Latest / Merryn Talks Money / How to Invest Amid an Upended Global Financial Order

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How to Invest Amid an Upended Global Financial Order · Merryn Talks Money

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Speaker 1: Bloomberg Audio Studios, Podcasts, Radio News. Welcome to Merrin Dooks Money.
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Speaker 1: The podcast and is people who know the markets Explain
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Speaker 1: the markets. I am Maren Zamaset Webinar. Just before I
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Speaker 1: start to let you know, we are recording this podcast
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Speaker 1: on Thursday, the sixteenth of April, and so you're listening
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Speaker 1: to something that is a couple of days old. I
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Speaker 1: only mentioned that because things move so fast these days. Anyway,
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Speaker 1: this week, we welcome back to the show Alexander Charters,
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Speaker 1: fund manager at the Rougher Investment Company. We have had
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Speaker 1: Alex on a few times before. Some of you will
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Speaker 1: remember him. Alex Welcome to Merrin Drook's Money.
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Speaker 2: Great se Maren, thank you for having me on now.
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Speaker 1: The reason I've asked you on in particular is because
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Speaker 1: while you've always given us great ideas about investment and
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Speaker 1: really good portfolio chat, the other thing that you've done
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Speaker 1: for us is really given us a great macro overview,
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Speaker 1: a real understanding of how geopolitics and investment work together.
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Speaker 1: So one of things I wanted to start by doing
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Speaker 1: was saying to you, well, you know, there's a lot
1:09
Speaker 1: going on, and I wonder how, for example, the war
1:12
Speaker 1: in the middle least at the moment, fits into your worldview.
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Speaker 1: The worldview we've discussed before.
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Speaker 2: Well, we're definitely in an era of regime change that
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Speaker 2: we've touched on before. Packs Americana is breaking down. We
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Speaker 2: don't have a benign hedgemon that's either able or willing
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Speaker 2: to keep order in the global system the same way,
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Speaker 2: and Trump is an accelerant of this transition, but the
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Speaker 2: root causes run much deeper, and that means they will
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Speaker 2: outlast him. The net result, I think, is going to
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Speaker 2: be this much more volatile and inflation prone system. Shocks
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Speaker 2: are going to be a feature, not a bug. So
1:48
Speaker 2: think about the return of big government, great power, competition,
1:51
Speaker 2: weaponized inter dependence. Just think about China using its rare
1:55
Speaker 2: earth gun last year and it's exposing the facts. Thinking
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Speaker 2: about that, the whole global system runs through about half
2:03
Speaker 2: a dozen critical choke points, and now you have cheap
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Speaker 2: asymmetric warfare. Think about drones. It makes it very hard
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Speaker 2: to secure those places. We saw it the Huthis and
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Speaker 2: the Red Sea, and now we see it with Iran
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Speaker 2: and Hormuz. So hard power matters again, so does physical
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Speaker 2: control of resources, obviously including energy and rebuilding hard power
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Speaker 2: and securing those resources are trends that are going to
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Speaker 2: dominate for many years to come.
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Speaker 1: So basically everything is geography. Can I go back a
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Speaker 1: little bit and you said that Trump is an accelerant,
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Speaker 1: but he's not part of the root cause. Can we
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Speaker 1: just run briefly through the root causes here?
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Speaker 2: Well, there are lots of things going on. One of
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Speaker 2: them is that at the end of the Cold War,
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Speaker 2: America was left as a unipower effectively over global system,
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Speaker 2: so they were able to exercise their power without any
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Speaker 2: material threat. Now you have a kind of global leveling up,
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Speaker 2: particularly the rise of China that changes that calculus, the
3:01
Speaker 2: return of the nuclear question, and also the fact that
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Speaker 2: the economic settlement of the last thirty years is not
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Speaker 2: working for large parts of the populations of major Western economies.
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Speaker 2: So the kind of political economy dynamics are change, The
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Speaker 2: geopbilistical landscape has changed very dramatically, and all of these
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Speaker 2: things would have driven a pivot in the way America
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Speaker 2: approaches the world anyway. Clearly we have particular Trumpian flavor
3:26
Speaker 2: of that at the moment, but there are big structural
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Speaker 2: dynamics at play and they're going to play out over
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Speaker 2: a long period of time.
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Speaker 1: Let's stick with the Middle East briefly. Then, how do
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Speaker 1: you think that's going to play out over the next
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Speaker 1: couple of months.
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Speaker 2: Yeah, so if we get our crystal balls out, of course,
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Speaker 2: the answer really is who knows. But the fact that
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Speaker 2: we now have an American blockade of Homer's and the
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Speaker 2: Iranians have not immediately launched retaliatory drone attacks, I think
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Speaker 2: is an important signal that both are acting rationally and
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Speaker 2: there is presumably some kind of deal to be done.
