Latest / Merryn Talks Money / Capital Had Its Day. Now It’s Labor’s Turn, Troy’s Lyon Says

Transcript

Capital Had Its Day. Now It’s Labor’s Turn, Troy’s Lyon Says · Merryn Talks Money

0:00
Speaker 1: So John, we've both spente some of today at the
0:02
Speaker 1: Bloomberg invest conference. Coming up as the live podcast that
0:07
Speaker 1: I did with Sebastian from that, although I'm not entirely
0:10
Speaker 1: sure it wakes it more live than other podcasts because
0:12
Speaker 1: most of my guests are definitely alive. I think the
0:15
Speaker 1: key difference was that it was in front of an audience,
0:18
Speaker 1: so that makes it a different kind of life. But
0:20
Speaker 1: you hosted a panel, didn't new early on which I
0:23
Speaker 1: didn't make it too, So lucky me, I can here
0:27
Speaker 1: at the same time as the listeners what you talked about. Well,
0:31
Speaker 1: there we go. What a treat, No, I said, I
0:34
Speaker 1: think that makes the live podcast. You should have encouraged
0:36
Speaker 1: more heckling. There was heckling. I think there was heckling.
0:41
Speaker 1: Actually there was certainly low level giggling, and Sebastian had
0:45
Speaker 1: a couple of little goes at me. I noted, I
0:48
Speaker 1: think I gave back as good as I got, but
0:50
Speaker 1: we'll leave the listeners to judge that. Oh yes, yes,
0:55
Speaker 1: thanks on host places, I know beat Let's Table one day.
1:00
Speaker 1: On one day no So, I had seen a show
1:04
Speaker 1: from Principal Asset Management and Chann Belle from Goldman Sachs
1:08
Speaker 1: and Alex Chapter's old friend of the podcast from Rougher
1:12
Speaker 1: She's so good and everyone, by the way, letting go
1:15
Speaker 1: back and little for the podcast I did with Alex
1:17
Speaker 1: a few weeks ago. It was so right. Yeah, no,
1:20
Speaker 1: and he is, he's very he's very smart. But interestingly,
1:25
Speaker 1: I mean, because he could be really wrong. But most
1:30
Speaker 1: of the they basically agreed, which is interesting. Um, the
1:36
Speaker 1: I suppose it's this thing, well A the banking crisis.
1:39
Speaker 1: The banking crisis is not going to tune into two
1:42
Speaker 1: thousand and eight, and it's probably not going to spread
1:45
Speaker 1: much beyond what we've already had, so they cannot credit
1:48
Speaker 1: sweet So the US regional stuff, um, which personally speaking
1:52
Speaker 1: I agree with. I don't. I think that that doesn't
1:56
Speaker 1: mean that's okay, but it's going to be a different
1:59
Speaker 1: kind of thing. And their main point was that if
2:03
Speaker 1: the central banks are forced to choose between financial stability
2:07
Speaker 1: and letting inflation rip, then we've seen time and time
2:11
Speaker 1: again that the thing that they will do is favor
2:14
Speaker 1: financial stability, and clearly they'll try and do it in
2:18
Speaker 1: a way that doesn't let inflation explode. But the only
2:22
Speaker 1: tool they really got is pumping more money and he
2:25
Speaker 1: certain areas the economy, um, you know, arguably kind of
2:30
Speaker 1: encouraging misallocation that resources. I mean, at this rate, you know,
2:34
Speaker 1: we'll all just have one giant bank that we bank
2:37
Speaker 1: with that is backed by you know, the FED. Basically
2:41
Speaker 1: sounds great, one cost my services person. Well, I mean yeah,
2:45
Speaker 1: the Department, I hope, not passion. That's how they will
2:48
Speaker 1: sell Central Bank digital counties to his convenience. And the
2:52
Speaker 1: more entrenched we get in our mobile phones, the harder
2:56
Speaker 1: it will be to not do it. I mean, these days,
3:00
Speaker 1: so much as I try to avoid it, there's a
3:02
Speaker 1: big party that doesn't care who owns my data anymore,
3:06
Speaker 1: track of it? You welcome. Google knows everything about such
3:10
Speaker 1: too many cookies, John your dun for Well, I know,
3:12
Speaker 1: but it's you know, my best hope is that I'm
3:17
Speaker 1: just I'm just one of a billion kind of fairly
3:20
Speaker 1: irrelevant people all sold to China. Well no, well I'm
3:24
Speaker 1: not on TikTok to be fair, I've avoided that anyway.
