. I was listening on the
19:37
Speaker 4: way into the radio and obviously in Australia. You're starting
19:39
Speaker 4: to see changes being made there as children can't use
19:43
Speaker 4: social media et cetera. That is going to be the
19:46
Speaker 4: interesting next step. I think it's not going to be
19:48
Speaker 4: about the banks again, that's quite I think it's more
19:52
Speaker 4: likely to be about for AI. What does that mean
19:55
Speaker 4: from a social perspective. It's going to be really interesting,
19:58
Speaker 4: But that I think is going to be much more
20:00
Speaker 4: the focus than the banks.
20:02
Speaker 2: That is interesting because yeah, because one thing we have
20:04
Speaker 2: been talking about for a long time is when is
20:08
Speaker 2: the backlash against the big tech company is going to
20:11
Speaker 2: come about? And I know that's an idea that's been
20:12
Speaker 2: bubbling under for several years. But that's really interesting you
20:18
Speaker 2: raise that then, because it almost feels as if that
20:20
Speaker 2: has starting to happened. People are getting more and more
20:22
Speaker 2: concerned about what social media is perceived at least to
20:26
Speaker 2: have done to you know, the children's brains and things
20:29
Speaker 2: like that. So I okay, that's so that's a kind
20:31
Speaker 2: of possible risk for the tech sector next year.
20:34
Speaker 4: Perhaps it is, but again our job is to think
20:36
Speaker 4: about how do you turn that into something more tangible.
20:39
Speaker 4: Backlash can be words, but a backlash can be actions
20:42
Speaker 4: and at the moment until you know more about actions.
20:44
Speaker 3: I think it's yeah, I'd.
20:47
Speaker 4: Love over a beer to chat more about it. But
20:49
Speaker 4: from it from an investment perspective, you're just guessing.
20:52
Speaker 2: And in terms of sectors for next year that you're
20:55
Speaker 2: perhaps less keen on are ones you would just not
20:59
Speaker 2: be as in through yas to go about any standout
21:02
Speaker 2: as being either the two expensive or there's just nothing
21:06
Speaker 2: going to happen there or anything you would basically avoid.
21:10
Speaker 3: Yeah.
21:10
Speaker 4: The one area that unfortunately still struggles is the auto
21:13
Speaker 4: sector in Europe. It is under a huge structural pressure
21:18
Speaker 4: obviously where you've seen tariffs coming in and that has
21:22
Speaker 4: put it under pressure both directly and obviously indirectly through
21:26
Speaker 4: other countries now having cheaper vehicles that they can export
21:30
Speaker 4: it to Europe. So it pays me to say it,
21:33
Speaker 4: but the European auto sextor is one that we remain underweight.
21:37
Speaker 4: It feels a little bit of a value trap at
21:38
Speaker 4: the moment.
21:39
Speaker 2: And in terms of the individual countries, are there any
21:42
Speaker 2: fever over others or is that not really how you
21:45
Speaker 2: think about the European market.
21:47
Speaker 4: It's a bit like you say, when you get too
21:49
Speaker 4: much in the European market. You're really looking at companies.
21:51
Speaker 4: So Spain is great, but Spain is great because it's
21:53
Speaker 4: got fantastic banks and utilities.
21:55
Speaker 3: I would say, as I mentioned with.
21:56
Speaker 4: Ebidroler earlier, the one area as we are sitting here
22:00
Speaker 4: in pattern not to square that this worth is mentioning
22:03
Speaker 4: is the UK small cap. So the UK small cap
22:06
Speaker 4: has been unloved and undervalued for a period of time now,
22:10
Speaker 4: and you know, the budget last week perhaps provides a
22:13
Speaker 4: little bit more stability. Obviously one of the things the
22:16
Speaker 4: chance he's trying to do is get people investing more
22:18
Speaker 4: in the UK and if people invest, they tend to invest.
22:22
Speaker 3: In their home country.
22:23
Speaker 4: We've got great small cap companies in this country and
22:27
Speaker 4: the valuations of some of them are incredibly interesting. So
22:31
Speaker 4: we remain long term positive whilst recognizing that structurally it's
22:35
Speaker 4: been a very difficult place over the last couple of years.