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Speaker 2: Now who knows when this podcast is going out and
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Speaker 2: what would have happened by the time it does. Best
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Speaker 2: case immediately as they're going to extend the ceasefire, kick
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Speaker 2: the can for a bit, but America's still moving kit
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Speaker 2: into the region. We could very easily have another round
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Speaker 2: of fireworks. And I think the key thing from our
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Speaker 2: side is that we're positioning the portfolio to protect whatever happens.
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Speaker 2: So there's a big escalation and the energy market lurches again,
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Speaker 2: we're in a good place. If the benign story continues
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Speaker 2: to play out, we should be making money too.
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Speaker 1: Yeah, but the key thing I supposed to say is
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Speaker 1: that it doesn't really whether there's a deal or not,
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Speaker 1: and whatever that deal is a lot of damage. And
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Speaker 1: also change is baked into the system because already, even
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Speaker 1: if there were a full truth and the Austraight of
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Speaker 1: Humors was open tomorrow, A, we'd still have the damage
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Speaker 1: that was already done, and B we'd have the continued
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Speaker 1: strategic thinking about how else people can supply themselves with energy.
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Speaker 1: So those two changes still exist regardless of an immediate
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Speaker 1: piece or not.
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Speaker 2: Yeah, they still exists. I mean, disruption has been rippling
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Speaker 2: out from the Middle East at the speed of tankers,
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Speaker 2: which is about fifteen miles an hour, give or take,
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Speaker 2: and I think that has masked, plus all the infantries
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Speaker 2: that are being drawn down, the fact that we've had
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Speaker 2: this enormous disruption. We've got more than ten million barrels
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Speaker 2: a day offline for over six weeks. So there's a
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Speaker 2: pretty long fuse on the disruption that's already baked in.
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Speaker 2: And it slightly brings to mind. You know that old
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Speaker 2: picture of the two dinosaurs talking to each other as
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Speaker 2: the massive meteorite comes across the sky in the background,
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Speaker 2: and one of them is looking pretty anxious and says,
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Speaker 2: what do you think it means? And the other one
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Speaker 2: says that an't why it's all in the price now.
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Speaker 2: Of course, the flip side is the global system has
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Speaker 2: consistently proven itself in recent years more resilient to shocks
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Speaker 2: than expected. It was during COVID, it was during the
5:50
Speaker 2: trade war. But if you had told me two months
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Speaker 2: ago Dot Holmers would still be shut mid April and
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Speaker 2: the S and P has just hit a fresh all
5:58
Speaker 2: time high, I freely I would be very surprised.
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Speaker 1: But this is a problem that you can't print money
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Speaker 1: to make go away, right, And we talk about previous
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Speaker 1: problems and previous disruptures, financial crises, etc. For the last
6:11
Speaker 1: couple of decades, we've been able to print pretty much
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Speaker 1: everything away. But this is a genuine physical supply crunch
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Speaker 1: that you can't talk out like that.
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Speaker 2: Yes, it's a surprise problem, not a demand problem. And
6:23
Speaker 2: that the FED can't conjure copper mines or barrels of
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Speaker 2: oil out of thin air.
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Speaker 1: So why is the market so resilient in this circumstances,
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Speaker 1: This general idiotcy from investors us there something else going on.
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Speaker 2: I think the market has been trained to fade Geo
6:36
Speaker 2: Poul shocks for decades. Anyway, and in recent years you've
6:40
Speaker 2: had a supercharger on that, which is the infamous taco trade.
6:44
Speaker 2: And in addition, the Trump administration, which is pretty financially
6:48
Speaker 2: savvy if you think about mister Besson in the Treasury,
6:51
Speaker 2: have been ruthlessly exploiting that. So they've been foaming the
6:54
Speaker 2: runway with hopium since the first week of the war
6:57
Speaker 2: to get machines to buy. Plus, you had supportive tailwinds
7:01
Speaker 2: coming into the crisis, so I think rate cutting cycle
7:03
Speaker 2: had been going on for some time. You had fiscal stimulus,
7:06
Speaker 2: the AI boom has continued. Now you've got very strong
7:09
Speaker 2: earnings growth coming through. But there are also a lot
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Speaker 2: of important market structured dynamics that it's worth thinking about.
7:16
Speaker 2: In particular, a lot of non fundamental investment flows i e.
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Speaker 2: Machines or strategies buying and selling for reasons other than
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Speaker 2: how many barrels were well are making it out into
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Speaker 2: the economy, for example, And so markets often change more
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Speaker 2: about care more excuse me, about rate of change rather
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Speaker 2: than absolute levels. So when the oil stops going up
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Speaker 2: and the news gets less bad, that's a positive impulse.
