Latest / Merryn Talks Money / Seema Shah Warns: US Recession Still Coming. What Does That Mean For Your Money?

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Seema Shah Warns: US Recession Still Coming. What Does That Mean For Your Money? · Merryn Talks Money

0:00
Speaker 1: John, how many people do you think in the UK
0:02
Speaker 1: what percentage will end up paying inheritance tax.
0:05
Speaker 2: Where it's something like four percent or it's at the moment,
0:10
Speaker 2: I guess that would go up because of inflation and
0:13
Speaker 2: foods and thresholds. But yeah, a minority, a minority.
0:17
Speaker 1: It is something like that. When you look at the
0:19
Speaker 1: headline number, it's really tiny. So you can see why
0:21
Speaker 1: there are all these columns out there and everything on newspaper.
0:24
Speaker 1: Person has written in column saying, you know, it's such
0:26
Speaker 1: a tiny amount of people, but it gives us a
0:28
Speaker 1: huge amount of money, and so abolishing it is a
0:30
Speaker 1: massive mistake and they don't understand. And politicians don't understand
0:34
Speaker 1: this either, why it is that MYHD inheritance tax is
0:37
Speaker 1: so unbelievably popular. But when you look at it in
0:41
Speaker 1: the way that you and I have looked at other
0:42
Speaker 1: taxes in the past. Let's go back and look at
0:44
Speaker 1: the income tax rates, for example, when we look at
0:47
Speaker 1: the forty percent income tax rate, and politicians don't understand
0:52
Speaker 1: why it's so unpopular to put higher rates of tax up.
0:56
Speaker 1: It's because they're not understanding that more people than they
1:00
Speaker 1: think are affected by higher rates. So we pass through
1:03
Speaker 1: different income tax rates over our careers. Sometimes we paid
1:05
Speaker 1: twenty time, times we pay four dy, sometimes we pay more,
1:07
Speaker 1: sometimes we pay less. It's amazing how many people pass
1:10
Speaker 1: through the higher rates. Of course, so do their partners.
1:13
Speaker 1: So inside a family, it matters what rate one person pays,
1:17
Speaker 1: and it's the same of course with IHT you get
1:20
Speaker 1: these estates that pay it. But it's not just the
1:22
Speaker 1: estate that is affected. It's the children of the person
1:26
Speaker 1: who has died, and of course it's the way that
1:28
Speaker 1: the partner's money transfer as well. So there's an IFS
1:32
Speaker 1: report out today saying that by twenty thirty two, one
1:34
Speaker 1: in eight will pay IHT on their death or on
1:37
Speaker 1: their partner's death. So the money that's transferred between partners
1:41
Speaker 1: is of course effectively two estates, not one estate. So
1:45
Speaker 1: it's a much larger percentage of the population that are
1:47
Speaker 1: affected by inheritance tax than politicians and newspaper columnists appear
1:52
Speaker 1: to believe. And this seems to me to be a problem.
1:55
Speaker 2: Yeah, I mean, one in the is a lot of people,
1:58
Speaker 2: and you're rate. There's a lot of I guess kind
2:02
Speaker 2: of slightly sneering commentary about how you know people are
2:06
Speaker 2: unduly kind of like annoyed by this tax. But you
2:10
Speaker 2: know that is also the fundamental fact that people don't
2:14
Speaker 2: like the idea of being kind of, you know, their
2:18
Speaker 2: loved ones being targeted, if you like, on their deaths.
2:21
Speaker 2: And it's because, I mean people, people do get worried
2:24
Speaker 2: about this. I mean, one thing I've noticed about older people,
2:27
Speaker 2: well obviously about older people is that they kind of
2:30
Speaker 2: want to tidy up after themselves in order to leave
2:35
Speaker 2: their inheritors with as little hassle as possible. And that's
2:38
Speaker 2: entirely understanding. What was it kind of you know, an
2:42
Speaker 2: act of love, if you like. And so I can
2:43
Speaker 2: see why this idea that the state's going to step
2:46
Speaker 2: in and cause an awful lot of admin hassle and
2:51
Speaker 2: on it kind of hard to wrap your head around.
2:54
Speaker 2: Expense is unpopular and the reality is that that does
2:58
Speaker 2: hit the people who are least able to plan for
3:01
Speaker 2: it the hardest, because obviously, if you've got millions and
3:04
Speaker 2: millions of pounds in the biggest date, you're already that's
3:07
Speaker 2: part of your tidy up process. There's a lot of
3:10
Speaker 2: people who maybe are at the end where you know,
3:12
Speaker 2: their house is worth a lot of money, but most
3:14
Speaker 2: of the rest of their assets really aren't are sort
3:17
Speaker 2: of don't have this kind of like concern that you know,
3:20
Speaker 2: they're going to come and they're going to take me
3:21
Speaker 2: to the house or whatever that kind of thing. So
3:23
Speaker 2: it's the it's entirely rational white people why it is
3:27
Speaker 2: the most hated tax in you know, the UK, conting
3:29
Speaker 2: all the polling.
3:30
Speaker 1: Yeah, I would have to say, the whole family has
3:32
Speaker 1: business I flon slightly amazing because you know, your parents die,
3:34
Speaker 1: nobody keeps the house. I mean, the house is always sold.
3:37
Speaker 1: So the whole idea that you know, we mustn't pay
3:39
Speaker 1: inheritance tax on houses because we have to keep the
3:41
Speaker 1: family home, I mean, it's absurd.
3:43
Speaker 2: Oh yeah, I mean I agree. And I think one
3:46
Speaker 2: of the irriitating things about the edition of the primary
3:51
Speaker 2: property thing was that that was purely a political move
3:54
Speaker 2: that made the enherance tax much more complicated, but done
3:59
Speaker 2: purely for paid lines to reassure people that the family
4:02
Speaker 2: home was going to be protected by that particular conservative government. So,
4:06
Speaker 2: you know, another case of senical politics complicating the tax
4:11
Speaker 2: system and soling problems for the future.
4:13
Speaker 1: Yeah, they should have just shoved that rate up. Yeah,
4:18
Speaker 1: but I tell you what, it seems to me that
4:20
Speaker 1: the reason I wrote a column about this this week.
4:21
Speaker 1: That's the reason people hate inheritance tax is not so
4:24
Speaker 1: much because it is a tax on the rich, but
4:26
Speaker 1: because it's not a tax on the rich. Because if
4:28
Speaker 1: you are very rich, avoiding inheritance tax is really very easy.
4:31
Speaker 1: There are so many ways you can do it. You
4:33
Speaker 1: can buy aim shares, you can have farmland, you can
4:35
Speaker 1: have forestry, or crucially, you can just give it away
4:38
Speaker 1: if you have enough left to live on in your
4:40
Speaker 1: last seven years, which if you're very wealthy, of course
4:42
Speaker 1: you if you're on a state of twenty million, give
4:44
Speaker 1: away eighteen million, keep two million, marveless. You know nothing
4:47
Speaker 1: to worry about that, and you can do that basically
4:49
Speaker 1: IHT three, which is why, of course, you know, states
4:52
Speaker 1: of over five million pounds at the moment will pay
4:55
Speaker 1: an effective IHD rate it more like nineteen twenty percent
4:58
Speaker 1: than the forty percent there is supposed pay. So you know,
5:01
Speaker 1: the richer you are, the lower your effective rate of IHTM.
5:04
Speaker 1: That's the big problem with it, apart from the fact
5:06
Speaker 1: that it's ridiculously high relative to countries around the world
5:08
Speaker 1: that have no wonder that are of very rich going
5:10
Speaker 1: dom cell somewhere else where they can pay two or
5:12
Speaker 1: three percent or a gift tax or nothing in IHD.
5:14
Speaker 1: I mean that's the real problem. Do we want our
5:16
Speaker 1: ridge to stay at home or do we want them
5:17
Speaker 1: to go away? We want them to stay at home,
5:19
Speaker 1: So we did have a much lower tax AX. You
5:21
Speaker 1: outline a couple of ideas for this in this week's column,
5:23
Speaker 1: which everyone should go and read. But in a nutshell,
5:25
Speaker 1: make it capital gain tax instead a very low rate
5:28
Speaker 1: of capital gain SAX or a gift tax very low. Indeed,
5:30
Speaker 1: make it simple, make it straightforward, make it low, make
5:33
Speaker 1: it fair, and as is the way of on the taxes,
5:35
Speaker 1: you will raise more money anyway. Enough one inheritance taxes,
5:39
Speaker 1: we bord of inheritance tax. I'm kind of bord of
5:40
Speaker 1: inheritance tax. There is also very a big report out
5:43
Speaker 1: on it today and we will have a look at
5:45
Speaker 1: that possibly next week if it's interesting. But before we
5:49
Speaker 1: move on to our guest this week, John, you and
5:51
Speaker 1: I have decided to offer more takeaways in this podcast,
5:54
Speaker 1: haven't we, So we are going to have and apologies
5:57
Speaker 1: if none of you are interested in this, but I
5:58
Speaker 1: strongly suspect you are. From now on there is going
6:00
Speaker 1: to be a personal finance tip off the week coming
6:03
Speaker 1: from either may or John. And this week John is
6:06
Speaker 1: going to offer a personal finance tip over to you. John.