3:31
Speaker 1: I think I got a bit sidetrack there. I was
3:33
Speaker 1: just thinking of the listeners are rushing to TikTok to
3:37
Speaker 1: dancing Jay No I don't want to kids get crashing it,
3:43
Speaker 1: celebrity on TikTok, myself financial financial anyway, you know, moving on,
3:49
Speaker 1: moving on swiftly on what were their investment recommendations. Well,
3:53
Speaker 1: I did ask them about bitcoin um and there was
3:58
Speaker 1: the usual kind of skepticism on that one. I asked
4:02
Speaker 1: Imasgine about bitcoin and when when you listen to those listeners,
4:05
Speaker 1: you'll find he could barely be puble to talk about it. See,
4:09
Speaker 1: I'd rushed that one off almost straight away. I think,
4:12
Speaker 1: I said, I think it's sort of a good scene
4:16
Speaker 1: if you're someone who's a bitcoin booll. It was still
4:20
Speaker 1: in this uneasy kind of no man's land. I mean,
4:23
Speaker 1: it's up about thirty percent this year. It's not it's
4:27
Speaker 1: not going to get killed like the rest of the
4:29
Speaker 1: crypt You think it's an inflation hedge, don't you? No,
4:33
Speaker 1: Nor do it twice an inflation edge. I don't know
4:36
Speaker 1: what it is, but it is for something, is for something.
4:41
Speaker 1: I imagine that a lot of the people we panicked
4:43
Speaker 1: about the US regional banks may have stuck some of
4:45
Speaker 1: them money in bitcoin. I mean, then again, I guess
4:49
Speaker 1: SVB was full of people who would probably be inclined
4:53
Speaker 1: to see bitcoin. It's some sort of disaster edge. But
4:58
Speaker 1: but yeah, not other than that, equities the rates to
5:00
Speaker 1: what's their equities value in all its forms? Um and
5:08
Speaker 1: the strangely enough, Alex recommended a multi asset fund. I
5:13
Speaker 1: can't think why. I can't think why. I don't I
5:16
Speaker 1: wonder where one would buy something such a thing, such
5:20
Speaker 1: a thing, let's see, that's the terrible conflict of interest.
5:23
Speaker 1: You need to give me a better answer. But I
5:25
Speaker 1: don't think that fund managers worry about conflict of interesting
5:29
Speaker 1: and lucky we do try and get the fund managers
5:31
Speaker 1: on the show and fun managers we talked to who
5:33
Speaker 1: are fund managers, not salespeople for funds. And remember most
5:36
Speaker 1: fund managers are in Victor, Yeah, salespeople because they make
5:39
Speaker 1: their money out of bumping up the assets under management
5:42
Speaker 1: a lot more than they make their money out of performance.
5:44
Speaker 1: But we drank out the ones who care about their
5:47
Speaker 1: their investorsn't care about returned and so they believe in
5:52
Speaker 1: their stuff, which they believe in their staging. And they
5:55
Speaker 1: all have, or we hope they have quite a lot
5:57
Speaker 1: of skin in the game. Anyway, And on to somewhere
6:01
Speaker 1: I'm pretty sure does have exactly that. Welcome to Marin
6:05
Speaker 1: Talks Money, the podcast in which people who know the
6:07
Speaker 1: markets explain the markets. I'm Marian Sumset Web. This week
6:10
Speaker 1: we bring you our very first live taping. Again I question,
6:13
Speaker 1: I question the use of the word live. Here very
6:16
Speaker 1: first live taping of the podcast, which took place at
6:18
Speaker 1: the Bloomberg invest Summit at Bloomberg's London headquarters, I spoke
6:22
Speaker 1: with Sebastian Lyon, founder and chief investment Officer of Troy
6:26
Speaker 1: Asset Management. Sebastian, thank you for being on my live
6:32
Speaker 1: recording of my podcast Pleasure Marin. We're going to start
6:35
Speaker 1: with it something that I read in one of your newsletters. Okay,
6:40
Speaker 1: markets are never constant. They change and evolve like the weather.
6:43
Speaker 1: Trends can sustain for months and years, perhaps even a decade,
6:48
Speaker 1: but not forever. Now we're in the middle. I think
6:50
Speaker 1: you would agree of a massive regime change for markets
6:54
Speaker 1: from a world of low interest rates, low inflation, globalization, peace,
6:59
Speaker 1: lowly be costs, cheap energy, all these wonderful things to
7:03
Speaker 1: a period when all that has changed. Is that fair?
