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What it Takes to Build a Stagflation-proof Portfolio · Merryn Talks Money

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  Speaker 1: Bloomberg Audio Studios, Podcasts, Radio News.
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  Speaker 2: Welcome to Maren Talks Money, the podcast in which people
• 0:20
  Speaker 2: who know the markets explain the markets. I am Maren
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  Speaker 2: Sumset Web and this week I am speaking with Duncan
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  Speaker 2: LaMonte had a strategic research at Schroeders. I invited Duncan
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  Speaker 2: on well, partly because he's been on before and he's
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  Speaker 2: very good, but also because he's got a new bit
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  Speaker 2: of research out on how one should invest in stagflationary periods.
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  Speaker 2: And as geopolitics is remarkably volatile at the moment and
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  Speaker 2: there's nothing like volatile geopoliticis give you cagflation, I thought
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  Speaker 2: we would have him on to talk about it. I
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  Speaker 2: was talking about a variety of other things. We talk
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  Speaker 2: about the AI bubble, or maybe not bubble. We talk
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  Speaker 2: about UK equities, and we talk about some new research
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  Speaker 2: that he is doing that may have a fairly massive
• 0:59
  Speaker 2: effect on the US market. Well it's not that his
• 1:01
  Speaker 2: research will have a massive effect on the UK. Marketers
• 1:04
  Speaker 2: that think he is researching might have a massive effect
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  Speaker 2: on the UK market. You all know what I mean. Anyway, Duncan,
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  Speaker 2: Welcome to Marin Talks Money.
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  Speaker 1: Thank you so much. For having me on. It's great
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  Speaker 1: to be here right.
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  Speaker 2: There is a lot going on. I've been on a
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  Speaker 2: lot Inay for a few weeks, and I come back
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  Speaker 2: and I find that everything's gone slightly now, says. There's
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  Speaker 2: massive momentum moves in the market all over the place.
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  Speaker 2: I've been looking at the costb and worrying about all
• 1:27
  Speaker 2: the retail investors in Korea who are getting margin called.
• 1:32
  Speaker 2: I've been looking at the Nicket, which is now done
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  Speaker 2: quite a lot as well from its hires, although it
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  Speaker 2: was had a marvelous time, so we don't need to
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  Speaker 2: worry about that. I've been looking at the general shifts
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  Speaker 2: across the market. Was beginning to see small cups outperforming
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  Speaker 2: some places. We're beginning to see the big technology companies
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  Speaker 2: in the US underperform a little, the chip manufacturers in
• 1:53
  Speaker 2: career having a very torrid time. There's just there's a
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  Speaker 2: lot going on. And that's before we even start on geopolitics. War,
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  Speaker 2: the yen moving all over the place, Bondyell's moving all
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  Speaker 2: over the place, missile's drones moving all over the place.
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  Speaker 2: There's an awful lot going on. When we look at
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  Speaker 2: our portfolios these days, what should we be concentrating on
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  Speaker 2: and what should we be thinking about about from so
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  Speaker 2: fair basically.
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  Speaker 1: So, I'm perhaps a little bit boring in the sense
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  Speaker 1: that I think that we can spend an awful lot
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  Speaker 1: of time trying to predict our forecast what's going to happen,
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  Speaker 1: and the chances of getting any of that right are
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  Speaker 1: actually quite low a lot of the time. So rather
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  Speaker 1: than trying to guess what might happen next, my general
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  Speaker 1: approach is to think about like prepared, don't predict, so
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  Speaker 1: to think how is your money invested and how might
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  Speaker 1: it perform if you were to go into different scenarios.
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  Speaker 1: And one of the ones that I think that we're
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  Speaker 1: hearing an awful lot from our clients this year is
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  Speaker 1: around the risk of stagflation, so growth being weak, inflation
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  Speaker 1: being high, partly based on what's been happening in the
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  Speaker 1: Middle East, and what might that mean for the portfolio.
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  Speaker 1: So I think it's a very good place to start
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  Speaker 1: when you're thinking about robust outcomes for your portfolio.