6:09
Speaker 2: I think we need a jingle for this section. Anyone's going.
6:15
Speaker 1: As you know your doatus can sing it.
6:17
Speaker 2: Yeah see there we.
6:19
Speaker 1: Gots are very musical anyway, not today, no singing today.
6:24
Speaker 1: Personal finance tip.
6:26
Speaker 2: John, Yes, thanks, So current account switching more people should
6:32
Speaker 2: do it because it's very easy and you can also
6:34
Speaker 2: get what is actually a really significant decent summer money
6:39
Speaker 2: for switching your account. So right now, for example, if
6:43
Speaker 2: you switch the Nationwide, they're offering two hundred pounds to switch.
6:48
Speaker 2: There's also the tsb's off one hundred and fifty quid
6:51
Speaker 2: first direct offer one hundred and seventy five. Lloyds are
6:55
Speaker 2: off one hundred and seventy five as well, so there's
6:58
Speaker 2: a lot of kind of good deals out there. And
7:01
Speaker 2: one thing that I think is key about this is
7:04
Speaker 2: that these switching bonuses are income tax free, so this
7:09
Speaker 2: is you know, if you're talking about they can interest
7:12
Speaker 2: rate you would need to earn on the kinds of
7:14
Speaker 2: sums you're talking about to get two hundred pounds in
7:16
Speaker 2: a year for example. You know, this is probably much
7:19
Speaker 2: better than an awful lot of the other things that
7:21
Speaker 2: you've got your money in just now. So I think
7:25
Speaker 2: that that is something that more people should do, and
7:28
Speaker 2: it is pretty straightforward to do and if you think,
7:30
Speaker 2: but also if you've got a partner, then they can
7:32
Speaker 2: do it as well. So you could both switch to
7:35
Speaker 2: let's say, for example, the nationwide you get two hundred
7:37
Speaker 2: pounds each. That's four hundred pounds, and then three months
7:40
Speaker 2: later you can switch to whoever else is off on
7:42
Speaker 2: a DAL at that point get another kind of like
7:44
Speaker 2: three hundred and odd pounds. So actually over the course
7:46
Speaker 2: of a year, where a bit of kind of pretty
7:48
Speaker 2: minor league admin. You know, you can probably be getting
7:52
Speaker 2: in the best party over a thousand pounds. And again
7:54
Speaker 2: it's you know, it's tax free because it's a it's
7:57
Speaker 2: an inset. I can't remember the way the hmrc CLIs.
8:00
Speaker 2: Is it because it's kind of an incentive rather than
8:03
Speaker 2: than you can get an interest income that's where it's
8:06
Speaker 2: county dies.
8:07
Speaker 1: So actually all income is an incentive, that incentive to
8:14
Speaker 1: turn up to work.
8:17
Speaker 2: As I say, as I say, I haven't read the
8:19
Speaker 2: full rationalization in the AHMR website.
8:22
Speaker 1: But okay, tax experts, experts, please contact on us on this.
8:26
Speaker 1: I would like to know why money paid to you
8:29
Speaker 1: buy a bank for transferring your cash to them is
8:32
Speaker 1: tax free, whereas income from work is not going to
8:34
Speaker 1: be something going on here. And that sounds like a
8:37
Speaker 1: great tip jump. But I will just say one word
8:38
Speaker 1: to you, admin, I admin an apathy.
8:45
Speaker 2: It's just not that hard. These these these switch account
8:48
Speaker 2: more relatively speaking, And I mean, what else are you
8:52
Speaker 2: going to get? You know, even if even if you're
8:54
Speaker 2: well paid, Like, what else are you going to get?
8:56
Speaker 2: Like two hundred quids? Definitely much less than I knows what.
9:00
Speaker 1: I don't know, John, But if it involves me scanning
9:02
Speaker 1: my passport, I'm not doing.
9:04
Speaker 2: It, okay, and me involves scanning the passport. At some
9:06
Speaker 2: point I must have met I am going to do this.
9:11
Speaker 2: I'm going to do this, and I'm going to set
9:13
Speaker 2: up a bunder account to do these chians fails and
9:15
Speaker 2: I'll let you know her goys over the course of
9:17
Speaker 2: the next twelve months.
9:18
Speaker 1: All right, just wat chat. You don't put it in
9:20
Speaker 1: an account ends up paying inheritance tax on it. I'm
9:22
Speaker 1: telling you nothing safe. Please days Welcome to Maren Talks Money,
9:27
Speaker 1: the podcast in which people who know the markets explain
9:30
Speaker 1: the markets and Maren sum up Web. This week I
9:32
Speaker 1: spek with Sema Shah, the chief Global strategs for Principal
9:35
Speaker 1: Asset Management. We talk about why she thinks the US
9:38
Speaker 1: economy will enter a recession, likely at the end of
9:41
Speaker 1: this year, and why she's optimistic that it's just not
9:43
Speaker 1: going to be that bad and that long term everything
9:45
Speaker 1: in America is looking very good. Finally, don't forget if
9:49
Speaker 1: you hadn't had enough of listening to me and John talk,
9:52
Speaker 1: that we are going to have a debrief at the
9:53
Speaker 1: end of the conversation talk about what seemas said and
9:56
Speaker 1: also talk about possible investment takeaways from what she said. Seaman,
10:03
Speaker 1: thank you so much for joining us today. Welcome.
10:05
Speaker 3: Thank you very much for having me.
10:08
Speaker 1: I wanted to start by asking you about your views
10:11
Speaker 1: on the.
10:12
Speaker 4: More macro environment, in particular about the odds of recession
10:15
Speaker 4: in the US. So at the moment, everyone is still
10:18
Speaker 4: very wedded to the soft landing idea that somehow everything's
10:22
Speaker 4: just going to be.
10:23
Speaker 1: Fine, and I suspect you think things might not be
10:26
Speaker 1: that fine exactly.
10:28
Speaker 3: So I think I'm in the minority at the moment
10:30
Speaker 3: who still actually believe that there's going to be a
10:34
Speaker 3: deeper slow down than a soft landing. So there's lots
10:36
Speaker 3: of different ways of describing it rocky landing, economic downturn
10:42
Speaker 3: as such, but we are anticipating two quarters of negative growth.
10:47
Speaker 3: Now it's really important at this point to say that
10:49
Speaker 3: I wouldn't consider that necessarily as recession, because historically, when
10:53
Speaker 3: we talk about recession, you associate it with significant job losses,
10:58
Speaker 3: significant permanent damage done to the economy. We're not anticipating
11:02
Speaker 3: that by any means. So this is a from peach
11:04
Speaker 3: to trough perspective. That's a zero point three to five
11:06
Speaker 3: percent drop in output, which is tiny by historical standards.
11:10
Speaker 3: It lasts for two quarters, which again very very short
11:12
Speaker 3: by historical standards, but it's not a soft landing. We
11:16
Speaker 3: come back to the idea continuously that we've had incredibly
11:19
Speaker 3: aggressive central bank tightening, and not just in the US,
11:22
Speaker 3: of course, but around the world, and there will be
11:24
Speaker 3: some kind of repercussions from that, and that ultimately is
11:28
Speaker 3: going to be a driver of economic growth and stoftening
11:31
Speaker 3: quite significantly over the couple of the next couple of quarters.
11:35
Speaker 1: It's interesting, isn't it. How lots of people look at
11:37
Speaker 1: the incredibly fast tightening, but because by historical standards, particularly
11:41
Speaker 1: if you look at it percentage terms, it's really extraordinary,
11:44
Speaker 1: they look at that and think that there won't be
11:48
Speaker 1: severe consequences when we know that monetary policy always comes
11:52
Speaker 1: with quite a long lag. I mean, that's not new news.
11:55
Speaker 1: So now and the next six months would be the
11:58
Speaker 1: time when you begin to see the consequence from the
12:00
Speaker 1: beginning of the rate hiking cycle exactly.
12:03
Speaker 3: And I think one of the things that's been very
12:05
Speaker 3: interesting about this cycle is, you know, we don't like
12:08
Speaker 3: to talk about the pandemic anymore. You know, people want
12:10
Speaker 3: to move past it. But the truth is this is
12:13
Speaker 3: a post pandemic economy. The face of it is very different.
12:17
Speaker 3: So actually, the lags and therefore the montary transmission mechanism
12:20
Speaker 3: is a little bit different to what we've seen previously.
12:23
Speaker 3: So I think the one thing that we did see
12:25
Speaker 3: is there are, as we said, variable lags, some of
12:27
Speaker 3: them are very short, which is what we saw through
12:29
Speaker 3: last year where it really hits the market pretty quickly
12:33
Speaker 3: and hit the housing market very very quickly. But then
12:35
Speaker 3: there's other parts of the economy where the lag is
12:38
Speaker 3: proving to be a lot more extended. And for that,
12:41
Speaker 3: I'll probably refer to the course to the consumer, which
12:43
Speaker 3: has shown very impressive resilience to this point. And of
12:47
Speaker 3: course corporates, their lags are proven to be longer, and
12:50
Speaker 3: part of the reason is simply is that during the
12:52
Speaker 3: pandemic they did receive considerable fiscal support, which essentially has
12:56
Speaker 3: shielded both consumers and corporates from really having to face
13:00
Speaker 3: the true impact from interest rate hikes.