7:07
Speaker 1: Is that? And how you're looking at It's very fair
7:09
Speaker 1: and it means that it's going to make investing a
7:11
Speaker 1: lot tougher over the next three or four years, maybe
7:14
Speaker 1: the next decade than it has been for the last decade.
7:16
Speaker 1: The last decade you almost needed to just actually just
7:20
Speaker 1: do very little buttonholed, bitonhole growth stocks. They were rerated
7:25
Speaker 1: over a period of a long, long period of time.
7:27
Speaker 1: They are very good companies in the UK and the
7:29
Speaker 1: US where you've seen steady growth, not spectacular growth, not
7:33
Speaker 1: like the tech companies that we were hearing about earlier,
7:36
Speaker 1: but just good solid engineers businesses that are growing five, ten,
7:40
Speaker 1: fifteen percent perannum and they've been rerated. They were rerated
7:42
Speaker 1: usually over the last decade. They went from fifteen times
7:46
Speaker 1: earnings to thirty times zarnings before COVID. Even before COVID
7:50
Speaker 1: we had the COVID blowout, they went to fifty times earnings.
7:52
Speaker 1: They're back now at about thirty times earnings. You know,
7:55
Speaker 1: we're on a long journey back to that fifteen times
7:57
Speaker 1: zonninges where we were when interest rates were still zero
8:00
Speaker 1: back in twenty and twelve. Interest rates are you know,
8:03
Speaker 1: now between four and five percent. If you look back
8:07
Speaker 1: at valuations when interest rates were four or five percent
8:10
Speaker 1: prior to the financial crisis valuations were on those those
8:14
Speaker 1: mid teams multiples for good, good quality stocks. So I
8:17
Speaker 1: just think we have a long journey ahead. There's going
8:19
Speaker 1: to be more volatility and that's what you need to
8:23
Speaker 1: be patient about in terms of from perspective investing for
8:27
Speaker 1: private wealth, which affects you what I'm doing. But you've
8:29
Speaker 1: been positioned from inflation of quite a long time. Yes,
8:31
Speaker 1: possibly too long, yeah, long, thank you, thank you for that.
8:36
Speaker 1: So you came into this latest bad for inflation ready
8:40
Speaker 1: for it? Yes, pretty ready. I mean I think that
8:43
Speaker 1: we were aware that there were there were huge concerns
8:47
Speaker 1: that interest rates were were far too low and that
8:51
Speaker 1: inflation was unlikely to remain stable. And the remarkable thing
8:57
Speaker 1: is that come two years ago to an of years ago,
9:01
Speaker 1: ten year yields got was learned nor point five percent.
9:04
Speaker 1: That sort of started a journey whereby the dominoes sort
9:09
Speaker 1: of effectively fell, and then we saw inflation remains stickier
9:13
Speaker 1: due to that those post COVID issues, and that sort
9:16
Speaker 1: of continued. And then when obviously a year ago we
9:17
Speaker 1: had the war with Ukraine, which I think was a
9:19
Speaker 1: massive wake up anybody who thought that inflation was going
9:23
Speaker 1: to be transfreme any thought that the body thought that
9:25
Speaker 1: inflation was going to return to two percent, which markets
9:28
Speaker 1: for forecasting at that particular point in time. I think
9:31
Speaker 1: that that was when everyone realized that interest rates needs
9:34
Speaker 1: to go up and needs to go out quickly, and
9:36
Speaker 1: inflation was likely to be around. And here we are
9:38
Speaker 1: a year later, UK inflation at ten point four percent.
9:41
Speaker 1: It's just it's not it's not that there are still
9:44
Speaker 1: people who think it is going away. There are still
9:45
Speaker 1: two people who believe that once the impulse of higher
9:48
Speaker 1: energy prices and the supply problems of COVID disappear, we
9:52
Speaker 1: will go back to two three percent inflation, interest rates
9:56
Speaker 1: will four and the old normal And what we perceive
9:58
Speaker 1: is the old normal will return, and then the panel
10:01
Speaker 1: before us will be happy because technology stocks will sow again,
10:03
Speaker 1: the everything bubble will return. It's possible, but I think
10:08
Speaker 1: it's I think it's unlikely for all of the reasons
10:10
Speaker 1: that you gave in the original question. You've got you've
10:12
Speaker 1: got deglobalization happening. You've got the power of labor which
10:19
Speaker 1: is higher than it's been for many years, if not decades.