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Speaker 2: The net result is that the market has banked a
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Speaker 2: bullish outcome already, so clearly the symmetry of near term
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Speaker 2: risk is that actually things do re escalate, there are
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Speaker 2: further shocks, or it just gets dragged out and the
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Speaker 2: stoppage through almost continues. And look out below.
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Speaker 1: If that's the case, okay, And how do we have
8:00
Speaker 1: against that? I mean, that's something we've talked about a
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Speaker 1: lot on this part of the last couple of years.
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Speaker 1: If you can't rely on bonds to head your equity position,
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Speaker 1: and you know, used to think I'll have mind or
8:09
Speaker 1: to have some gold, but now that appears to be
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Speaker 1: financialized and shifts all over the place. What can you
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Speaker 1: possibly do when you look at an environment like this,
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Speaker 1: when I suspect what you're saying is that amused by
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Speaker 1: the equity market being quite this resilient, new highs in
8:24
Speaker 1: the SNPC and completely nuts right now, and so there's
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Speaker 1: a lot of risk baked into that. How on earth
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Speaker 1: as a retail investor, an ordinary investor, do you mitigate
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Speaker 1: that well?
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Speaker 2: As you as you say, the failure of conventional hedges
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Speaker 2: and the fact that bonds, for example, are going to
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Speaker 2: be a much less reliable friend in a balanced portfolio
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Speaker 2: than they have been for a generation. Is a key
8:45
Speaker 2: feature we think of this era of regime change. It's
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Speaker 2: more shot bone, it's more inflation prone, and that scrambles
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Speaker 2: those correlations. And again in the war, in the first
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Speaker 2: few weeks really through march bonds did not work. They
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Speaker 2: sold off with equities. Gold didn't work, although of course
9:01
Speaker 2: it's had an extraordinarily strong run, partly because of geopolitical tailwinds. Yeah,
9:06
Speaker 2: didn't work because it's an energy shock. Energy did work,
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Speaker 2: and I think it's a reminder that energy in a
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Speaker 2: world where all economic activity is energy transformed, energy is
9:17
Speaker 2: useful hedge. We've been taking profits in our brend crude,
9:20
Speaker 2: for example, we held the dollar has been supportive, but
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Speaker 2: so you rallied modestly, and that's really because of the
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Speaker 2: energy dynamic, America being a net energy exporter, and volatility
9:32
Speaker 2: has been relatively contained so far. We would say if
9:36
Speaker 2: it gets worse from here, in particular, if you get
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Speaker 2: a shock scenario where the market realizes that actually there
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Speaker 2: is a heart attack coming down the pipe because the
9:45
Speaker 2: oil still stopped, those tail hedges, the derivatives are going
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Speaker 2: to be extremely powerful. We've got lots of them. That's
9:52
Speaker 2: why things get worse from here. We're confident the portfolios
9:55
Speaker 2: will set.
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Speaker 1: And what about gold from here?
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Speaker 2: Long term? I think the tailwinds for gold are still intact.
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Speaker 2: We're in a world where you've got fat currency compromise,
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Speaker 2: inflation instability, fiscal stress, geopolitical angst. All of these things
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Speaker 2: and more are driving a desire for more neutral efcts
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Speaker 2: and reserve assets. But what you've seen recently is that
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Speaker 2: after central bank buying really drove gold post Ukraine War initiation,
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Speaker 2: lots of momentum players got into the price and that's
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Speaker 2: why you've had some pretty big corrections recently. So don't
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Speaker 2: discount a lot more volatility. I think the structural tailwinds
10:34
Speaker 2: are very good. Final thought, you know a lot of people,
10:37
Speaker 2: if you think about currencies buying gold, they buy it
10:39
Speaker 2: because they want a rainy day pop. And Turkey, for example,
10:43
Speaker 2: has been liquidating a lot of gold recently to defend
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Speaker 2: its currency against the energy shock. So you are going
10:49
Speaker 2: to see from time to sign people caching in their
10:52
Speaker 2: insurance policy. It doesn't mean that over long run the
10:55
Speaker 2: tailwinds aren't still good. As fiat currency goes down the ubent,
11:00
Speaker 2: so what.
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Speaker 1: Do you expect other central banks to keep buying, and
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Speaker 1: they've been the backstop for a while now.
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Speaker 2: Yes, I expect that central bank buying will continue, and
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Speaker 2: in particular, it's hard to imagine the Chinese coming away
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Speaker 2: from the currents set up in the Middle East and
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Speaker 2: concluding that they should have more dollars and less gold
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Speaker 2: in the mix going forward.