13:02
Speaker 1: Yeah, but that money's got to be running out now.
13:05
Speaker 3: I think that's what we're going to start to see.
13:06
Speaker 3: You know, for the consumer, if you think about all
13:09
Speaker 3: of the additional fiscal support that is starting to roll off,
13:12
Speaker 3: we just have to think about student loans repayments, which
13:15
Speaker 3: is starting of course, and that's going to have an impact.
13:19
Speaker 3: The other thing, which I know has been talked about
13:21
Speaker 3: for months and months, is really about that extra savings numbers,
13:25
Speaker 3: and from our own calculations which do corroborate with the
13:28
Speaker 3: stuff that's coming out from the FED, we see those
13:31
Speaker 3: extra savings essentially being exhausted by the end of this year,
13:36
Speaker 3: so at that point there's very little cushion left for consumers.
13:40
Speaker 3: Now they can, of course turn to credit card spending.
13:42
Speaker 3: Because we're not expecting a cliff edge drop, and householdvancy
13:45
Speaker 3: generally speaking, are in a healthy state. Then you would
13:48
Speaker 3: have seen it in the start of previous downturns, so
13:52
Speaker 3: we're not expecting consumers to really come to a horrible, failed,
13:56
Speaker 3: full brunt of economic damage. There will be some softening
14:01
Speaker 3: coming into place. So what we're anticipating is that this
14:04
Speaker 3: economic slowdown in twenty twenty four is really led in
14:08
Speaker 3: by the consumer and of course the labor market. That's
14:11
Speaker 3: the other part of the story. The labor market has
14:13
Speaker 3: been very, very strong to this point, very tight, but
14:16
Speaker 3: you are starting to see quite clear signs of softening.
14:20
Speaker 3: If you just think about the payroll numbers once that
14:22
Speaker 3: we get every month, we know that the numbers are
14:24
Speaker 3: fairly strong to this point. But if you were to
14:27
Speaker 3: just draw a very basic chart, let's say, for non
14:31
Speaker 3: fun payrolls each month for the past eighteen months, you
14:34
Speaker 3: can clearly see a downward trend. So this softening in
14:37
Speaker 3: payrolls is eventually going to I think end up in
14:40
Speaker 3: either very very minor positive numbers or potentially a negative
14:44
Speaker 3: payroll number, and at that point the income support that
14:49
Speaker 3: consumers have been receiving household has been receiving starts to
14:52
Speaker 3: go into reverse. And I think that's when you start
14:55
Speaker 3: to see the economy starting to really struggle.
14:58
Speaker 1: But you're not expecting to just be here a very
15:00
Speaker 1: significant rise in unemployment. Not that good.
15:03
Speaker 3: Not so, we are expecting the unemployment rate to rise
15:06
Speaker 3: to around four percent, but then by the end of
15:10
Speaker 3: this year, and then to continue rising through twenty twenty four.
15:13
Speaker 3: But again you're only expecting a number of about four
15:15
Speaker 3: and a half percent, So again by historical standards, that's
15:18
Speaker 3: a very small increase in unemployment. Remember as well that
15:21
Speaker 3: actually when you think about full full employment, that's not
15:24
Speaker 3: far off actually what these forecasts are showing. So this
15:27
Speaker 3: is not in economy which is permanently damaged, but there
15:30
Speaker 3: is weakness which is going to start unfolding we think
15:34
Speaker 3: within the next few courses.
15:36
Speaker 1: Okay, now the problem there we must make the mistake
15:39
Speaker 1: of thinking that, you know, economic growth and stop market
15:41
Speaker 1: returns are intimately correlated, because of course they're not. But
15:46
Speaker 1: it is true that with most investors expecting a very
15:50
Speaker 1: soft landing in an environment where equities are already or
15:54
Speaker 1: US equities we're talking about here, already pretty fully valued.
15:58
Speaker 1: You say in one of your notes that there's skill
16:00
Speaker 1: priced for perfection after after all this time, given that
16:04
Speaker 1: the US exuity market in particular feels like it would
16:07
Speaker 1: be unpleasantly at risk if these weaker numbers start coming through.
16:13
Speaker 3: So I think the USFT market is at risk, but
16:16
Speaker 3: I think it's important not to exaggerate what that risk is.
16:19
Speaker 3: So as of right now, the valuations, as you said,
16:22
Speaker 3: they are stretched. That is very very clear. They've actually
16:24
Speaker 3: become more stretched over the progress, of course of this year.
16:28
Speaker 1: Is one of the greatest of analysts euphemisms, you know.
16:32
Speaker 1: I love that. It's the equivalent of the doctors saying
16:35
Speaker 1: it will just be a little prick well exactly.
16:38
Speaker 3: And the other best one is, you know, the market
16:40
Speaker 3: is already pricing in something, which is of course it's
16:42
Speaker 3: very difficult to know what the market is pricing in.
16:44
Speaker 3: But what we do know is that if you know,
16:46
Speaker 3: as we said earlier, the general consensus for the market
16:49
Speaker 3: is that there will be a soft landing. The market
16:51
Speaker 3: has been pleasantly surprised by the positive economic numbers, positive
16:55
Speaker 3: earning surprises for this year, But unfortunately, what that's meant
16:58
Speaker 3: is the general expertations are that the earnings numbers will
17:03
Speaker 3: continue to improve, and actually expectations for twenty twenty four
17:06
Speaker 3: are for even higher earnings growth and absolutely no signs
17:10
Speaker 3: of any concerns around margins. Now, what we do know
17:13
Speaker 3: is that as inflation continues to decelerate, and of course
17:16
Speaker 3: as the economy slows, pricing power for firms becomes a
17:19
Speaker 3: lot more challenging. So there will be margin challenges through
17:22
Speaker 3: twenty twenty four, which we don't think yet is reflected
17:26
Speaker 3: in equity market pricing, So there is that vulnerability. But
17:30
Speaker 3: then at the same time, because we're not talking about
17:32
Speaker 3: a deep recession with something as they said, very short,
17:35
Speaker 3: very shallow, any pullback in equities should be equally short
17:40
Speaker 3: and equally shallow. So for an investor when they're thinking
17:43
Speaker 3: about equities, we have to be really careful because actually
17:46
Speaker 3: timing the market trough can be a falls game. It's
17:50
Speaker 3: notoriously difficult to get their time incorrect. So you have
17:52
Speaker 3: to think about what your horizons are, are you able to
17:54
Speaker 3: dip in and out of the market, or is it
17:57
Speaker 3: something a little bit more difficult, in which case you
17:59
Speaker 3: might want to maintain a bit of a neutral positioning.
18:02
Speaker 3: And then once you start to see the market sliding down,
18:05
Speaker 3: that's actually the time to probably start averaging in because
18:07
Speaker 3: we do know with some confidence, I think that any
18:10
Speaker 3: equity market pullback is not going to be particularly deep
18:13
Speaker 3: or sustained.
18:16
Speaker 1: Tell me what you mean by neutral positioning. That's the
18:19
Speaker 1: kind of thing that professionals say and ordinary investors look
18:22
Speaker 1: and go, I don't really know what that means. What
18:24
Speaker 1: does it mean to be neutral on stock market?
18:27
Speaker 3: Yeah, no, that is an important question to ask when
18:30
Speaker 3: we're talking about this. You know, we're doing the positioning
18:33
Speaker 3: relative to a benchmark. So this is having your equity
18:36
Speaker 3: market positioning in line with what that benchmark is saying.
18:40
Speaker 3: So you're not having greater positioning inequities in the benchmark
18:43
Speaker 3: and you're not having lower positioning inequities in the benchmark.
18:47
Speaker 3: So you are absolutely in line. If you have the
18:49
Speaker 3: S and P five hundred in your benchmark and you
18:51
Speaker 3: have maybe a forty percent allocation to it, well that's
18:54
Speaker 3: what we're saying. You have that forty percent to match
18:56
Speaker 3: the benchmark.
18:57
Speaker 1: So what is your benchmark when you talk about reality?
19:01
Speaker 3: So for us, and I guess for many asset managers
19:04
Speaker 3: when we talk about this, our portfolios are very very broad.
19:07
Speaker 3: It's a different number of clients, different risk profiles, and
19:10
Speaker 3: so the benchmarks will generally be quite varied. So from
19:14
Speaker 3: a strategy perspective, which is always the easiest way to
19:16
Speaker 3: talk about it because it can be so dispersed and broad.
19:20
Speaker 3: So for this, I'm talking for us secrities. Let's talk
19:22
Speaker 3: about the S and P five hundred and let's say,
19:25
Speaker 3: for example, you were to have in a multi asset portfolio,
19:30
Speaker 3: maybe you had about sixty percent allocation decuities in your benchmark. Well,
19:35
Speaker 3: that's the kind of position you should have today.