10:22
Speaker 1: And I think one of the things I've always said
10:24
Speaker 1: about the expectation for higher inflation is wages, and it's
10:28
Speaker 1: always wages that you've got to look at. Ultimately, there's
10:31
Speaker 1: noise of of of commodity prices, there's the noise of
10:34
Speaker 1: the old price, there's noise of food prices. But ultimately
10:38
Speaker 1: the thing that sustains inflation over longer periods of time
10:43
Speaker 1: is wages. And we have actually been seeing wages rising materially.
10:49
Speaker 1: We've seen obviously strikes in the UK, but but do
10:52
Speaker 1: only wage pressure. As services have come back post the pandemic,
10:56
Speaker 1: particularly last year, we've seen a material amount of wage pressure.
11:00
Speaker 1: Maybe that won't be sustained. We can track it can't
11:02
Speaker 1: be by watching union membership. And one of the most
11:05
Speaker 1: interesting dynamics of the whole thing. I remember being told
11:08
Speaker 1: a couple of years ago that wage inflation could not
11:10
Speaker 1: be sustained because the unions weren't powerful enough, and thinking
11:14
Speaker 1: you've got that the wrong way around. Union power follows inflation.
11:17
Speaker 1: Inflation doesn't follow union power. And we can see union
11:20
Speaker 1: membership rising and rising and rising, which may not be
11:22
Speaker 1: a bad thing. No, no, no, not at all. But
11:24
Speaker 1: I think wages are key. Capital's had it, you know,
11:28
Speaker 1: had a fantastic time for the last two decades, three decades.
11:30
Speaker 1: You could say, you know, it's labor's turn, and labor
11:34
Speaker 1: is having its turn, certainly at the moment. We'll have
11:35
Speaker 1: to see how that lasts. But if that continues, then
11:38
Speaker 1: I would be more cautious about the view that you
11:41
Speaker 1: gave earlier about you know, rates coming back down, inflation
11:44
Speaker 1: from back down to normal. I think. I think we're
11:46
Speaker 1: just in a world where things will be more volatile.
11:48
Speaker 1: Inflation will be more volatile, fishing will come down. There's
11:50
Speaker 1: something called the base effect where she soon act knows
11:52
Speaker 1: about the base effect. He's not stupid. So that's why
11:55
Speaker 1: his forecast inflation is like to half this year. Maybe
11:57
Speaker 1: it will, maybe it won't. Be forecasting. He was saying,
12:00
Speaker 1: you would bring it down. Yes, yes, And so unless
12:04
Speaker 1: something dramatic happens from a geopolitical perspective and deal price
12:08
Speaker 1: hasn't got to one hundred fifty dollars or something, then
12:11
Speaker 1: inflation is likely to be falling this year. The question
12:13
Speaker 1: isn't whether it falls, The question is whether where it stops,
12:18
Speaker 1: and ultimately whether there's a sort of second wave out
12:23
Speaker 1: next year, in the year yeah beyond, and that will
12:25
Speaker 1: be the surprise to the to the investors who are
12:27
Speaker 1: saying things are going to come back down to where
12:29
Speaker 1: they were pre COVID. Yeah. So it feels like an
12:31
Speaker 1: environment where you would expect volatility at best. Yeah, yeah, okay,
12:36
Speaker 1: so rates rising, yea, rates are not going to come
12:40
Speaker 1: back down to zero. This isn't going to happen. And
12:42
Speaker 1: in an environment where rates have basically been falling for
12:45
Speaker 1: a couple of decades plus and then four decades, and
12:49
Speaker 1: they start to write things start to break, and we're
12:52
Speaker 1: beginning to see things break. What's going to break next?
12:56
Speaker 1: Where do you see the breaks coming? The usual suspects
12:59
Speaker 1: are you're in banks, they're usually obviously we've had we've
13:02
Speaker 1: had credit swees. But I suspect, you know, it will
13:06
Speaker 1: continue to be within the banking sector, all within sort
13:09
Speaker 1: of shadow banking type companies perhaps that we've never heard of,
13:12
Speaker 1: like Green Sial, But those sorts of issues will will.
13:16
Speaker 1: I suspect these dominoes will continue to fall. One of
13:20
Speaker 1: the things that I think there are there are parallels
13:22
Speaker 1: with what we're seeing at the moment from a stock
13:24
Speaker 1: market point of view, with two thousand to two thousand
13:27
Speaker 1: and three and two thousand and seven to two thousand nine,
13:29
Speaker 1: So the financial crisis and the dot com bubble busting.