22:38
Speaker 2: I mean, that is interesting you to bring that up,
22:40
Speaker 2: because I perfectly think about valuation without worrying too much
22:43
Speaker 2: about catalysts. But obviously small caps in the UK have
22:47
Speaker 2: been struggling for a long time. Is that anything you
22:50
Speaker 2: see that may actually make that kind of start to
22:53
Speaker 2: go awi in twenty twenty six, because obviously even the
22:56
Speaker 2: footy two fifty has had by compartison a buy eleven
23:01
Speaker 2: percent would not be a pretty decent year. So I'm
23:04
Speaker 2: just cursed to see what you're thinking that.
23:06
Speaker 4: Yeah, I don't think there's a one clear catalyst, which
23:08
Speaker 4: is a real shame because if there was, I would
23:10
Speaker 4: be absolutely pivoting all in. I think maybe what we
23:13
Speaker 4: are going to see is again this understanding that you
23:16
Speaker 4: need to broaden out portfolios exactly what we've seen this year.
23:20
Speaker 1: Now.
23:20
Speaker 4: At the start of the year, that felt easy in
23:22
Speaker 4: inverted commas because you had these pockets that had not
23:25
Speaker 4: performed well. Now of course it's more difficult because you
23:27
Speaker 4: have more pockets that have performed well. So maybe what
23:30
Speaker 4: that forces is it forces investors to go further afield
23:34
Speaker 4: to find those pockets that still look relatively cheap and
23:38
Speaker 4: relatively interesting. That's the hope that I have, But maybe
23:42
Speaker 4: that's my hope in a slightly biased opinion, but it
23:46
Speaker 4: would be lovely if they did. And I think what
23:48
Speaker 4: you will see, because the equidity is relatively low, you
23:51
Speaker 4: do start to see these virtuous cycles.
23:53
Speaker 3: Once it happens, people think I've missed out here and
23:56
Speaker 3: we go.
23:56
Speaker 4: So I would love love to see that happen and
24:00
Speaker 4: hope right it could be a hope for twenty twenty six.
24:03
Speaker 2: Hope I like that. I mean honestly, I think people
24:06
Speaker 2: were were great to be disappointed with the budget that said,
24:11
Speaker 2: do you think that the three year stamp duty holiday
24:14
Speaker 2: may bring a couple of big get apos here that
24:17
Speaker 2: we're looking elsewhere and perhaps now you think, oh, I
24:21
Speaker 2: sually maybe we can choose London or at least dual
24:25
Speaker 2: less than London or something like that. Is it going
24:28
Speaker 2: to move the needle at all?
24:30
Speaker 4: I think what it shows is a real try, a
24:32
Speaker 4: support you know, a kind of desire of a government
24:35
Speaker 4: to say we want to help make this happen. And
24:37
Speaker 4: I think that is important. But let's be honest, the
24:40
Speaker 4: thing that is the most important thing of all is
24:42
Speaker 4: the valuation level. So actually what is more likely to
24:45
Speaker 4: be supportive is again that foot sea starting to move up,
24:49
Speaker 4: and the foot sea and people thinking if I list here,
24:51
Speaker 4: my opportunity for re terms is just as great as
24:54
Speaker 4: if it was elsewhere. That is the big deal mover.
24:56
Speaker 4: But having a supportive government it can't help in terms
24:59
Speaker 4: of a government. That's basically indicating to the world market,
25:02
Speaker 4: we want to make it easier for you to list
25:04
Speaker 4: in the UK.
25:05
Speaker 2: Yeah, what's the biggest risk you see for twenty twenty six,
25:08
Speaker 2: Because obviously this year there was tartiffs, there was the
25:13
Speaker 2: you know, bind market was going to blow up at
25:15
Speaker 2: any point, and neither of those things have actually really
25:18
Speaker 2: done the damage that perhaps people were worried that we're
25:20
Speaker 2: going to do. What do you think the potential kind
25:23
Speaker 2: of thing you keep an eye on ers for next year.
25:26
Speaker 4: I think the biggest risk is actually complacency driven by
25:29
Speaker 4: those couple of things that you've seen. And although the
25:32
Speaker 4: macro does look okay and decent, you know, we are
25:36
Speaker 4: starting to see a little bit of softening of job
25:38
Speaker 4: data in the US. At the moment, we're still in
25:40
Speaker 4: that bad news is good news because then the FED
25:43
Speaker 4: is more likely to cut. But if we get too
25:46
Speaker 4: complacent and we don't think about, you know, the impact
25:50
Speaker 4: of maybe stickier inflation on jobs, on stick of inflation
25:55
Speaker 4: on consumer confidence, that is the big biggest concern that
26:00
Speaker 4: I would have that actually what you see is this
26:02
Speaker 4: kind of creep of things not getting terrible, but kind
26:07
Speaker 4: of just getting a little bit worse and a little
26:09
Speaker 4: bit worse, and again all of this comes back to
26:12
Speaker 4: the market is driven to a certain extent by the
26:15
Speaker 4: multiple that people are willing to pay, which is driven
26:17
Speaker 4: a lot by the confidence they have in the underlying economies.