19:38
Speaker 1: Okay, so it's entirely benchmark riven. It's difficult, isn't it,
19:41
Speaker 1: because that's not neutral. You know, these decisions are made
19:44
Speaker 1: by somebody. It's like talking about passive investing. It doesn't
19:46
Speaker 1: exist in any kind of sense that you can be
19:49
Speaker 1: neutral on markets. Also, slightly doesn't exist because someone still
19:53
Speaker 1: made the decisions exactly.
19:55
Speaker 3: And you know, if you have the ability to be
19:56
Speaker 3: short the market or along the market, of course, and
19:59
Speaker 3: you're not talking about benchmark. Well, this is about having
20:01
Speaker 3: no allocation dequities. Of course, that's not what we're thinking.
20:04
Speaker 3: We're thinking the one it should be invested this point.
20:08
Speaker 3: It's just about case of saying, I'm not going to
20:10
Speaker 3: be increasing my allocation today, and I'm not going to
20:12
Speaker 3: be reducing my allocation today. I'm going to be sitting
20:14
Speaker 3: where I am and looking for the opportunity as the
20:17
Speaker 3: market starts to weaken and decline, that's going to be
20:20
Speaker 3: the opportunity for me to add in some of that exposure.
20:24
Speaker 1: Okay, well, we'll come back shortly to the various markets
20:27
Speaker 1: that you think might be interesting or not interesting. But
20:29
Speaker 1: before we go there, can I ask you, given your
20:32
Speaker 1: not soft landing but soft recession for cast or hypothesis,
20:36
Speaker 1: where do you see inflation going in that context?
20:40
Speaker 3: So we are anticipating inflation continues to decelerate, right, So
20:44
Speaker 3: you know we have inflation coming down to a round
20:46
Speaker 3: and this is a headline number of course, because it
20:49
Speaker 3: is that difference between headline core is going to become
20:51
Speaker 3: increasingly important. We see the headline number coming down towards
20:55
Speaker 3: two and a half percent by year end of twenty
20:57
Speaker 3: twenty four. So core inflation it's a bit higher, so
21:00
Speaker 3: it's around a two point seventy to three percent level,
21:03
Speaker 3: so still somewhat uncomfortable for the Federal Reserve, but at
21:08
Speaker 3: least a lot healthier than what we've seen, of course
21:11
Speaker 3: over the last eighteen months. Now we know that the
21:13
Speaker 3: FED is targeting, of course two percent in our forecast,
21:16
Speaker 3: we don't think that they actually get to two percent,
21:19
Speaker 3: because in order to get to two percent you need
21:22
Speaker 3: to have a deeper downturn. You know, that last bit
21:25
Speaker 3: is where things get a little bit more challenging, and
21:27
Speaker 3: we don't think that the FED is prepared or even
21:30
Speaker 3: needs to bring inflation down to two percent. You know,
21:32
Speaker 3: that number has essentially, I think, been plucked out of
21:35
Speaker 3: thin air by per central bankers over the years. So
21:38
Speaker 3: two and a half percent level we think the FED
21:40
Speaker 3: would be essentially content with.
21:42
Speaker 1: Yeah, interesting, I mean it has been plugged out of
21:44
Speaker 1: thin air, John and I with bitter work. Input on
21:47
Speaker 1: came from New Zealand for a New Zealand banker at
21:49
Speaker 1: some point, and then everyone picked it up and seems
21:51
Speaker 1: like a p a few reasonab numbers that why not.
21:53
Speaker 1: But of course there's no different to one point five
21:54
Speaker 1: or two point five or three point five, depends what
21:57
Speaker 1: you choose. But given that's what they've chosen, and given
22:00
Speaker 1: that central banks have lost so much credibility, while almost
22:03
Speaker 1: complete credibility over the last two or three years, do
22:05
Speaker 1: you don't think that they would feel they needed to
22:07
Speaker 1: push on to actually reach the target.
22:10
Speaker 3: I don't think so. I think what we've seen in
22:12
Speaker 3: the last few years is central banks shifting to that
22:16
Speaker 3: average inflation targeting, so they can say, we'll look over
22:18
Speaker 3: the previous decade, we'd essentially under hit that two percent level,
22:23
Speaker 3: and so for the next ten years, maybe we can
22:25
Speaker 3: be slightly above. They also know that over time, over
22:29
Speaker 3: the next couple of years, assuming that there is another
22:31
Speaker 3: huge boom, inflation should overtime again drift towards that two percent.
22:37
Speaker 3: We don't need to hit two percent today, especially because
22:40
Speaker 3: they do have to weigh up and remember, for the FED,
22:42
Speaker 3: relative to the Bank of England or the ECB or
22:44
Speaker 3: many other central banks, they do have that dual mandate,
22:47
Speaker 3: so they do have to keep full employment in their
22:49
Speaker 3: mind as well as the inflation number. So actually, for
22:51
Speaker 3: the FED, I think is easier for them to stop
22:53
Speaker 3: at a two and a half percent level inflation rate
22:56
Speaker 3: than you would see for the ECB.
22:58
Speaker 1: Interesting, do you think the Bank of England will feel
23:00
Speaker 1: forced to go down to exactly two percent given they
23:03
Speaker 1: do not have this deal mandate they have the one mandate.
23:06
Speaker 3: I don't think the Bank of England feels they have
23:09
Speaker 3: any need to hit any target at the moment. I mean,
23:12
Speaker 3: the communications like.
23:13
Speaker 1: That, doesn't it.
23:14
Speaker 3: It's extraordinarily confusing. And maybe that's right because you know,
23:18
Speaker 3: as been talking the market, the economy is confusing, I
23:20
Speaker 3: think particularly so for the UK, but unfortunately does mean
23:23
Speaker 3: that with a difficult communication messaging around the story, I
23:28
Speaker 3: don't think any investor had can have full confidence in
23:31
Speaker 3: exactly what the Bank of England is trying to target
23:33
Speaker 3: on the inflation numbers.
23:35
Speaker 1: And the move, the shift from where we are now
23:38
Speaker 1: in US and the UK for that matter, the shift
23:40
Speaker 1: from high inflation down to the stay two and a
23:42
Speaker 1: half percent. There's also a sort of constant thought that
23:46
Speaker 1: this is a this is straightforward, it's easy, not easy,
23:49
Speaker 1: but smooth. It's quite smooth, But it feels a bit
23:52
Speaker 1: like it's going to be much more volatile, that we're
23:54
Speaker 1: not going to have a smooth line down.
23:57
Speaker 3: I think that is correct. We think that you need
24:00
Speaker 3: to have a downturn to get from a three percent
24:04
Speaker 3: number to a two and a half percent two and
24:05
Speaker 3: a half percent number, and then you need a deeper
24:07
Speaker 3: downturn to get from two and a half percent to
24:09
Speaker 3: two percent. But along the way it is going to
24:12
Speaker 3: be rocky. You know, we've seen another resurgence in all
24:14
Speaker 3: prices that will inevitably push up headline inflation over the
24:17
Speaker 3: next coming months, and whilst central banks can ignore it
24:20
Speaker 3: in the near term, if it persists, there's always that
24:23
Speaker 3: fear that it's going to feed through to the core numbers,
24:25
Speaker 3: just like we saw over the last two years. So
24:28
Speaker 3: there is that aspect. The other part of it is
24:30
Speaker 3: that if you believe in a soft landing, well, then
24:33
Speaker 3: the chances are that actually inflation may stay a little
24:36
Speaker 3: bit higher than what we're forecasting. For example. The other
24:40
Speaker 3: part of this is that if you believe that there
24:41
Speaker 3: will be no landing, and when I say no landing,
24:43
Speaker 3: of the economy continues to perform very well, grows stays
24:46
Speaker 3: above target, sorry above trend, and or even accelerates, then
24:51
Speaker 3: at some point there has to be some kind of
24:53
Speaker 3: come up because in that scenario, your inflation continues to increase,
24:57
Speaker 3: the Fed central banks have to continue need to high crate,
25:01
Speaker 3: and unfortunately that ends in an almighty crash. So to me,
25:05
Speaker 3: a no landing scenario is worse than a soft recession scenario.
25:11
Speaker 1: Yeah, it feels time for a recession, I supposely. The
25:13
Speaker 1: other thing to say about inflation over the longer term,
25:16
Speaker 1: there is a fairly wild widely held view at this
25:19
Speaker 1: point that long term inflation is automatically going to be
25:23
Speaker 1: higher than it's been for the last couple of decades
25:25
Speaker 1: because of the changing geopolitics, because of the end of
25:28
Speaker 1: the peace, the dividend, because the sort of gradual shutdown
25:31
Speaker 1: of our economic relationship with China, because of labor shortages
25:35
Speaker 1: across the globe, etc. That there is going to be
25:38
Speaker 1: a sort of a generational shift in the inflationary dynamic.