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  Speaker 2: Okay, so looking at the history of stagflationary events and
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  Speaker 2: seeing what happens when that happens, while you look at
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  Speaker 2: our current environment, you say, well, might we have stagflation.
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  Speaker 2: I mean in suttinly. In the UK we're very prone
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  Speaker 2: to inflation anyway, and we keep putting in place policy
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  Speaker 2: after policy after policy that embeds inflation further into our economy.
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  Speaker 2: But globally we can suspect that it is possible that
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  Speaker 2: we might see about this stagflation because of rising oil
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  Speaker 2: prices and energy shortages.
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  Speaker 1: Et cetera exactly, And I think most people's natural response
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  Speaker 1: would be to assume that this is a pretty terrible
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  Speaker 1: time for investing. That's the reaction. I hear people say,
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  Speaker 1: surely stagflation is awful for the stock market, and we
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  Speaker 1: look to the data going back all the way to
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  Speaker 1: the nineteen twenties, so one hundred years worth of data.
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  Speaker 1: And it is true that stagflation is a challenging time
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  Speaker 1: for the stock market. It is more challenging than pretty
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  Speaker 1: much any other outcome you can have. But it also
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  Speaker 1: so isn't actually as bad as people might expect. It
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  Speaker 1: doesn't mean a kind of run for the hills ditch
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  Speaker 1: stocks scenario. On average. Actually the stock market managed to
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  Speaker 1: roughly match inflation. Isn't terrible if it's a high inflation environment,
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  Speaker 1: And actually, more often than not. It still beats cash,
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  Speaker 1: so harder going, less conviction of high returns, but actually
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  Speaker 1: still not a terrible outcome for stock market investors. So
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  Speaker 1: a bit of reassurance. I think there, okay.
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  Speaker 2: And was that the case in the seventies. If you
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  Speaker 2: had equitied at the beginning of the nineteen seventies in
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  Speaker 2: the UK and you still have the same ones at
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  Speaker 2: the end of the nineteen seventies, would you have been
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  Speaker 2: an inflection?
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  Speaker 1: So I was looking at this more for the US
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  Speaker 1: because I had the data going all the way back
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  Speaker 1: to the nineteen twenties. The unfortunate reality of these things
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  Speaker 1: is that you get a better, longer data set for
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  Speaker 1: the US. I love a good data set, but there's
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  Speaker 1: always a risk that the future is not going to
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  Speaker 1: be like the past, so we have to have caveat caveat, caveat.
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  Speaker 1: But what I did was I looked at any calendar
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  Speaker 1: years when inflation was above its ten year average and
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  Speaker 1: growth was below its ten year average, and then looked
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  Speaker 1: at the performance of of stocks bonds the sixty forty portfolio.
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  Speaker 1: I said, stocks normally managed to match inflation beat cash. YEA,
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  Speaker 1: bonds tough, It's a tough environment. If your interest payments
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  Speaker 1: are fixed and inflation goes through the roof, that is
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  Speaker 1: clearly not a great outcome. But they kind of traditional
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  Speaker 1: sixty forty portfolios are really interesting ones. So it feels
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  Speaker 1: like pretty much every single years you read a ton
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  Speaker 1: of articles which say the death of the sixty forty.
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  Speaker 1: This portfolio, which lots of people rely on, is just
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  Speaker 1: a kind of base case balanced portfolio. People saying it's
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  Speaker 1: time for it to die. It's not going to work anymore.
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  Speaker 1: And again sixty forty finds it challenging stagflation when I
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  Speaker 1: looked at the data. But actually it has a better
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  Speaker 1: media and outcome than either stocks and bonds and isolation,
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  Speaker 1: and it actually outperforms cash more often than not too
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  Speaker 1: so I think that again bonds, it's not great for bonds,
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  Speaker 1: but I don't think we should just rip up the
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  Speaker 1: whole investment playbook and actually the portfolios which have served
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  Speaker 1: investors pretty well. The sixty to forty still has a
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  Speaker 1: place you're not going to get as good diversification benefits.
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  Speaker 1: But it also doesn't mean that you should consign it
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  Speaker 1: to the dustbin either.