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Speaker 1: Let's talk then about other political shocks that we might see.
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Speaker 1: And we're obviously in a very very voluntele environment, and
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Speaker 1: so far we've just talked about what might and might
11:46
Speaker 1: not happen in the Middle East, but a lot of
11:49
Speaker 1: the guests that we've had on the podcast recently talk
11:51
Speaker 1: about the pattern that they see in Trump's behavior moving
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Speaker 1: from Venezuela to Iran and how that impacts on the
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Speaker 1: Chinese in particular, And then what might happen next? What
12:03
Speaker 1: do you think he'll be looking at next? And how
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Speaker 1: does China fit into to that?
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Speaker 2: Yeah, so on wist Trump going to do next? More
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Speaker 2: policy volatility? I think we can say that's pretty nailed on.
12:17
Speaker 2: His window of maximum latitude for policy flexibility is closing
12:22
Speaker 2: pretty quick as the midterms approach the end of this year.
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Speaker 2: My guess is the narrative he wants is he dealt
12:28
Speaker 2: with quotes, dealt with Venezuela at the start of the year.
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Speaker 2: Then he'll be trying to move on from Iran, try
12:35
Speaker 2: being the operative word potentially, and then Cuba, I think
12:38
Speaker 2: is next, and I also think he'll go back to
12:41
Speaker 2: Greenland at some points. We've described the Trump dynamic ahead
12:46
Speaker 2: of the midterms as a sort of bread and circuses dynamic.
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Speaker 2: So it's very difficult. Given the cost of living is
12:53
Speaker 2: killing political prospects for incumbents right across the Western world,
12:57
Speaker 2: it's very difficult for him to do anything about that.
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Speaker 2: And indeed, war in Iran's made that worse because energy
13:02
Speaker 2: is feeding through into inflation that will crimp real wages.
13:05
Speaker 2: So you're going to see lots more distraction techniques, probably
13:09
Speaker 2: attempts to bribe the electorates, maybe even price controls, restart
13:15
Speaker 2: the FED spat all sorts of things. But policy volatility,
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Speaker 2: I think is the watchword.
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Speaker 1: Really okay, And internationally.
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Speaker 2: Well, America has been playing for daytart with China since
13:29
Speaker 2: mister g fired the rare earth gun. You know, thinking
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Speaker 2: again about those structural dynamics of the regime change era
13:35
Speaker 2: we're in, that weaponized interdependence gives opponents huge leverage over
13:41
Speaker 2: each other, and so that has driven this daytime period
13:45
Speaker 2: in the trade war. We've now got the first Trump
13:47
Speaker 2: GI meeting of the year pushback to mid May, and
13:50
Speaker 2: Beijing must be delighted that Washington is busy alienating many
13:55
Speaker 2: of its traditional allies. You know, if you think about
13:58
Speaker 2: something like Taiwan in some respects, it will be the
14:02
Speaker 2: perfect time, wouldn't it. You have Beijing with it's probably
14:04
Speaker 2: maximum supply chain leverage. It'll take years to wean the
14:09
Speaker 2: West off even some of their strategic dependence on China.
14:13
Speaker 2: The current White House is clearly very unlikely to choose
14:17
Speaker 2: to fight a major war with China over the Ukraine.
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Speaker 2: US missile infantries have been reduced by both what's going
14:24
Speaker 2: on in Europe visa the Ukraine and also Taiwan. The
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Speaker 2: Alliance is afraid, as I mentioned, So were it not
14:30
Speaker 2: for the fact that the PLA leadership is in a
14:31
Speaker 2: kind of perma perched state, I'd be a bit more worried.
14:35
Speaker 2: But I think if you look at the kind of
14:37
Speaker 2: KMT chair visit to China just now, the fact that
14:42
Speaker 2: China clearly expects to be able to extract concessions from
14:44
Speaker 2: America in the discussions this year. I think they're going
14:47
Speaker 2: to just continue their pressure campaign for now, and of
14:50
Speaker 2: course tactically thinking about Iran. If China comes in over
14:53
Speaker 2: the top and puts more pressure on Iran to do
14:55
Speaker 2: a deal, that's one way the off ramp gets sealed.
14:59
Speaker 1: That seems likely one, doesn't it.
15:03
Speaker 2: Yeah, potentially. I mean Beijing, I think is feeling like
15:06
Speaker 2: it's in quite a good position coming out of this,
15:08
Speaker 2: and I think that's possibly an interesting angle for the
15:10
Speaker 2: equity market because when people start thinking about who the
15:13
Speaker 2: winners and losers coming out of this, China might be
15:17
Speaker 2: a winner.