25:42
Speaker 3: So I don't know how much I buy into this,
25:45
Speaker 3: and I think maybe it comes down to what kind
25:47
Speaker 3: of horizons you're thinking about. So let's say over the
25:49
Speaker 3: next five years, absolutely that is the case. I think
25:52
Speaker 3: the globalization, the changing relationships, change in supply change, reasuring, frenchshuring,
25:57
Speaker 3: whatever the latest fashionable term is, that will all put
26:01
Speaker 3: up oppression. Then of course there's the energy transmission, I guess,
26:04
Speaker 3: the resurgence and the use of fiscal policy. These are
26:07
Speaker 3: all aspects which you'll add to inflation. But then if
26:10
Speaker 3: you're looking out beyond the next five years, we have
26:13
Speaker 3: to think about AI, and I think any inflation conversation
26:18
Speaker 3: has to include the consideration of what the impact and
26:21
Speaker 3: productivity is. And when you're seeing headlines already about companies
26:26
Speaker 3: making mass layoffs, that have to be a deflationary aspect.
26:30
Speaker 3: And maybe and I think the numbers have still have
26:32
Speaker 3: to be crunched, that this is still very early days
26:34
Speaker 3: to be thinking about the exact magnitudes. But there is
26:38
Speaker 3: a chance that your AI side starts to offset that
26:41
Speaker 3: deglobalization inflationary perspective, and perhaps what you end up with
26:44
Speaker 3: this inflation kind of around where you are today or sorry,
26:48
Speaker 3: where we could be at the end of next year.
26:50
Speaker 3: So I don't think that inflation story has been fully
26:53
Speaker 3: thought out. In light of the improvements in artificial intelligence
26:58
Speaker 3: that we've of course been experiencing this year already.
27:01
Speaker 1: So we might suddenly see that wave of technological productivity
27:04
Speaker 1: improvements we've been longing for a decade.
27:09
Speaker 3: I think it's possible. I think what we have seen,
27:10
Speaker 3: for example, with the tech stocks is their incredible move
27:13
Speaker 3: up in recent months is maybe a little bit optimistic
27:17
Speaker 3: in terms of when we're going to see those productivity
27:19
Speaker 3: gains coming through. I think it will be transformational, but
27:24
Speaker 3: I suspect the timing for which many investors are expecting
27:28
Speaker 3: is a little bit optimistic, and you're looking, we're thinking
27:30
Speaker 3: more about a multi year time rather than just in
27:33
Speaker 3: the next six months to a year.
27:36
Speaker 1: Yeah. The one part of that inflation higher for longer
27:40
Speaker 1: story that I've find particularly compelling is around the energy
27:43
Speaker 1: transition and net zero and the extraordinary shift in the
27:47
Speaker 1: global mining sector that is required to get us through
27:51
Speaker 1: any kind of energy transition, which often doesn't seem to
27:54
Speaker 1: be quite priced in, there's bound to be pretty clear
27:58
Speaker 1: shortages of a lot of the metals that we use
28:00
Speaker 1: for electricity transmission and battery creation, etc. I'm not entirely
28:05
Speaker 1: sure that everyone has factored the ongoing cost of energy
28:09
Speaker 1: transition into long term inflation numbers.
28:11
Speaker 3: That's a fair point. I think that when we think
28:13
Speaker 3: about the energy transmission there's also I mean even just
28:16
Speaker 3: the aspect of kind of thinking about research and development
28:19
Speaker 3: thinking about bringing in you know, kind of that that energy,
28:23
Speaker 3: know how, into companies. These are all added wage costs
28:26
Speaker 3: as well for companies. So when you have any kind
28:29
Speaker 3: of dimensional shift in an economy, that brings along with
28:32
Speaker 3: the new prices. And you said about electricity, well, you know,
28:36
Speaker 3: we're all kind of seduced in the idea that electricity
28:38
Speaker 3: is very good for the environment, and the truth is
28:41
Speaker 3: it's not that healthy. So there are of course those
28:44
Speaker 3: costs as you said, of mining for the various metals,
28:48
Speaker 3: which will add to costs over the next few years.
28:51
Speaker 3: But then maybe once you're past the next ten years
28:54
Speaker 3: and you're close into that period where you've already had
28:56
Speaker 3: that transmission, some of those inflation costs, not all of them,
28:59
Speaker 3: of course, there's some of those inflation costs start to
29:01
Speaker 3: fade off again. So I think having your what is
29:04
Speaker 3: the time horizon that you're thinking about when you're talking
29:07
Speaker 3: about inflation, that has to be part of the conversation.
29:11
Speaker 1: Yeah, okay, we just mentioned China in the sense that
29:15
Speaker 1: we are beginning to globalize and that changes the way
29:18
Speaker 1: we interact with China and it changes some of the
29:20
Speaker 1: inflationary dynamics. But if you look at where people are
29:23
Speaker 1: investing at the moment, and where the earth the allocators
29:26
Speaker 1: are looking. Absolutely everybody is now anti China. No one
29:30
Speaker 1: is investing in China. Everyone's bearish, and of course the
29:34
Speaker 1: economic story is pretty disappointing and the political situation is
29:37
Speaker 1: relatively worrying. But is there any any case to be
29:42
Speaker 1: made for investing in China while everyone else is running
29:45
Speaker 1: in the other direction.
29:47
Speaker 3: I think maybe you could put out something for China.
29:49
Speaker 3: One of the problems I think that investors have is
29:52
Speaker 3: that they had such high hopes for China's reopening that
29:55
Speaker 3: they were willing to look through some of the discussion
29:58
Speaker 3: points that had been sent out through Chinese policymakers for
30:01
Speaker 3: a couple of years of where they had been talking
30:04
Speaker 3: about looking away from trying to move away from a
30:06
Speaker 3: boom bus cycle and not wanting to really reinvigorate leverage,
30:12
Speaker 3: for example within the Chinese economy. Now that disappointment that
30:17
Speaker 3: Chinese policymakers haven't stepped in size has meant that investors
30:22
Speaker 3: are now trying to maybe keep a bit of an
30:24
Speaker 3: arm flunt away from the market. And then of course
30:27
Speaker 3: there's a geopolitical tensions which continue to brew and in
30:31
Speaker 3: some cases kind of get a little bitt of control
30:33
Speaker 3: for a few weeks and then come back in. For us, though,
30:36
Speaker 3: we know that with China, they have got a tendency
30:40
Speaker 3: to surprise. So when things look really dark, when the
30:44
Speaker 3: economy starts to look very worrying, when youth unemployment, which
30:47
Speaker 3: of course I know that they have stopped published it,
30:49
Speaker 3: which is worrying, But once youth unemployment has got to
30:52
Speaker 3: a worrying factor, policymakers do have a tendency to step
30:56
Speaker 3: in size with that kind of bazooka. And I think
30:59
Speaker 3: that is a potential situation that we could be seeing
31:04
Speaker 3: the next couple of months. I think a savvy investor
31:06
Speaker 3: would look at the Chinese market and say that valuations
31:08
Speaker 3: today are pretty interesting. Policymakers must be getting worried about
31:13
Speaker 3: the downturn. They know that investors are standing to shy
31:16
Speaker 3: away from the market, and maybe we need to do
31:17
Speaker 3: something big. And I think that is maybe an element
31:21
Speaker 3: that investors could be interested in.
31:23
Speaker 1: Yeah, and interestingly, going back to our conversation about having
31:28
Speaker 1: a neutral portfolio, if you are following an emerging markets benchmark,
31:34
Speaker 1: you're going to have a reasonal amount in China already
31:36
Speaker 1: aren't you.
31:38
Speaker 3: You are, well, this is a really good point. Actually,
31:40
Speaker 3: this is something that we had realized recently. You know,
31:44
Speaker 3: when you think about China in any kind of em benchmark,
31:48
Speaker 3: it really is the majority holder. But interestingly enough, actually
31:52
Speaker 3: China's holdings within a benchmark have dropped quite considerably over
31:57
Speaker 3: recent years. So we're not talking about the kind of
32:00
Speaker 3: thirty percent anymore. They have actually dropped down quite significantly
32:03
Speaker 3: to about twenty five percent level for example. So you
32:06
Speaker 3: are able to offset your exposure to emerging markets, I say,
32:10
Speaker 3: if you're really worried about China, by increasing your exposure
32:12
Speaker 3: to other e markets which are although of course related
32:16
Speaker 3: to China, and there may be some spillover effects that
32:20
Speaker 3: they are becoming increasingly I think, less exposed to China
32:24
Speaker 3: than they were a few years ago. So if I
32:26
Speaker 3: give you an example, India, which has been a wonderful
32:29
Speaker 3: performer this year, but interestingly it doesn't have much exposure
32:33
Speaker 3: to China, either from a macroeconomic side but also from
32:37
Speaker 3: a market side. If you look at the MSCI India Index,
32:40
Speaker 3: for example, the amount of revenue which is generated in
32:44
Speaker 3: China for the MSCI India Index is actually very small,
32:48
Speaker 3: which shows you that if you have worried about China,
32:51
Speaker 3: India is your greatest diversifier. Those two cycles can move
32:55
Speaker 3: in opposite directions. So there are opportunities out there, but
32:59
Speaker 3: of course, like you said, you have to consider China
33:01
Speaker 3: is a big part of em. Can you entirely ignore
33:04
Speaker 3: China when you're investing in emerging markets? There are ways,
33:07
Speaker 3: but again you have to be pretty particular and really
33:10
Speaker 3: know the market that you're investing in.