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  Speaker 2: But it's a matter of when we say the sixty
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  Speaker 2: to forty, and we're talking about a portfolio that is
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  Speaker 2: forty percent bonds and sixty percent equities. Both those things,
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  Speaker 2: bonds and equities, cover a vast universe of potential choices. Yes,
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  Speaker 2: so when we say in a stag pleasure and re environment,
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  Speaker 2: you can still have a sixty to forty portfolio, that
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  Speaker 2: forty percent that you might have in the bond market,
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  Speaker 2: what are we talking about?
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  Speaker 1: So in the forty there was initially just talking about
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  Speaker 1: long dated government bonds. You're absolutely right that there is
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  Speaker 1: a whole universe of things under each of these umbrellas.
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  Speaker 1: And that's where I think you can say, yes, your
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  Speaker 1: standard just I don't know, equities plus sixty percent equities
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  Speaker 1: plus forty percent long dated bonds, it's okay, But you
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  Speaker 1: can do better in both of those. So in bonds,
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  Speaker 1: a pretty simple hack actually has been just to invest
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  Speaker 1: in shorter dated bonds. Shorter daty bonds. Their prices are
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  Speaker 1: less sensitive to what happens to interest rates, so you've
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  Speaker 1: got a more steady source of return. And historically just
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  Speaker 1: doing that one simple trick would actually have led to
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  Speaker 1: better risk adjusted returns.
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  Speaker 2: But when you say show to sorry, how's show to you? Toking.
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  Speaker 1: I think so five year bonds as opposed to twenty
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  Speaker 1: year bonds.
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  Speaker 2: Five year bonds as opposed to twenty.
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  Speaker 1: Yes, exactly. So people might be normally have invested in
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  Speaker 1: very long dated ones as a kind of risk hedging asset.
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  Speaker 1: But if you're going to something that's nearer to kind
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  Speaker 1: of five year point then actually or even shorter than that,
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  Speaker 1: then prices are not going to move around as much,
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  Speaker 1: They're going to be less volatile. You'll have a greater
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  Speaker 1: certainty of what your return is going to be, and
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  Speaker 1: historically your risk adjusted returns have been better. I'm talking
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  Speaker 1: government bonding. The same applies in corporate bonds. If you're
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  Speaker 1: investing in a corporate bond portfolio, if you decide to
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  Speaker 1: invest in shorter dated ones, so again, something around the
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  Speaker 1: five year point or even shorter, you can have greater
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  Speaker 1: confidence in what your returns are going to be than
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  Speaker 1: if you're investing in longer dated ones.
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  Speaker 2: That makes complete sense. But most ordinary investors, they won't
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  Speaker 2: be investing in individual bonds. I'll be investing in a
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  Speaker 2: bond fund, right so it's hard for an individual investor
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  Speaker 2: to have any control of the duration of the bonds
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  Speaker 2: they hold.
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  Speaker 1: Right, you say that, but actually are there are plenty
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  Speaker 1: of funds out there which we'll invest in different maturity buckets,
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  Speaker 1: so you can have ones that focus more on shorter
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  Speaker 1: dated corporate bonds for example. Yeah, we manage portfolios like
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  Speaker 1: that at Schroders, so we have ones that are for
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  Speaker 1: different clients who are seeking different exposures, different outcomes they
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  Speaker 1: are looking for. Schroders manage short dated corporate bond funds.
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  Speaker 1: Lots of other competitors in the market will as well.
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  Speaker 1: You can probably invest in ETFs which target different parts
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  Speaker 1: of the market as well. So I think it's I
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  Speaker 1: think you're right that people might just have invested in
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  Speaker 1: a let's call it a corporate bond fund, but there
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  Speaker 1: is a lot more available out there than just those
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  Speaker 1: kind of vanilla ones.
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  Speaker 2: Okay, all right, So that takes care of of a
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  Speaker 2: forty percent of a word about stipulation. Let's look at
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  Speaker 2: the equity component, which I think most people find easier
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  Speaker 2: to manage somehow. What can you do inside your equity
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  Speaker 2: portfolio to only have the bits that will withstand this
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  Speaker 2: environment better.