13:32
Speaker 1: Both both of those times the S and P fell
13:34
Speaker 1: about fifty percent um and that people say, well, is
13:38
Speaker 1: this a great financial crisis, No, it's not. You know,
13:39
Speaker 1: the banking system is is a lot better capitalized, particularly
13:43
Speaker 1: the larger banks are much better capitalized than they were
13:45
Speaker 1: when Lehman went bust. So there are differences, but there
13:48
Speaker 1: are similarities. And we've seen, you know, a tech bust effectively,
13:53
Speaker 1: and we've seen issues in the banking sector, and this
13:56
Speaker 1: time they're related. Whereas in two thousand the banking sector
13:59
Speaker 1: is fine, in two thousand and two thousand and nine
14:03
Speaker 1: the tech sector was actually not not too bad. Now
14:06
Speaker 1: we've actually effectively got them, got them converging. So I
14:09
Speaker 1: think we need to think about the merging of those
14:12
Speaker 1: two bear markets and think that's probably what we're facing
14:15
Speaker 1: this time around, something significantly worse than well, not necessarily worse,
14:19
Speaker 1: but probably you know, I think you need to be
14:22
Speaker 1: open minded about how it's going to play out. But
14:25
Speaker 1: I think be open minded means we don't know how
14:28
Speaker 1: it's complete. Yes, no, we don't know how. We don't
14:30
Speaker 1: play out. But but I suspect that there will be
14:34
Speaker 1: more accidents ahead. Okay, well, let's talk about than where
14:37
Speaker 1: we can hide, because in August, every other crisis in
14:40
Speaker 1: my career anywhere, there has been somewhere obvious, necessarily immediately obvious,
14:46
Speaker 1: but somewhere you can hid, some area that's cheap, something
14:48
Speaker 1: that doesn't mean caught up in the previous malia. And
14:51
Speaker 1: this time around is how hard you see that thing?
14:53
Speaker 1: It is incredibly hard to see that. And this is
14:56
Speaker 1: we have been talking about this in our investment ports
14:58
Speaker 1: for a number of years. Your rights, There aren't very
15:01
Speaker 1: obvious place to hide. The dollar was good last year,
15:04
Speaker 1: that really helped us last year. This year, I think
15:07
Speaker 1: the dollars are a harder one to call, generally speaking
15:10
Speaker 1: when they're risk off markets. And if we're write about
15:13
Speaker 1: other accidents happening, then the dollars should do well within that.
15:17
Speaker 1: But I suppose I'd be surprised if we saw quite
15:20
Speaker 1: the sort of melt up in the dollar, meltdown in
15:22
Speaker 1: sort of Stirling that we saw back in September of
15:26
Speaker 1: last year. So so there aren't very obvious placed. I
15:30
Speaker 1: suppose the one that you'll probably want me to mention
15:32
Speaker 1: is gold. I do want you to mention that I
15:34
Speaker 1: was naming till the end, but which has not been
15:36
Speaker 1: has not been in a bubble. Yum did its job
15:39
Speaker 1: in twenty twenty during the pandemic for us when everything
15:44
Speaker 1: was was melting down. Did its job for us last
15:47
Speaker 1: February during the invasion of Ukraine. And it was flat
15:52
Speaker 1: last year. And everybody, everybody looks at the dollar price meriton,
15:56
Speaker 1: don't look at prices in other currencies. We don't hedge
15:58
Speaker 1: our golds. So in sterling gold was up temper tent
16:02
Speaker 1: last year. Yeah, did it did its job for us
16:04
Speaker 1: within the portfolio. So I think that that still may
16:09
Speaker 1: yet do its job. It's certainly feeling it's certainly feeling
16:12
Speaker 1: that way. It's feeling as if it's not a bad
16:15
Speaker 1: place to be in an environment where inflation is high,
16:19
Speaker 1: where negative real rates are likely to stay in place.
16:24
Speaker 1: You're not going to see a situation where central banks
16:27
Speaker 1: are going to be able to put interest rates up
16:28
Speaker 1: well above the rate of inflation, which is what positive
16:31
Speaker 1: real rates because more things will break, because a lot
16:34
Speaker 1: more things will break, and so rates are probably going
16:37
Speaker 1: to stay higher for longer as a result, and there'll
16:40
Speaker 1: be there'll be some drift in terms of policy on
16:45
Speaker 1: inflation targeting. We've seen that with Haldane's article in the Ft,
16:49
Speaker 1: We've seen it with Howard Davis West talking about thinks
16:53
Speaker 1: we should allow the inflation target from the Bank of
16:56
Speaker 1: England just to drift out maybe maybe three years or
16:59
Speaker 1: four years, allow them to have a bit more time.