26:21
Speaker 4: So my biggest concern, and it's not a big bang answer,
26:24
Speaker 4: I don't think, you know, there will be certain things
26:26
Speaker 4: that we haven't even thought about yet. I mean, twelve
26:28
Speaker 4: months ago, I didn't know, you know, deep Seek was
26:30
Speaker 4: a thing that was going to kind of blow up
26:32
Speaker 4: in January. But that kind of creep of nervousness that
26:38
Speaker 4: that is something that I am keeping a real eye
26:40
Speaker 4: on because I worry that we've become complacent John, you know,
26:44
Speaker 4: the concerns we have went away. Everyone just kept buying
26:46
Speaker 4: the dip, and therefore we end up in a situation
26:49
Speaker 4: where we just almost don't even look at things that
26:52
Speaker 4: we should as investors be continually looking at.
26:55
Speaker 2: And there on the glass half we'll say, there's an
26:57
Speaker 2: anthing you see as being a big poison to surprise
27:00
Speaker 2: that could happen, something that may engender more confidence that
27:04
Speaker 2: we're not really thinking about.
27:07
Speaker 4: That's a really good question, I think, because we've all
27:09
Speaker 4: been so positive. We probably are thinking about all of
27:12
Speaker 4: the good things that might be likely to happen. But
27:18
Speaker 4: I think maybe one of the things is the element
27:21
Speaker 4: of Again, I don't want to sound boring always bringing
27:25
Speaker 4: back to this energy story, but the ability of the
27:29
Speaker 4: human being to continually solve the issues that are coming
27:33
Speaker 4: up in the world. It's not necessarily a big bang surprise,
27:36
Speaker 4: but I think the resilience of us as humans. Again,
27:40
Speaker 4: if you think about the market, if you think about
27:42
Speaker 4: Liberation Day, Liberation Day was such a big day in
27:45
Speaker 4: the markets, but actually very quickly companies adapted, government's adapted,
27:50
Speaker 4: people adapted, And I think giving ourselves a little bit
27:53
Speaker 4: of a pat on the back for that and recognizing
27:56
Speaker 4: the ability of humans to respond well is a good thing.
28:00
Speaker 4: And then you know, maybe obviously from a other perspective,
28:04
Speaker 4: that there's a lot of geopolitical issues that continue. Seeing
28:08
Speaker 4: those move through and resolution of some of those is
28:10
Speaker 4: always obviously helpful for markets, if more importantly helpful for humans.
28:15
Speaker 2: Yes, quit so was saying by energy, stick with the banks,
28:20
Speaker 2: avoid cars. Anything else was loxuredly sick. That's the one
28:27
Speaker 2: other You.
28:29
Speaker 4: Saw my finger come up if we were being recorded
28:31
Speaker 4: and buy energy. To be very clear, let's let's kind
28:34
Speaker 4: of scope that out everything energy, because I think people
28:36
Speaker 4: when they think about that, they just think about the
28:38
Speaker 4: oils in one segment, all energy solution providers by banks,
28:43
Speaker 4: and then actually for luxury, I'd actually broughten it out
28:46
Speaker 4: to quality growth in Europe. Quality growth in Europe, and
28:49
Speaker 4: by that I mean they're really good European companies that
28:53
Speaker 4: again have resilient earnings, they have strength in their balance sheets.
28:57
Speaker 4: These companies have not actually had a great year. And
28:59
Speaker 4: the reason I've not had a great year in Europe
29:01
Speaker 4: is a weakening dollar and the tariffs, and most of
29:04
Speaker 4: them are exporters. Those two things combined have really put
29:08
Speaker 4: pressure and nervousness on those companies. So they include names
29:11
Speaker 4: in the luxury good space like LVMH, names in the
29:14
Speaker 4: semiconductor space, names in the data providers a space, and
29:19
Speaker 4: the solutions space software space, which often have just been
29:24
Speaker 4: kind of actually downgraded quite significantly in investor minds. Those
29:29
Speaker 4: as a group of companies have not had a great
29:32
Speaker 4: year in Europe. But when we see more stabilization in
29:35
Speaker 4: terms of currency, when we see obviously the tariff resolutions
29:38
Speaker 4: starting to come through, I think they're a really interesting
29:41
Speaker 4: group of companies. Perhaps being selective though always good for
29:45
Speaker 4: me to throw in a recommendation for active investing in
29:49
Speaker 4: that space to really understand the winners versus the losers.