33:12
Speaker 1: Yeah, other other emerging markets that you find interesting. India
33:15
Speaker 1: is very compelling. Is there anything else that is a
33:18
Speaker 1: standalone market?
33:20
Speaker 3: Yeah, Latin America at the moment is definitely one of
33:22
Speaker 3: the more interesting ones. From a valuation perspective, places like
33:26
Speaker 3: Brazil have actually rarely been cheaper than they are today
33:29
Speaker 3: now for Brazil, for Chile, for a number of these economies,
33:33
Speaker 3: they have managed to actually succeed almost in their inflation
33:36
Speaker 3: fight a lot earlier than expected, so their interest rate
33:39
Speaker 3: cards have already started expected to continue. So that's certainly
33:42
Speaker 3: very interesting, and actually even from a political baddop for Brazil,
33:46
Speaker 3: it has turned out to be a lot more stable
33:48
Speaker 3: than many investors are anticipating, So those are good. Mexico
33:51
Speaker 3: is another really interesting one because although valuations maybe are
33:54
Speaker 3: not as compelling is for Brazil, the structural story, the
33:58
Speaker 3: secular story for Mexico has been one of the kind
34:01
Speaker 3: of the shining parts of the post pandemic world, where
34:04
Speaker 3: you are seeing the government really focusing on Mexico being
34:08
Speaker 3: a destination for reshoring. They're trying to encourage domestic international
34:13
Speaker 3: companies to set up there and that is really boosting
34:16
Speaker 3: their economy and the benefits should be expected to persist
34:19
Speaker 3: actually for a while. Is not just a cyclical play,
34:22
Speaker 3: but more of a structural play as well.
34:23
Speaker 1: Thank you long way from China, but really interesting. I
34:25
Speaker 1: wonder if we can talk briefly about the bond market
34:28
Speaker 1: before before we end. The bond yials have been extremely
34:33
Speaker 1: high over the summer, and that's meant that a lot
34:35
Speaker 1: of people are beginning to think maybe that bond market
34:37
Speaker 1: is just not as safe as it was. But I
34:39
Speaker 1: think you'll reasonably posit it.
34:41
Speaker 3: Yeah, and it goes back to the macro outlook. If
34:44
Speaker 3: you're like me and you're expecting some level of downtown
34:47
Speaker 3: that should really put downward pressure on bond deals, it's
34:50
Speaker 3: not going to be as much downward pressure as maybe
34:53
Speaker 3: people have thought about a year ago, because actually the
34:55
Speaker 3: global environment is different. You know, we know that the
34:57
Speaker 3: Bank of Japan I think, is going to be moving
35:00
Speaker 3: away from ial curve control in the near future, so
35:02
Speaker 3: that takes away of living anchor for bond deals. And
35:06
Speaker 3: we know that there's quantitative tightening which is going to
35:08
Speaker 3: be putting up with pressure. So there are a number
35:09
Speaker 3: of factors which means that the floor for bond deals
35:13
Speaker 3: is higher than it was. But even at this level
35:16
Speaker 3: of kind of the four point three percent fourth to
35:18
Speaker 3: four point four percent range that we've been moving in,
35:21
Speaker 3: that should progressively move down as the economy continues to weaken.
35:27
Speaker 3: So actually, for us, it is an important part of
35:29
Speaker 3: a portfolio. It's an important diversifier and it gives you
35:33
Speaker 3: it should give you a little bit of stability and
35:36
Speaker 3: income as you see that soft, softer downtown starting to
35:42
Speaker 3: take shape.
35:43
Speaker 1: Yeah, or the UK investors might think for themselves that
35:46
Speaker 1: they're looking for income and they can get a pretty
35:48
Speaker 1: good income off the UK exty market, but more importantly
35:51
Speaker 1: they can get over six percent in an NSNI savings account.
35:55
Speaker 3: This is very true. Look for any investor out there,
35:58
Speaker 3: and actually, whether it's a UK or the US, or
36:00
Speaker 3: or or you know so many places when you can
36:03
Speaker 3: make kind of a five or six percent yield just
36:06
Speaker 3: by putting your savings in a bank account for a year.
36:12
Speaker 3: Compared to ACUTI, where the actualistic premium now is actually
36:15
Speaker 3: fairly low, you know, what are you getting in this way?
36:20
Speaker 3: So I think if you have any concerns about the
36:21
Speaker 3: economic outlook, the clever thing to do is actually think
36:25
Speaker 3: about fixed and can think about bonds, and as I said,
36:28
Speaker 3: that gives you a little bit of protection as some
36:30
Speaker 3: of the down sty starts to emerge, and whether that's
36:31
Speaker 3: the US or indeed the UK.
36:34
Speaker 1: Let's talk briefly then about the UK empty market, which
36:37
Speaker 1: we talk a lot on this podcast, and John and
36:39
Speaker 1: I talk with a lot of our writing about her
36:42
Speaker 1: phenomenally cheap the UK market is and have possibly at
36:46
Speaker 1: some point political uncertainty has got to recede and international
36:49
Speaker 1: investors have got to start coming back into the UK.
36:52
Speaker 1: And at this point it won't take much, surely to
36:54
Speaker 1: push prices up here. And we're beginning to see some
36:57
Speaker 1: of the brokers putting out notes saying, gosh, that's cheaper
36:59
Speaker 1: than I thought. Goodness, Maybe the UK over Europe etc.
37:02
Speaker 1: What's your view there.
37:04
Speaker 3: I think the UK is a diffficult market at the moment.
37:07
Speaker 3: I'm probably less positive on the UK market than then. Yes,
37:12
Speaker 3: valuations are very interesting, and actually that's been the case
37:15
Speaker 3: for the majority of the year. In fact, most analysts
37:18
Speaker 3: the reason that they've liked the UK is despite the
37:20
Speaker 3: macro backdrop, is because of those valuations. The consent that
37:24
Speaker 3: I think I have is what is happening in the
37:27
Speaker 3: UK economy. I think the inflation story has got to
37:29
Speaker 3: be the worst of any of the major markets out there.
37:33
Speaker 3: That inflation story, the interest rate hikes, even if the
37:35
Speaker 3: Bank of England were to stop today, for example, I
37:39
Speaker 3: think that the UK economy is more susceptible to those
37:42
Speaker 3: interest rate increases and what you're going to see for
37:44
Speaker 3: the US. So the downturn that we're anticipating for the
37:47
Speaker 3: UK economy is I think going to be fairly damaging.
37:50
Speaker 3: You throw that a government, which I think is as
37:53
Speaker 3: you said, there's a lot of instability in there, and
37:56
Speaker 3: it becomes a difficult play for investors to take. So
38:01
Speaker 3: you have to be very much focused on the valuations
38:04
Speaker 3: and willing to look through any of the near term
38:06
Speaker 3: cycnical forces to increase exposure to UKTI is at this.
38:10
Speaker 1: Point I got to pick you up on that inflation number,
38:14
Speaker 1: in that the same dynamics of feeding into the inflation
38:17
Speaker 1: numbers across Europe and here it doesn't seem to be
38:19
Speaker 1: that different.
38:20
Speaker 3: I think the US is a little bit further down,
38:22
Speaker 3: further through in its process of getting inflation down than
38:25
Speaker 3: what you're seeing for Europe and the UK. The other
38:28
Speaker 3: part of it is is for the US, inflation is
38:32
Speaker 3: more of a cyclical issue, which we think will fade.
38:36
Speaker 3: When you start to look at Europe and actually particularly
38:39
Speaker 3: the UK, some of the inflation concerns are a little
38:41
Speaker 3: bit more structural. I think the labor markets supply issues
38:44
Speaker 3: are not disappearing anytime soon. For wages, for wage pressures,
38:48
Speaker 3: I think that's going to be a persistent headache for
38:51
Speaker 3: the Bank of England, which means that even if we
38:54
Speaker 3: do get to that recession point for the UK and
38:57
Speaker 3: the bankering feels compelled to start cutting interest rates, how
39:00
Speaker 3: far can they realistically cut rates when wage growth is
39:04
Speaker 3: still quite elevated. So I think that is a headache
39:07
Speaker 3: which I suspect that you won't see of similar magnitude.
39:10
Speaker 3: There will be some element of it, but not quite
39:12
Speaker 3: such a magnitude.
39:13
Speaker 1: For the US, but possibly for the EU.
39:17
Speaker 3: In some way it's a little bit different in terms
39:18
Speaker 3: of the labor supply issues. But for Europe, I think
39:23
Speaker 3: the greater concern is just with regards to inflation expectations,
39:26
Speaker 3: and we just haven't seen it coming back. In Inflation
39:29
Speaker 3: expectations have continued to creep up, so I think that
39:32
Speaker 3: is potentially concerned. But I would think that for Europe
39:36
Speaker 3: the inflation story will improve more than you're going to
39:39
Speaker 3: see for the UK, because the UK's labor supply issues
39:42
Speaker 3: is one of the worst that we're expecting now.