17:02
Speaker 1: That's slippage. Effectively move to all moved to arrange from
17:09
Speaker 1: two to four yeah, whatever, and that is effectively debasement,
17:13
Speaker 1: and that is that's a good environment for gold. So
17:16
Speaker 1: so I think gold will have a role to play
17:19
Speaker 1: and personal personal assets for example, holds watch in gold
17:24
Speaker 1: ten percent percent of portfolio and God hasn't actually gone
17:28
Speaker 1: up interially. No, it's been been about ten percent for
17:32
Speaker 1: for a while. We wouldn't have it go up to
17:34
Speaker 1: about fifteen or twenty percent. I think what's really important
17:37
Speaker 1: with holding gold and having a role within the portfolio
17:40
Speaker 1: is you want to have You want to have enough
17:42
Speaker 1: to make a difference. There's no point in having one
17:44
Speaker 1: or two percent. It's just not going to move the needle.
17:46
Speaker 1: But you also don't want to have too much where
17:48
Speaker 1: the tailwat's the dog effects for you it's affecting. It's affecting,
17:52
Speaker 1: then then have too much you want to place your
17:54
Speaker 1: full bet there. But I think you know it has
17:56
Speaker 1: a role to play in terms of its defensibility, and
17:58
Speaker 1: you've seen it time and time again. There were now
18:01
Speaker 1: three three episodes in the last three years where it's
18:05
Speaker 1: kicked in, and it's actually kicked in very nicely at
18:07
Speaker 1: a time when things have been pretty febrile. Um, And
18:11
Speaker 1: there were a lot of losses out there for elsewhere,
18:14
Speaker 1: within within portfolios and other portfolios. And quite like to
18:17
Speaker 1: ask you about bitcoin, you can ask me about Okay,
18:19
Speaker 1: I'm going to age against inflation. I mean, I think
18:23
Speaker 1: we know what I think. No, I think crypto just
18:28
Speaker 1: for me goes into the too hard bucket. Um, I
18:30
Speaker 1: think it's been found out a little bit. I was
18:32
Speaker 1: very interested to nar Ferguson's comment about his view on
18:36
Speaker 1: crypto and the fact that crypto had been sort of
18:38
Speaker 1: effectively corrupted. Um, we've never held it. I've never held it.
18:44
Speaker 1: I think gold has actually proven itself over the last
18:47
Speaker 1: year or two or three during a period where bitcoin
18:49
Speaker 1: has been very highly volatile. And I think that volatilis
18:54
Speaker 1: is the definition of you know, people don't know how
18:57
Speaker 1: to value something, and it's about the most vola tile
19:00
Speaker 1: thing that you can own, so clearly people don't really
19:02
Speaker 1: know how to value it. Okay, let's move on from that.
19:05
Speaker 1: I'm interested in you saying that when I was talking
19:08
Speaker 1: about there being somewhere to hide, somewhere that wasn't caught
19:11
Speaker 1: up and everything bubble, and you said no, previous times
19:14
Speaker 1: there have been good value stocks in the UK. A
19:17
Speaker 1: lot of my podcast gus say exactly that. Now there
19:20
Speaker 1: is a place to hide, and it is the UK,
19:23
Speaker 1: which is cheap on any measure you could look at.
19:26
Speaker 1: And the value ratio between the UK and the US,
19:29
Speaker 1: for example, is that it's one of the widest has
19:31
Speaker 1: ever been. And not only that, but these are good,
19:33
Speaker 1: high quality companies operating internationally with good, high dividend yields.
19:38
Speaker 1: And I think you know you and I both agree
19:40
Speaker 1: that a good dividend yield is one of the greatest
19:42
Speaker 1: hedges you can get against inflation. So why on earth
19:45
Speaker 1: wouldn't invest it? Like you not be pouring into the
19:48
Speaker 1: UK market. We're definitely looking at UKA. I went to
19:51
Speaker 1: visit the headquarters of a UK company in Slow this morning,
19:54
Speaker 1: so We're definitely looking at UK companies. I would say, Marion,
19:58
Speaker 1: I'd say you're half right. I think you're comparing chalk
20:01
Speaker 1: and cheese a little bit. In terms of comparing the
20:03
Speaker 1: US with UK. The if you scrape, scrape below the
20:07
Speaker 1: surface a little bit, the businesses within the UK. If
20:10
Speaker 1: you look at the foot Sea, there are a large
20:12
Speaker 1: number of very large cap companies that are highly cyclical.