29:51
Speaker 2: So you have to be pecky. So we can't just
29:53
Speaker 2: buy a track I find is that they hate it,
29:55
Speaker 2: not a.
29:55
Speaker 4: Track of fund for quality growth. Quality growth is exactly
29:58
Speaker 4: the kind of area that you want to play selective
30:00
Speaker 4: and active.
30:01
Speaker 2: Very good, Well, listen, that's been really helpful here, and
30:06
Speaker 2: I think we've got a good all review of what
30:07
Speaker 2: we need to be looking at for next year. I'm
30:10
Speaker 2: going to ask a usual end question, but before I
30:13
Speaker 2: do that, is it anything else specific that you wanted
30:15
Speaker 2: to bring up that you feel that havn't covered, that
30:18
Speaker 2: we haven't covered.
30:20
Speaker 4: The one thing I perhaps is is and ask that
30:22
Speaker 4: all the listeners. AI and ai Us is such an
30:25
Speaker 4: interesting story that, as we say, we could talk about
30:29
Speaker 4: entirely just about that. But just because that's the story
30:32
Speaker 4: that is dominating the headlines, don't forget that there is
30:36
Speaker 4: still really interesting returns happening in many other parts of
30:39
Speaker 4: the market. So diversifying portfolios is not just about moving
30:43
Speaker 4: away from a dominant risk in portfolios and feeling you've
30:47
Speaker 4: got to give up returns to do so. It's absolutely
30:50
Speaker 4: not the case. You can diversify portfolios in a really
30:53
Speaker 4: sensible way and also.
30:55
Speaker 3: Maintain those returns.
30:56
Speaker 4: So don't let the headlines grab how you allocate portfolio one.
31:00
Speaker 2: Listen to the headlines? Can you trust journalists? Terrible? So
31:06
Speaker 2: for Christmas, which book have you read this year that
31:11
Speaker 2: you would see with make an excellent gift?
31:13
Speaker 4: Oh well, it's a great question, and I'm going to
31:16
Speaker 4: say the one that's best for a gift because it's
31:18
Speaker 4: a brilliant book. It's a fiction book Frederick Backman called
31:21
Speaker 4: My Friends. I love that author, and it's a really
31:24
Speaker 4: really good, really enjoyable, really heartwarming, readable book.
31:27
Speaker 3: So as a gift, definitely do that.
31:30
Speaker 4: The second one, if I can have two, which is
31:32
Speaker 4: probably less good as a gift, but it's really really interesting.
31:35
Speaker 4: It's called Being Mortal by A Gandhi, and this is
31:40
Speaker 4: really about how we think about death and dying. So
31:43
Speaker 4: probably not the best thing to give us a gift,
31:46
Speaker 4: but certainly one that I would recommend reading it. It
31:48
Speaker 4: really gets you thinking, which is all that you can
31:50
Speaker 4: ask for from a book. So one that's heartwarming, one
31:53
Speaker 4: that gets you thinking, one that is a gift, one
31:55
Speaker 4: that's a by yourself.
31:57
Speaker 2: It was a good choice.
31:57
Speaker 3: Diversification everywhere you see.
32:01
Speaker 2: Well look. Thanks very much, Helen, really appreciate your time.
32:04
Speaker 3: Thanks John, great to be Hey, Thanks for having me.
32:17
Speaker 2: Thanks for listening to this week's Merton Talks Money. If
32:19
Speaker 2: you like a show, rate the view and subscribe wherever
32:22
Speaker 2: you listen to podcasts, and keep sending questions or comments
32:25
Speaker 2: to Merron Money at Bloomberg dot net. This episode was
32:28
Speaker 2: hosted by me Join step Beck. You can also follow
32:30
Speaker 2: me on Twitter or x I am at Join Underscore
32:33
Speaker 2: step Beck and Meron is at Merton sw This episode
32:37
Speaker 2: was produced by some of Sadie and Wasis and Am
32:39
Speaker 2: sound designed by Blake Maples and special thanks to Helen,
32:42
Speaker 2: Joel Edelman, Smithfield and the London Stock Exchange