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  Speaker 1: Yeah, So again I had to look at the different
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  Speaker 1: styles and the different sectors. So styles looking at say
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  Speaker 1: value versus growth, small cap versus large cap, high quality
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  Speaker 1: versus low quality, and different sectors too, and some of
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  Speaker 1: these are intuitive, like more defensive sectors typically do well,
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  Speaker 1: So things like healthcare, utilities, consumer staples, the kind of
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  Speaker 1: things that you buy anyway no matter what is happening,
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  Speaker 1: So it doesn't really matter what happens to growth, you're
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  Speaker 1: still going to be needing to buy some of these things.
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  Speaker 1: Energy equities. Again, it maybe seems obvious, but energy equities
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  Speaker 1: because if energy prices are causing higher inflation while the
• 9:37
  Speaker 1: company's profits are going to go up, blocks it's maybe
• 9:39
  Speaker 1: a little bit more interesting on the style point. So
• 9:43
  Speaker 1: value tends to outperform growth, So value companies, So many
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  Speaker 1: companies which trade on cheaper valuation metrics often unloved in
• 9:51
  Speaker 1: some way. Whereas your growth companies are maybe your exciting,
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  Speaker 1: sexy tech companies that people think are going to grow
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  Speaker 1: their awning super fast in future. The growth ones tend
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  Speaker 1: to struggle more relative to value. Partly, I guess because
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  Speaker 1: maybe that growth doesn't come through demand is maybe weaker,
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  Speaker 1: partly because sentiment turned against them, and also partly is
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  Speaker 1: because valuations tend to fall in this environment. So even
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  Speaker 1: if you assume that there's going to be an a
• 10:15
  Speaker 1: supercycle and that's going to support the growth of the
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  Speaker 1: big tech companies, there is still a risk to the valuations,
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  Speaker 1: and that's what we've seen recently, to be honest, is
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  Speaker 1: quite incredible. If you look at companies like in Nvidia,
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  Speaker 1: it's price earnings multiple today is the lowest it's been
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  Speaker 1: for a decade, which when you consider we're in the
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  Speaker 1: middle of an AI boom cycle, one of the companies
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  Speaker 1: that's at the very center of that cycle, for it
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  Speaker 1: to be at a decade low in terms of price
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  Speaker 1: earnings multiple is pretty extraordinary. And it's the same if
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  Speaker 1: you look across Alphabet, Meta, Amazon, they're all trading actually
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  Speaker 1: pretty low valuations compared with their ten year histories. So
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  Speaker 1: we're seeing a valuation impact already.
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  Speaker 2: Is there a suggestion from people that they believe that
• 10:54
  Speaker 2: there's an earnings bubble here and that for these earnings
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  Speaker 2: aren't sustainabletons and the growth in these earnings is that
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  Speaker 2: it's sustainable.
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  Speaker 1: I think it suggests that they're skepticism there right now. Yeah,
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  Speaker 1: so we're seeing a huge amount of capex. Actually, revenues
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  Speaker 1: are continuing to surprise to the upside, like there are
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  Speaker 1: a lot of revenues coming through. Ernie's growth forecasts are
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  Speaker 1: off the scale for some of these companies, but I
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  Speaker 1: guess the market is saying, we don't think that is
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  Speaker 1: going to be able to last longer. But you also
• 11:20
  Speaker 1: find there's a transmission mechanism when interest rates go up,
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  Speaker 1: So when bondiodes go up, stock market valuations tend to
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  Speaker 1: fall as well because of the way the analysts value
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  Speaker 1: these companies in a kind of discounted cash flow approach.
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  Speaker 1: So when you've seen interest rates going up partly because
• 11:34
  Speaker 1: inflation is higher, then you see that that starts to
• 11:37
  Speaker 1: have an impact on the valuation of stocks. And if
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  Speaker 1: you're starting on a very high valuation, then there's greater
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  Speaker 1: risk of that coming unstuck. Why this gets really important
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  Speaker 1: is when you think about how most people are invested.
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  Speaker 1: So you look at the global stock market today, You've
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  Speaker 1: got about seventy percent of the developed market in the US.