20:17
Speaker 1: We've got a very large percentage in oils. We've got mining,
20:21
Speaker 1: we've got utilities with large Telco's exposure and Vodafone BT,
20:26
Speaker 1: you've got a very large exposure to banks, You've got
20:29
Speaker 1: house builders. It is not like the US. And yes,
20:33
Speaker 1: there is a valuation differential and I think there are
20:35
Speaker 1: some things to blame for that in terms of a
20:37
Speaker 1: breakfast and other other issues that you've discussed in the past.
20:40
Speaker 1: And definitely investors, particularly in the UK, have been selling
20:44
Speaker 1: down in the UK. We can see that with the
20:47
Speaker 1: flows in unit trusts over the last five or six years.
20:52
Speaker 1: Wealth managers have been reducing their exposure to the UK
20:55
Speaker 1: stock market. One I happen to know is reduced from
20:58
Speaker 1: thirty percent of their portfolio down to about three percent
21:01
Speaker 1: of their portfolio, specifically in UK stock. So you might say, well,
21:04
Speaker 1: there's nobody left to sell. That is exactly what I
21:07
Speaker 1: was going to say. But all the big domestic Penton
21:09
Speaker 1: found and all the big balance funds have shifted, which
21:11
Speaker 1: they have now shifted, they're holding in UK could us
21:14
Speaker 1: down from thirty forty in some cases fifty percent to
21:17
Speaker 1: a maximum in most cases of three or four percent.
21:20
Speaker 1: They're done with the selling. It's over, So that may
21:24
Speaker 1: mark a boss. My one reservation is that all of
21:27
Speaker 1: those sectors that I mentioned, probably the exception of pharmaceuticals,
21:30
Speaker 1: a lot of those sets are very cilical. They did
21:32
Speaker 1: really well last year because we were in a six
21:34
Speaker 1: up time. If I'm right, and I suspect we're going
21:39
Speaker 1: into hard landing, a more traditional hard landing than the
21:42
Speaker 1: ones we've had in the past as well. So by
21:45
Speaker 1: that I mean more traditional than the COVID recession, more
21:49
Speaker 1: traditional than perhaps the financial crisis recession, more like the
21:52
Speaker 1: recessions we used to have in the sort of early
21:53
Speaker 1: nineties that are sort of slightly more prolonged. Central banks
21:56
Speaker 1: from titan to get inflation down slightly old school. Then
22:00
Speaker 1: those cychnical companies like the miners light, the oils light.
22:04
Speaker 1: The banks probably going to struggle, so they're going to
22:09
Speaker 1: really struggle with earnings. I suspect so you may be right,
22:13
Speaker 1: but not yet. But I think that in terms of
22:16
Speaker 1: some companies that we mean, my largest holding is Unilever.
22:20
Speaker 1: Unilever is definitely on a discount to the lights of
22:23
Speaker 1: prop from gamble Nessley. It's Piers, which we also hold,
22:25
Speaker 1: but not to the same extent. I think there is
22:28
Speaker 1: a little bit of a gap. It's not massive, but
22:29
Speaker 1: I think there is a little bit of a gap
22:31
Speaker 1: between those better quality blue chips within the UK and
22:34
Speaker 1: their international piers. I think that is a gap that
22:37
Speaker 1: has to narrow and where we have been adding, we
22:39
Speaker 1: have been adding there. So I think you're right. There
22:42
Speaker 1: is a reason why lots of companies thinking about moving
22:45
Speaker 1: their headquarters to America, and we know exactly where it is,
22:47
Speaker 1: because so they can get a higher share price. Right now, Yeah,
22:50
Speaker 1: I do think that the UK market has got a
22:51
Speaker 1: problem and they couldn't get arm back. They've lost some
22:55
Speaker 1: great companies over the years, like Cabris, which we were
22:57
Speaker 1: a holder of. You know, there was no replacement for Cabris.
22:59
Speaker 1: It's now gone to Mondealais in the US. So I
23:02
Speaker 1: think that the sad thing is we have lost some
23:04
Speaker 1: great companies in the UK and they haven't been replaced.
23:06
Speaker 1: And that is something which has been discussed at nauseam
23:09
Speaker 1: for the last five or six ers. And I'm sure
23:10
Speaker 1: you've written Aboust in your in your articles, but there
23:14
Speaker 1: doesn't seem to be a resolution to that. And the
23:16
Speaker 1: concern is that where we've got things like companies look
23:18
Speaker 1: good companies like Ferguson up called Wolsley and in the
23:22
Speaker 1: UK a large foot one hundred company moving to the US.