39:44
Speaker 1: Sema, if I were to ask you what your favorite
39:49
Speaker 1: market would be to hold for the medium term, it
39:52
Speaker 1: sounded like India. Would that be right? Would you pick
39:55
Speaker 1: something else? If I were to say, do I'm going
39:57
Speaker 1: to let you invest in one market, one regional market,
40:01
Speaker 1: and then I'm going to lock you in a room
40:02
Speaker 1: for ten years, which I'm going if I what would
40:04
Speaker 1: you say? Okay?
40:06
Speaker 3: So this is an interesting question actually because it probably
40:08
Speaker 3: is going to fly a little bit against what we've
40:10
Speaker 3: been talking from a near to end state. Let's say
40:13
Speaker 3: you have a five to ten year horizon. I actually
40:16
Speaker 3: think US exceptionalism is right there. So if I'm taking
40:21
Speaker 3: a ten year of view, then actually the market that
40:23
Speaker 3: I want to have the greatest exposure to is still
40:25
Speaker 3: the US. There will be some interesting prospects coming in,
40:29
Speaker 3: as you said, from India, because I think the secular
40:31
Speaker 3: story for India has really improved, and you can see
40:34
Speaker 3: that investor interest in India as a real competitor to
40:38
Speaker 3: China's dominance is increasing. Another one, this is a little
40:43
Speaker 3: bit more dicey, but I think it's Japan. We haven't
40:45
Speaker 3: talked about that. Japan is a really really interesting market
40:48
Speaker 3: at the moment. Then the flows that are going into Japan,
40:51
Speaker 3: which have been very suppressed until this point, are I
40:56
Speaker 3: think I'd be driving in a Japanese act market to
40:59
Speaker 3: hire and higher level They also move in a different
41:02
Speaker 3: direction to what you're seeing in the rest of the world.
41:04
Speaker 3: So again it depends what your horizon is. I think
41:06
Speaker 3: India is compelling. I think Japan could be compelling, but
41:09
Speaker 3: it's a bit of iffy to see whether or not
41:12
Speaker 3: their better performance really persists beyond the next year or so.
41:16
Speaker 3: But I think your exceptionalism is still a key story.
41:20
Speaker 1: Still the best market. Okay. Same. A final question, and
41:24
Speaker 1: this is the trickiest one, and there's a right answer
41:27
Speaker 1: and the wrong answer as well. If I were to
41:31
Speaker 1: lock you in that same run and tell you that
41:35
Speaker 1: you could only buy before you entered the rum gold,
41:39
Speaker 1: bitcoin or cash, you have to buy cash, you suit?
41:43
Speaker 1: I mean, oh gosh, I'm really hard. Right, how long for?
41:49
Speaker 3: What's what's the time horizon that we're talking about.
41:51
Speaker 1: Let's go ten years? You could go ten years. That
41:54
Speaker 1: seems like a reasonable time horizon.
41:58
Speaker 3: So I would be in cash by any means. Oh,
42:01
Speaker 3: this is relative to the other three, right, So I
42:03
Speaker 3: only have.
42:04
Speaker 1: Relative exactly, That's all you've got. There are no other options.
42:08
Speaker 3: Oh gosh, I might actually put it into bitcoin.
42:13
Speaker 1: Oh interesting, you're the second one. In the last couple
42:16
Speaker 1: of weeks we had had absolutely nobody say bitcoin, And
42:20
Speaker 1: now you have to tell me why.
42:22
Speaker 3: I You know, I just generally believe in anything to
42:24
Speaker 3: do with technology. I think that's going to be the
42:27
Speaker 3: base for for for all markets, and even if bitcoin's
42:32
Speaker 3: not the main one from the blockchain aspect, I think
42:34
Speaker 3: it's going to be a beneficiary of blockchain technology interest.
42:39
Speaker 3: And you know, as for gold, I'm not entirely sure
42:42
Speaker 3: about the inflation story. I don't know if I believe
42:44
Speaker 3: it in inflation really taking off over the next ten years.
42:49
Speaker 3: Whereas bitcoin, I think, you know, be ready for involentile time.
42:52
Speaker 3: But I think maybe that could be your best performing market,
42:57
Speaker 3: you know.
42:57
Speaker 1: I mean, even though you risk of bitcoin is so
42:59
Speaker 1: much higher, and that one thing that we can be
43:01
Speaker 1: we can't really be sure of anything, but we can
43:03
Speaker 1: be almost certain that in a decade gold will still exist.
43:08
Speaker 1: But we can't be absolutely sure on that with with bitcoin,
43:11
Speaker 1: can we. There's sort of an existential risk to such
43:14
Speaker 1: a unacid class. It's happening already. I'm calling it a
43:17
Speaker 1: nastic class.
43:19
Speaker 3: You're making me, Yeah, you're you're you're making me crush it.
43:21
Speaker 3: But no, I'm going to stick with pickcoin. I think
43:24
Speaker 3: that money should be focused on. If you have to
43:27
Speaker 3: pick one of them, technology or commodities, I'm going to
43:30
Speaker 3: pick this, go with.
43:30
Speaker 1: Technology, Simma.
43:32
Speaker 3: Thank you so much, Thank you very much, Marin.
43:38
Speaker 1: So John, I think there was probably quite a lot
43:40
Speaker 1: in there that you agree with.
43:43
Speaker 3: That.
43:43
Speaker 2: That's interesting that you see that because I was good.
43:46
Speaker 1: It was it was it was a joke. Actually, it
43:48
Speaker 1: was a joke. Yeah.
43:51
Speaker 2: I mean, like, yeah, I was trying to work out
43:54
Speaker 2: because like, don't I don't, I don't want I'm not
43:58
Speaker 2: being mean Toma because she's not here. They kind of,
44:01
Speaker 2: you know, defend their views and be very nice, but
44:06
Speaker 2: it's just the the thing with that, I think what's
44:10
Speaker 2: really useful about this is I think that it sums
44:12
Speaker 2: up the main stream view very well, which is that
44:17
Speaker 2: even with the kind of idea that there's going to
44:19
Speaker 2: be a recession, it's going to be such a kind
44:21
Speaker 2: of feather light recession that all it does is give
44:25
Speaker 2: the Fed an excuse not to keep raising interest rates,
44:29
Speaker 2: which is therefore good for markets, which therefore means you
44:32
Speaker 2: can keep your money in the market at all times.
44:35
Speaker 2: And the future is going to be very much like
44:38
Speaker 2: the past, because we'll get over this little glitch and
44:42
Speaker 2: then it's just going to be back to kind of
44:45
Speaker 2: like you know, buy America, don't worry too much about
44:48
Speaker 2: everything else. And I thought that it is interesting because
44:53
Speaker 2: it's always good to get a sense of what the
44:56
Speaker 2: kind of the kind of I feel the central view
45:01
Speaker 2: of the world is, so you can then figure out
45:03
Speaker 2: what's changing about that and where the money might be
45:06
Speaker 2: about to flow to next. So I thought one of
45:09
Speaker 2: the most interesting things there, for example, was going to
45:11
Speaker 2: be able talking about other markets around the world and
45:14
Speaker 2: Japan saying it was quite excited about I haven't seen
45:19
Speaker 2: that for a long time, because Japan, you know, has
45:22
Speaker 2: been in the doghouse for decades, and now that it's
45:26
Speaker 2: kind of like started to outperform, you know, it's becoming
45:31
Speaker 2: popular again, whereas the UK, for example, which is very
45:35
Speaker 2: cheap and for which the rationale for not buying it
45:40
Speaker 2: is getting increasingly weak, and the you know, inflation problem
45:44
Speaker 2: is starting to converge with the e use. We just
45:48
Speaker 2: found out that our GDP problem isn't actually a problem.
45:50
Speaker 2: We've been no worse than the rest of the G
45:53
Speaker 2: seven in terms of recovery from COVID, so you can't
45:56
Speaker 2: use that excuse anymore. But that's still sort of been
45:58
Speaker 2: lent on as a reason not to buy the UK.
46:02
Speaker 2: And it's just interesting to see that the attitude towards
46:05
Speaker 2: Japan is changing, but the attitude towards they haven't kind
46:08
Speaker 2: of hit that point where they kind of move towards
46:11
Speaker 2: the UK is switching yet, And to me that kind
46:14
Speaker 2: of makes me think, well, I'm great, We've always liked Japan,
46:17
Speaker 2: but b also it makes me think, well, yeah, there's
46:19
Speaker 2: still plating room for both of those trades to walk
46:22
Speaker 2: if you like being long Japan and long UK.
46:27
Speaker 1: It's interesting, isn't it. And one of the things that
46:29
Speaker 1: you and I have been writing about for years is
46:30
Speaker 1: about how people are not looking at Japan properly. You
46:33
Speaker 1: are constantly looking at GDP numbers, not GDP per capita numbers,
46:37
Speaker 1: not thinking about the way Japan all the way through
46:39
Speaker 1: the last couple of decades has had these incredibly cheap equities,
46:42
Speaker 1: have been working very well as an economy, And now
46:44
Speaker 1: suddenly we're seeing people looking at Japanese GDP numbers, which
46:48
Speaker 1: are now rising pleasantly outside per capita numbers, and looking
46:51
Speaker 1: at the way Japan is managed it's the last decades
46:54
Speaker 1: and thinking, well, I see that's not so bad. This
46:56
Speaker 1: looks pretty good and it's cheap, and so it's interesting
46:59
Speaker 1: for us, and we've been saying this for years to
47:01
Speaker 1: see the rest of the world suddenly go well, yeah, no, okay,
47:04
Speaker 1: And now I'm seeing loads of Columnder people writing stuff
47:07
Speaker 1: as though this was entirely new information. Kind of irritated,
47:09
Speaker 1: but also kind of good.