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  Speaker 1: You've got the five biggest US stocks have the same
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  Speaker 1: weight or bigger weight than the next five biggest countries
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  Speaker 1: in the global stock market. All aaddy together, you've got
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  Speaker 1: a huge bet on the US, a huge bet on
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  Speaker 1: technology and actually the bets of the market that might
• 12:08
  Speaker 1: be expected to do well well. If we're talking about value,
• 12:10
  Speaker 1: we're talking about energy equities, if we're talking about defensive sectors,
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  Speaker 1: they're not what you're really getting exposure to in the
• 12:17
  Speaker 1: global market. I think people like to think and it
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  Speaker 1: was once the case that you invest in the portfolio
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  Speaker 1: global stocks and you've got a nice diversified portfolio. It
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  Speaker 1: is rubbish today it simply isn't happening. So if you
• 12:29
  Speaker 1: want to get diversification, you have to work a lot harder.
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  Speaker 1: You have to look away from the US. But most
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  Speaker 1: of your money is sitting in the US on a
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  Speaker 1: one way bet, so.
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  Speaker 2: You've got to get out of that. You've got to
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  Speaker 2: move it into different sectors. If you're thinking about a
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  Speaker 2: circuflationary environment, you might want to move into more in
• 12:49
  Speaker 2: the way of value stocks. You might want to move
• 12:51
  Speaker 2: into the energy sector defensive. And then there's also, well
• 12:56
  Speaker 2: there has been I don't know if this turned up
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  Speaker 2: in your research, but a dynamic wherebys small caps outperform
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  Speaker 2: large caps and stagflation reenvironments.
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  Speaker 1: I didn't look at the small cap bit particularly when
• 13:08
  Speaker 1: I was looking at this, but the other one that
• 13:10
  Speaker 1: did do really well was quality. So quality companies are
• 13:13
  Speaker 1: ones that have more stable balance sheets, more stable profit margins,
• 13:18
  Speaker 1: profit growth consistencies, what you're looking for. I always think
• 13:21
  Speaker 1: about the companies that won't break, and I guess in
• 13:24
  Speaker 1: an environment worth everything's a little bit more uncertain and volatile,
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  Speaker 1: that stability that you get from quality actually becomes quite valuable.
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  Speaker 1: And quality companies have gone through one of the worst
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  Speaker 1: three year draw downs in terms of performance that they've
• 13:35
  Speaker 1: ever had recently. So if you're thinking about things that
• 13:38
  Speaker 1: might do well in stagflation, if it's also one that's
• 13:41
  Speaker 1: performed pretty badly, so valuations have moved in its favor.
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  Speaker 1: Kind of qualities are a really interesting place to be looking.
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  Speaker 1: And there's loads of different funds out there which focus
• 13:49
  Speaker 1: on quality or quality growth as a style as well.
• 14:03
  Speaker 2: When you look at the list of things that performed
• 14:05
  Speaker 2: well in the US and the seventies and in the
• 14:08
  Speaker 2: UK in the seventies, the list is of a very
• 14:12
  Speaker 2: non equity and land. Its diamonds fine, odd, it's gold.
• 14:17
  Speaker 2: It was antique furniture back in the day. You can't
• 14:20
  Speaker 2: do that happening again. But who knows, who knows?
• 14:22
  Speaker 1: I'm going to be.
• 14:23
  Speaker 2: Lovely if it did. Did gold pop up in your studies?
• 14:27
  Speaker 1: So gold did. So Gold is an interesting one. It's
• 14:32
  Speaker 1: consistency of performance isn't necessarily great, but its average performance
• 14:36
  Speaker 1: actually is very good, and you have to almost think
• 14:38
  Speaker 1: what does that mean. It means it's less reliable, and
• 14:40
  Speaker 1: I guess we're seeing that abit this year. But when
• 14:43
  Speaker 1: it does perform well, it performs very well. So again
• 14:45
  Speaker 1: it is worth considering as part of your portfolio. But
• 14:48
  Speaker 1: don't assume that it's guaranteed to go up in value,
• 14:51
  Speaker 1: because it has some years where actually it struggles quite
• 14:53
  Speaker 1: a lot. Gold is good real essays. Things like real
• 14:57
  Speaker 1: estate are interesting. There's often an inflation linkage real estate
• 15:00
  Speaker 1: rental leases, which is great on the income side, but
• 15:03
  Speaker 1: if your highly leveraged real estate transaction, well, actually, if
• 15:07
  Speaker 1: your cost of borrowing is going up, then that's a
• 15:09
  Speaker 1: problem for you. So it's a bit some activity. I
• 15:11
  Speaker 1: think there it's at understanding the risks you're taking on.