23:25
Speaker 1: So I think that there is I mean, it's not
23:29
Speaker 1: an easy decision. I saw that Bat was suggested by
23:32
Speaker 1: one of the shelders that the Bat shout in sem
23:34
Speaker 1: it's got a very big US business, it hasn't got
23:35
Speaker 1: a UK business. So there is some logic to BAT
23:39
Speaker 1: moving to the US. And tobacco companies have slightly higher
23:42
Speaker 1: racings in the US than they do in the UK,
23:44
Speaker 1: so we'll see whether they do. It's not an easy
23:46
Speaker 1: thing to do. I worked at a company where they
23:48
Speaker 1: were getting a nastack listing. They had a UK listing,
23:51
Speaker 1: but they wanted a NaSTA listening for exactly the reason
23:53
Speaker 1: that you said, and I remember it was bureaucratically really tough.
23:58
Speaker 1: So you've got to be absolutely sure you're really share
24:01
Speaker 1: prices is going to double. Yeah, yeah, And let's talk briefly.
24:04
Speaker 1: We haven't got much time left, sorry, about the rest
24:06
Speaker 1: of the portfolio. How much of it is inequity at
24:08
Speaker 1: the moment to at low twenties percent, so it's about
24:11
Speaker 1: basically the lowest it's been about fifteen years, even lower
24:14
Speaker 1: than it wasn't the financial crisis. Partly coming back to
24:16
Speaker 1: the point you said that there aren't places. There aren't
24:18
Speaker 1: obvious places to hide within the secretary market. If there were,
24:21
Speaker 1: then we'd have a higher proportioned actors. But for exactly
24:24
Speaker 1: that reason, we're worried about that continued not only multiple
24:27
Speaker 1: contraction this year, but also the fact that there's more
24:30
Speaker 1: earnings risk and interest rate costs keep going up for companies.
24:33
Speaker 1: Companies have taken on frankly, they've taken on public companies
24:36
Speaker 1: to two on too much debt. Debt levels are pretty
24:38
Speaker 1: much doubled over the last year, and a lot of companies.
24:41
Speaker 1: We've seen your companies that were comfortable with one time
24:43
Speaker 1: to where it are suddenly comfortable with two. Companies that
24:46
Speaker 1: were comfortable with two are comfortable with four. And increased
24:49
Speaker 1: tax and increased interest costs mean that the earnings the
24:53
Speaker 1: top line might be fine, but actually the bottom line,
24:55
Speaker 1: the earnings that are not going to be as good.
24:57
Speaker 1: So that's why, because of those lack of places to hide,
25:00
Speaker 1: that's why we're very conservatively positioned at the moment, with
25:03
Speaker 1: the idea that probably within a year's time will be
25:06
Speaker 1: much more hopefully possibly positioned. We're right because we have
25:09
Speaker 1: only got a few seconds left. So let me challenge
25:11
Speaker 1: you before we end, give me one piece of good news.
25:16
Speaker 1: I think I think that sometime in the next eighteen
25:19
Speaker 1: months is going to be a very good time to
25:20
Speaker 1: buy the everything market just got to be patient, will
25:23
Speaker 1: we know? I think just keeping our evaluations, that's what
25:26
Speaker 1: I look at. I look at things like the KPE
25:29
Speaker 1: since like the key ratio. I look at the bottom up.
25:31
Speaker 1: Stop picking our bottom up, stop picking our stocks, and
25:34
Speaker 1: look at their evaluations on a day by day basis,
25:36
Speaker 1: and that's what informs me is to whether I'm going
25:38
Speaker 1: to make those longer term returns. So it'll be valuations
25:41
Speaker 1: which are the key. All right, I'm going to call
25:42
Speaker 1: you every week for the next eighteen months until you
25:44
Speaker 1: tell me it's time. Okay, all right, so Astian, thank
25:47
Speaker 1: you very much, look forward to it. Thank you for
25:53
Speaker 1: listening to this week's Marin Talks Money. We will be
25:55
Speaker 1: back next week in the meantime. If you like us, Joe, rate,
25:58
Speaker 1: review and subscribe where ever you listen to your podcast,
26:01
Speaker 1: and please do so positively. Will you'd appreciate that a
26:04
Speaker 1: lot more than anything else. This episode was hosted by
26:07
Speaker 1: me Marion Sumset Web. It was produced by Samer Sadi.
26:10
Speaker 1: Additional editing by Blake Maples. Special thanks to Sebastian Lyon
26:14
Speaker 1: and John Steppic. And finally, our weekly reminder, and you know,
26:18
Speaker 1: if you do all sign up, I'll have to I'll
26:20
Speaker 1: be able to stop reminding you. Just sign up. Sign
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26:25
Speaker 1: in the show notes. Do it. You won't regret it.