15:19
Speaker 1: Okay, So let's look then at the markets that it
15:24
Speaker 1: might be worth looking to invest in. You sound concerned
15:27
Speaker 1: about the US market. Where would do we feel positive?
15:31
Speaker 1: Some are coming into the market now thinking well, I've
15:33
Speaker 1: been a bit nervous what with everything that's going on.
15:35
Speaker 1: I've got quite a lot of cash. What should I
15:37
Speaker 1: be doing?
15:39
Speaker 2: Well, I give you a flavor of what we've been
15:40
Speaker 2: doing during the recent volatility. I mentioned we've been taking
15:44
Speaker 2: some profits in oil. We have actually been buying some
15:48
Speaker 2: bonds in different flavors. We think in this era where
15:51
Speaker 2: the stock bond correlation is much more unstable. You're going
15:53
Speaker 2: to have to be a lot more active. But we
15:55
Speaker 2: did get some pretty big dislocations in front end rates.
15:59
Speaker 2: For example, suddenly the market flipped from implying rate cuts
16:03
Speaker 2: in places like the UK this year to lots of
16:06
Speaker 2: rate hikes. We thought that was pretty unlikely, so we
16:07
Speaker 2: bought a load of short dated UK bonds on the selloff.
16:11
Speaker 2: We bought some ten year US tips, so those are
16:13
Speaker 2: inflation protective bonds in America offering a pretty decent real yield.
16:17
Speaker 2: We've been nibbling at very long day to Japanese bonds
16:20
Speaker 2: that are attracted on a global basis. Been buying some
16:23
Speaker 2: beaten up software names. There's going to be a lot
16:25
Speaker 2: of damage in some of the more exposed areas, but
16:28
Speaker 2: lots of babies have been thrown out in the bath water.
16:30
Speaker 2: We've been buying some China tech, which I mentioned a
16:33
Speaker 2: moment ago might be an interesting winner, particularly the market
16:36
Speaker 2: pivots back to thinking about that tech stack. And obviously
16:40
Speaker 2: we've been trading our derivatives a bit in terms of
16:42
Speaker 2: the stuff that we don't own but interested in. We
16:45
Speaker 2: could talk about a few of those ideas as well.
16:46
Speaker 2: If you're interested, definitely. I think if you think about
16:51
Speaker 2: the way the global system is unfolding, American focus on
16:57
Speaker 2: the Western hemisphere was a big part of all their
16:59
Speaker 2: literature in the National Security Complex over the last twelve months.
17:03
Speaker 2: Latin has loads of natural resources, including energy, metals, and
17:07
Speaker 2: soft commodities. It's got more favorable demography, it's geopolitically relatively
17:12
Speaker 2: insulated apart from the course from the predations of America.
17:16
Speaker 2: So that's an interesting area we're thinking more about. We
17:18
Speaker 2: don't have exposure at the moment, but it is of interest.
17:21
Speaker 2: Commodities in general are going to be more interesting in
17:24
Speaker 2: a world where nominal GDP is much more rich. Remember
17:27
Speaker 2: that our core view really is there's so much debt
17:29
Speaker 2: in the world that the authority is going to run
17:33
Speaker 2: the system hot wherever possible, to inflate nominal GDP and
17:36
Speaker 2: burn off the real value of debt. We've been nibbling
17:39
Speaker 2: a little bit at some of the left behind mag seven.
17:43
Speaker 2: Everyone's super gloomy on compute and AI, and it may
17:47
Speaker 2: may well be right that we're in a massive overbuild,
17:49
Speaker 2: but they could also be surprised about better than expected
17:53
Speaker 2: revenues from what is now quite scarce compute. We're interested
17:57
Speaker 2: in automation and robotics in particular, and I think one
18:01
Speaker 2: really interesting emergent theme is the repurposing of legacy industrial
18:06
Speaker 2: capacity for new growth industries. And so what I mean
18:09
Speaker 2: specifically is stuff like car makers pivoting into defense and
18:13
Speaker 2: robotics areas. And that could be a way that you
18:16
Speaker 2: see a very old legacy industry take on a much
18:19
Speaker 2: more interesting growth growth tenor so, loads of interesting opportunities
18:22
Speaker 2: out there and lots of things we're thinking about.
18:26
Speaker 1: Yeah, that last thing, the repurposing of manufacturing, that sounds
18:29
Speaker 1: like more of an American theme than a European them.
18:32
Speaker 2: Well, you've seen in Germany a deal between one of
18:36
Speaker 2: the big legacy OEMs and an Israeli defense manufacturer to
18:40
Speaker 2: save a couple of thousand jobs, So I think it's
18:43
Speaker 2: something you'll see more broadly. In South Korea. You saw
18:47
Speaker 2: Hyundai with its Boston Dynamics robotics subdivision. They're doing something similar.