47:11
Speaker 2: Yeah, you never get any thanks for being contriting or
47:17
Speaker 2: not adopted, and that never changes even if you're even
47:21
Speaker 2: if you tonic to be rate, so you sort of
47:24
Speaker 2: give up. Can only happen somebody points so or maybe no,
47:27
Speaker 2: she was seeing this, you know, for the last twenty years.
47:31
Speaker 1: But yeah, maybe we say too much, Yeah exactly, I
47:33
Speaker 1: mean there's still yeah, there's still a long way to
47:35
Speaker 1: go in Japan. We think you know, that cheapness is
47:37
Speaker 1: still there. The money are starting to pile in, people
47:41
Speaker 1: are starting to be interested in it. So you know,
47:42
Speaker 1: you should be out there possibly looking and thinking about
47:45
Speaker 1: investing in Japan if you haven't already, although if you're
47:47
Speaker 1: listening to us, you probably have already. And I just
47:49
Speaker 1: wanted to note that if you look at the investment
47:51
Speaker 1: trust in Japan and there's listeners will know John and
47:53
Speaker 1: I alway quite interested in the investment trust market. There
47:56
Speaker 1: are a couple that are obviously outperforming, and they end
48:00
Speaker 1: to have a value bent. They tend to be looking
48:02
Speaker 1: at the cheaper end, looking at where there's M and a,
48:04
Speaker 1: looking at companies with lots of cash, et cetera. So
48:08
Speaker 1: the ones at the top of the moment are CC
48:10
Speaker 1: Japan Income and Growth shroled, Japan Trust and ABI Japan
48:13
Speaker 1: Opportunity Trust, which is quite new, are all doing very
48:16
Speaker 1: well looking at up nineteen between nineteen and thirty percent
48:20
Speaker 1: of the last three years. So looking at those those
48:22
Speaker 1: trust with a little bit of a value edge might
48:24
Speaker 1: be might be one way to go if you're beginning
48:26
Speaker 1: to come round to the case for Japan.
48:28
Speaker 2: Yeah, And I think that's the other things, this desire
48:31
Speaker 2: to go back to the old normal because a new
48:35
Speaker 2: normal they can are too disruptive to a lot of
48:37
Speaker 2: the views, the kind of mainstream kind of Wall Street
48:41
Speaker 2: has if your leg And I was just listening to
48:45
Speaker 2: the radio and that we end today and they were
48:46
Speaker 2: talking about how, you know, kind of the US presidential election.
48:52
Speaker 2: So and the thing they was talking about was how
48:55
Speaker 2: both Joe Biden and Donald Trump were going down to
48:58
Speaker 2: talk to the auto workers in Michigan in Detroit. So
49:02
Speaker 2: and they're both trying to basically promise that they are
49:06
Speaker 2: more union than the next guy. So Joe Biden's on
49:08
Speaker 2: a picket line, Donald Trump's coming down. They basically try
49:12
Speaker 2: and out kind of out up the workers and you're like,
49:17
Speaker 2: hold on a minute. So we're going into a US
49:19
Speaker 2: presidential election where the leaders are competing to be the
49:23
Speaker 2: friend of the worker, not just a friend of the worker,
49:25
Speaker 2: the friend of the militant union worker. And you'll tell
49:29
Speaker 2: me that this is not a a massive change and
49:31
Speaker 2: be inflation is not going to be a problem in
49:34
Speaker 2: the future. This is just not conceivable. You know that
49:38
Speaker 2: this is a dramatic change again, one that we've been
49:41
Speaker 2: capping one a book for quite a while, and it's
49:44
Speaker 2: because the force, the pendulum in politics is shifting from
49:48
Speaker 2: you know, from the corporations to the workers, you know,
49:51
Speaker 2: from capital to labor, et cetera, et cetera, et cetera.
49:54
Speaker 2: And that just spells a more inflation, a more volatile
49:57
Speaker 2: inflation backdrop for the foreseeable few. So it's a big swing.
50:01
Speaker 2: And I think that if you don't take that any
50:05
Speaker 2: account when you're considering your asset allocation over the next
50:07
Speaker 2: ten years, then you can't get some nasty surprises.
50:11
Speaker 1: Yeah, interesting, which from our point of view, for you
50:14
Speaker 1: and I kind of just steering away from the US
50:17
Speaker 1: into some of the other cheaper markets because it doesn't
50:20
Speaker 1: matter what's going on in the macro environment. If you
50:22
Speaker 1: buy cheap, you have a much better chance of surviving
50:25
Speaker 1: that if you buy expensive. But Siemer is very keen
50:27
Speaker 1: on the US over a ten year of view. So
50:29
Speaker 1: I guess if you're going to go with her or
50:32
Speaker 1: go with her ideas, you just buy an ETF in
50:34
Speaker 1: the US, right, or if you really believe that the
50:36
Speaker 1: old normal is coming back one of our old favorite Scottish.
50:39
Speaker 2: Mort Yeah, I mean I think that that would yeah,
50:42
Speaker 2: to reflect that of view absolutely. I mean, if you
50:45
Speaker 2: want something that kind of seem also mentioned that may
50:47
Speaker 2: be a bit more can of exciting, then there's an
50:51
Speaker 2: ETF attracts Brazil, for example, we'd probably be an interesting one.
50:57
Speaker 2: I haven't looked en off Anto Brazil, but I do
50:59
Speaker 2: know that.
50:59
Speaker 1: Yeah, but if you're tracking Brazil, you're basically tracking Petro Brass.
51:03
Speaker 1: I'm getting gussing you're going to end up a lot
51:05
Speaker 1: of oil. Just something for those of you who aren't
51:07
Speaker 1: keen on investing in fossil fuels. That's not us, by
51:09
Speaker 1: the way, but it might be you. There are a
51:11
Speaker 1: couple of good trusts in this area as well. There
51:13
Speaker 1: as the Black Rock Latin American, which has big exposure
51:16
Speaker 1: to Brazil. Again, it's about sixty percent Brazil, and that's
51:19
Speaker 1: a lot of Petro Brun there, and then you've got
51:22
Speaker 1: quite a lot of Mexico in their twenty six percent,
51:24
Speaker 1: and I think Sima was very keen on Mexico as well,
51:26
Speaker 1: So again you know there is some trust out there
51:28
Speaker 1: that will reflect the views you've given and be quite interesting.
51:31
Speaker 1: Of course, the last thing she said was bitcoin. She
51:34
Speaker 1: chose bitcoin over gold. Let's just kind of I guess
51:37
Speaker 1: she's really interested in technology, so I get that. But
51:40
Speaker 1: one thing that it's slightly harder for us is to
51:42
Speaker 1: tell people how they might go about investing in bitcoin.
51:45
Speaker 1: I hate to use the word investing because we don't believe, well,
51:48
Speaker 1: I still don't believe that it's an investment. And I
51:52
Speaker 1: suppose at some point all these ETFs by the big
51:55
Speaker 1: fund managers will come through and that will make putting
51:57
Speaker 1: money into it into bitcoin relatively straightforward, but not quite
52:00
Speaker 1: there yet.
52:01
Speaker 2: In the UK only, Yeah, I think you could. You
52:03
Speaker 2: could just buy actual bitcoin, and I'm sure that's sure
52:09
Speaker 2: that someone can explain to you how you hold that
52:11
Speaker 2: or that what is it? Not your keys, not your coins,
52:13
Speaker 2: catchphraez and all that sort of thing. The equivalent the
52:16
Speaker 2: ORNI in physical gold under your mattress, except that it's
52:19
Speaker 2: not physical and there it's not gold.
52:23
Speaker 1: So and just remember there's no customer service.
52:27
Speaker 2: No one's going to tell you your past. What if
52:29
Speaker 2: you've forgotten it?
52:31
Speaker 1: Sadly that is that is the problem. John, Thank you
52:35
Speaker 1: very much, thanks for listening to this week's Maren Talks Money.
52:39
Speaker 1: We'll be back next week. In the meantime, we feel
52:41
Speaker 1: like our show great review and subscribe wherever you listen
52:43
Speaker 1: to podcasts. This episode was hosted by me Maren sumsep Web.
52:46
Speaker 1: It was produced by Summer Sadi. Additional editing by Baked
52:49
Speaker 1: Maples Pasure. Thanks to see Mishah and to John Steppeck. Finally,
52:53
Speaker 1: be sure to sign up to John's daily newsletter Money
52:56
Speaker 1: to sell. The links in the show notes and if
52:58
Speaker 1: you'll like a takeaway, you'll find take aways
53:00
Speaker 3: The mm hmm