18:53
Speaker 2: So I think it's probably a broader story. But going
18:57
Speaker 2: back to the kind of core structural theme, we're in
18:59
Speaker 2: a while where stuff matters again, matter matters, Industrial capacity
19:03
Speaker 2: really matters, So heavy businesses that can actually build stuff
19:07
Speaker 2: and can eke out more earnings in the world of
19:10
Speaker 2: more normal GDP we think are interesting.
19:13
Speaker 1: Yeah, just look at the UK briefly. You mentioned earlier
19:16
Speaker 1: when we were talking about the big changes, you were
19:18
Speaker 1: saying when one of the things we have to get
19:19
Speaker 1: used to is is big government, the return of big government.
19:22
Speaker 1: And it's hard to look at a country like the UK,
19:24
Speaker 1: and do any country in Europe and say that there's
19:26
Speaker 1: going to be a return of big government because government
19:29
Speaker 1: has never been this big.
19:32
Speaker 2: Yeah, in certain in terms of spend, that's absolutely true.
19:39
Speaker 2: The job is the government's big in all the wrong places.
19:42
Speaker 2: And in this country's case, you know, the Defense Investment Plan,
19:47
Speaker 2: infamously delayed from last year, is still nowhere to be seen.
19:51
Speaker 2: And that's basically because the political economy of the current
19:54
Speaker 2: government means that cutting welfare or net zero in exchange
19:58
Speaker 2: for more defense invests is extremely difficult. So I expect
20:03
Speaker 2: them to continue kicking the can. But really what we're
20:06
Speaker 2: talking about is much more activist states, so industrial policy,
20:10
Speaker 2: state capitalism, buying stakes in critical resources businesses. You've seen
20:14
Speaker 2: in America doing that already in the rarer space and
20:17
Speaker 2: other critical minerals to boot, so more activist leviathans are
20:22
Speaker 2: here to stay. At some point there will have to
20:25
Speaker 2: be a trade off between welfare and security. In different countries.
20:31
Speaker 2: We're at different stages in that journey, and unfortunately in
20:34
Speaker 2: the UK I think we're some way off the necessary
20:36
Speaker 2: decisions being made.
20:38
Speaker 1: Interesting, isn't it, because with everything that's going on geo politically,
20:41
Speaker 1: you would have thought that the penny would be beginning
20:43
Speaker 1: to drop that without adequate defense, welfare is meaningless.
20:48
Speaker 2: The first business of any government is national security and
20:51
Speaker 2: everything else's secondary. But as you say, the memo has
20:54
Speaker 2: not yet reached the necessary part of whitehall.
20:59
Speaker 1: Price controls. You mentioned a possible Trump policy in the US,
21:04
Speaker 1: and one of the things that we find in the
21:06
Speaker 1: UK is that in many ways there are price controls
21:08
Speaker 1: embedded into our system across the board. And interestingly, one
21:12
Speaker 1: of the things that the SMP has just put in
21:14
Speaker 1: their latest manifesto for the upcoming Scottish elections is actual
21:18
Speaker 1: price controlled on essential foods. So that's rather what we
21:23
Speaker 1: mean by the extension of government does not just activism
21:28
Speaker 1: into manufacturing areas and critical industries, but also this combination
21:33
Speaker 1: of financial oppression. I attempting to inflate the debtaway, but
21:36
Speaker 1: also trying to compensate for financial oppression by putting price
21:40
Speaker 1: controls on all sorts of things. It's a mess, right,
21:42
Speaker 1: It's a mess.
21:44
Speaker 2: It's a terrible mess. Look what we're really talking about
21:47
Speaker 2: here is, again the electoral kryptonite for politicians is inflation.
21:53
Speaker 2: Trump now owns the price level shock in America, and
21:56
Speaker 2: politicians everywhere are marching to its tune with massive subsidies.
22:00
Speaker 2: Is socialized risk basically for energy shocks, left right and center.
22:05
Speaker 2: And of course the measures that are often popular to
22:08
Speaker 2: address them politically speaking, tend to make the problems worse,
22:12
Speaker 2: and price controls are a classic example of it. Think
22:15
Speaker 2: about rent controls, food price controls you just mentioned, same
22:18
Speaker 2: for fuel prices. And I think that if you look
22:20
Speaker 2: at what's happening in America now with the recent election
22:24
Speaker 2: New York, people are going to vote in politicians promising
22:28
Speaker 2: more handouts. That's the ratchet we're in to address these
22:31
Speaker 2: costs of living issues, and they're likely, unfortunately, to make
22:34
Speaker 2: them worse. I think that's a really important long term
22:37
Speaker 2: threat to the market is the changing political economy that
22:40
Speaker 2: could ultimately mean higher corporate tax rates. We've already talked
22:43
Speaker 2: about much more intrusive government, but it all revolves around
22:46
Speaker 2: the same thing. Affordability, inflation. Political economy changes against this
22:51
Speaker 2: backdrop of a more shot prone system that demands electorally speaking,
22:56
Speaker 2: socialization of risk.
23:00
Speaker 1: Circumstances. How does the UK market look to you? We
23:02
Speaker 1: have all the risks that we've just discussed embedded here.
23:06
Speaker 1: We have a government that looks like it's going to
23:07
Speaker 1: be increasing the left leaning, and of course we have
23:09
Speaker 1: some of the most expensive, actually the most expensive electricity
23:12
Speaker 1: in the developed world. When you look at all those factors,
23:15
Speaker 1: and then you look at the UK market, which has
23:17
Speaker 1: been having a little bit of a resurgence, any interest
23:20
Speaker 1: in it?
23:21
Speaker 2: Lots of interest in Dear Old Blighty. On a fundamentals basis,
23:24
Speaker 2: there's a pretty good story to tell about the UK
23:26
Speaker 2: if the government was there to get out of the way,
23:28
Speaker 2: which the moment it should be said, it doesn't appear
23:30
Speaker 2: to be willing to. And the story is pretty simple.
23:34
Speaker 2: Households are geared excuse me, paid off debt. Over a
23:38
Speaker 2: long period of time since the Great Financial Crisis, rates
23:42
Speaker 2: were being cut from levels not seen for more than
23:44
Speaker 2: fifteen years, and that tends to encourage more borrowing and
23:49
Speaker 2: that could get a private sector credit cycle going, and
23:52
Speaker 2: if that happened, it'd be magic for a lot of
23:53
Speaker 2: the UK assets. That's one of the things we've been
23:56
Speaker 2: taking out exposure to in the portfolio, and UK equity
23:59
Speaker 2: is a big part of our equity book. Of course,
24:04
Speaker 2: there's a big question right there about political stability. We've
24:07
Speaker 2: got the local elections coming up, We've got left wood
24:08
Speaker 2: drift in government policy. So those are all known knowns.
24:13
Speaker 2: But that's the reason you get good value in the
24:16
Speaker 2: UK versus other places.
24:18
Speaker 1: Hopefully good value. Those things go probably wrong and it
24:21
Speaker 1: doesn't look like value at all anymore. There are risks
24:24
Speaker 1: that we haven't talked about embedded in markets, aren't them
24:27
Speaker 1: in private credit for example, and the private equity connection
24:30
Speaker 1: under private credit, and the AI connection under private equity
24:32
Speaker 1: via private credit, etc. That whole list of risks is
24:37
Speaker 1: something to worry about or not.
24:38
Speaker 2: You know, there are always things to be worried about
24:40
Speaker 2: in the market, and there are always things to be
24:42
Speaker 2: optimistic about. The way we build portfolios means that we
24:46
Speaker 2: tend to survey the market for what we think the
24:49
Speaker 2: biggest risks are. We build the protections in in advance,
24:52
Speaker 2: and then we put a load of growth assets around
24:53
Speaker 2: that to try and ensure that we can make money
24:56
Speaker 2: in any market environment. And the big things that we're
24:59
Speaker 2: thinking about other of course, some underappreciated tail risks from
25:03
Speaker 2: the war which remained considerable that could kick off another
25:06
Speaker 2: wave of inflation. Think about the template from the forties
25:09
Speaker 2: and fifties or the seventies. You still got glowing embers
25:12
Speaker 2: of inflation from the covid era experience, and the system
25:17
Speaker 2: is now much better at passing on price rises quickly.
25:21
Speaker 2: Of course, there are all sorts of tail risks from AI,
25:24
Speaker 2: as well as the very obvious productivity ballcase. On the upside,
25:27
Speaker 2: what am I thinking of? You probably saw the headlines
25:29
Speaker 2: recently about the new Mythos Mythos engine which have found
25:35
Speaker 2: all sorts of unpatched vulnerabilities in lots of the most
25:38
Speaker 2: popular operating systems. I would guess one of the most
25:41
Speaker 2: underappreciated risks out there is something to do with AI
25:45
Speaker 2: and cyber security. So of course that's something to be
25:48
Speaker 2: prepared for.
25:49
Speaker 1: Although we're never really sure, we talk about this quite
25:51
Speaker 1: a lot. We're never sure whether when these big AI
25:53
Speaker 1: stories come out, whether they're just a propaganda. Look, look
25:57
Speaker 1: at it, I can do it so amazing, give us
25:58
Speaker 1: more money. Well, how real it really is?
26:02
Speaker 2: Yeah, there's definitely some propaganda, isn't there, Because of course
26:04
Speaker 2: we've got some massive IPOs coming up this year, and
26:07
Speaker 2: so it's in everyone's interest involved in that ecosystem to
26:10
Speaker 2: pump the story as much as possible, to justify the
26:12
Speaker 2: valuation and get maximum market cap out of it. But
26:16
Speaker 2: it doesn't mean there is an also something important there
26:18
Speaker 2: in terms of tails. We all know about what's going
26:20
Speaker 2: in private markets, lots of other geopol stuff, and we've
26:24
Speaker 2: just spoken about the risk of more left leaning governments
26:29
Speaker 2: in fact, big government in general. But I think the
26:31
Speaker 2: thing from our point of view is we're never trying
26:33
Speaker 2: to pick a particular risk. We're never trying to nail
26:35
Speaker 2: the timing of anything. Quite the opposite. We're trying to
26:38
Speaker 2: make sure the portfolio has got protections so that whichever
26:41
Speaker 2: of that smallgest border, indeed anything else crops up and
26:44
Speaker 2: upsets the market, the portfolio will be fine.
26:47
Speaker 1: Alex, the one thing we haven't talked about is the dollar.
26:50
Speaker 1: Where do you stand there?
26:51
Speaker 2: Well, I think the short term lift has been delivered
26:55
Speaker 2: by the positive terms of trade shock as a result
26:57
Speaker 2: of the energy surge. All other major economies other than
27:02
Speaker 2: America are net energy importers. America of courses in net
27:05
Speaker 2: energy exporter, as we mentioned earlier. But the base case
27:09
Speaker 2: for a medium term from our side is that the
27:10
Speaker 2: dollar will go down, and that's really simply because the
27:14
Speaker 2: traditional providers of savings to the global economy, so things
27:18
Speaker 2: like East Asia, Germany, the Gulf, of course, they're going
27:22
Speaker 2: to have to keep more of their savings at home
27:24
Speaker 2: to pay for things that we mentioned at the top,
27:26
Speaker 2: like greater resilience, more infrastructure rebuilding in the case of
27:30
Speaker 2: the Gulf, rearmament, you name it, it's there. And if
27:34
Speaker 2: you run massive twin deficits as America does, says trade deficit,
27:37
Speaker 2: and there's a government spending deficit, you need to sell
27:40
Speaker 2: a lot of financial assets to plug the difference. And
27:43
Speaker 2: if there's less fresh new money coming in from those
27:46
Speaker 2: traditional providers of savings for the system, who would basically
27:49
Speaker 2: buy us assets and run overweights in America, that should
27:53
Speaker 2: bring down the value of the dollar. You don't actually
27:56
Speaker 2: need to believe that a single dollar of value in
27:58
Speaker 2: America at the moment will be taken out. It's just
28:01
Speaker 2: less fresh net new money going in would take it down.
28:05
Speaker 2: Now that's a medium term view. Tactically, I'd watch three things.
28:10
Speaker 2: Number one is rate differentials. Obviously that's pretty important. Number Two,
28:14
Speaker 2: if the energy shop continues and remember the fat tales
28:17
Speaker 2: from here on what happens in Iran, that's relatively good
28:20
Speaker 2: news for US terms trades and that could support it.
28:23
Speaker 2: And the third one is US equity performance relative to
28:26
Speaker 2: the rest of the world. So if US stocks start
28:29
Speaker 2: out performing again, that is helpful for the dollar. So
28:32
Speaker 2: medium term we think it'll go down, but in general
28:37
Speaker 2: currency is unlikely to be a great place to be
28:39
Speaker 2: this as well for real assets and lots of those
28:42
Speaker 2: new growth opportunities I mentioned earlier.
28:44
Speaker 1: Brilliant Alex, thank you so much for joining us today.
28:47
Speaker 1: Hugely appreciate it.
28:48
Speaker 2: Great pleasure. Thank you so much, Marek.
28:53
Speaker 1: Thanks for listening to this week's Mary and Talks Money.
28:55
Speaker 1: If you like our show, rate review and subscribe whereever
28:58
Speaker 1: you listen to podcasts. I keep sending question or comments
29:00
Speaker 1: and merrimony at Bloomberg dot Net. You can also follow
29:03
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29:06
Speaker 1: w and John is John Underscore Epic. This episode was
29:09
Speaker 1: hosted by Nimrin Zumset Web. It was produced by Samasadi
29:12
Speaker 1: and Moses and sound designed by Blake Mabels and special
29:15
Speaker 1: thanks of course to Alex