• 15:14
  Speaker 1: If you're understanding the risk of the tenants, then maybe
• 15:17
  Speaker 1: twenty years ago people just used to think, I don't know,
• 15:21
  Speaker 1: a fund manager would buy something, they would just lease
• 15:24
  Speaker 1: it and forget it. Whereas I think you have to
• 15:25
  Speaker 1: get much closer to the risk of the underlying tenant
• 15:27
  Speaker 1: and the financial risk of the transaction these days to
• 15:30
  Speaker 1: be able to know whether you're going to get the
• 15:31
  Speaker 1: returns in this kind of environment.
• 15:34
  Speaker 2: Okay, when we look at markets as a whole, and
• 15:38
  Speaker 2: we've talked about how everyone is horribly ever exposed to
• 15:41
  Speaker 2: the US and horribly ever exposed to technology, whether they
• 15:44
  Speaker 2: want to be or not, that's just the default which
• 15:48
  Speaker 2: markets geographically what people want to move into. And we
• 15:52
  Speaker 2: used to say consistently UK equity is the cheapest out
• 15:56
  Speaker 2: there by them before somebody else does. And they're still inexpensive,
• 16:00
  Speaker 2: the inexpensive across the board, and we know that because
• 16:02
  Speaker 2: foreign investors keep trying to take them over. In fact
• 16:04
  Speaker 2: do keep taking them over, and so does private equity.
• 16:06
  Speaker 2: So there's still reasonably good value. But on the other hand,
• 16:09
  Speaker 2: they're not a cheapest they were, and with the possibility
• 16:12
  Speaker 2: of associating eleven thousand, suddenly it all seems like quite
• 16:16
  Speaker 2: a big move quite quickly. Are you still thinking that
• 16:20
  Speaker 2: the UK market is attractive?
• 16:22
  Speaker 1: Yeah, I think on a relative valuation basis, the UK
• 16:24
  Speaker 1: still is cheap. Here. I guess you've got demand from
• 16:26
  Speaker 1: foreign investors. Demand from private equity also buybacks as the
• 16:29
  Speaker 1: other one, so share buybacks. The UK is now the
• 16:32
  Speaker 1: share buy back capital of the world, so UK more
• 16:35
  Speaker 1: UK companies are buying back their shares in bulk than
• 16:38
  Speaker 1: the US, which unheard over a few years ago, so
• 16:41
  Speaker 1: that there's a lot of demand there. We still haven't
• 16:43
  Speaker 1: really got the retail investor demand side. Fun Flows from
• 16:46
  Speaker 1: retail investors are still not coming through, so that's something
• 16:49
  Speaker 1: that I would love to see happen. I feel like
• 16:52
  Speaker 1: we're a bit to downbeat on the UK stock market
• 16:55
  Speaker 1: in the UK economy, like you just have to open
• 16:56
  Speaker 1: your social media for the amount of doom and gloomy
• 16:58
  Speaker 1: you read about it. But I think where the venture
• 17:00
  Speaker 1: capital capital of Europe here in the UK, and we're
• 17:03
  Speaker 1: great at producing unicorns. We have lots of fantastic research institutions.
• 17:06
  Speaker 1: We've got great listed companies that are actually really good
• 17:09
  Speaker 1: at what they do. But we spend all our time
• 17:11
  Speaker 1: till on itselves how terrible we are, and that can
• 17:13
  Speaker 1: be a bit self fulfilling. So I'd just like to
• 17:15
  Speaker 1: put the kind of great into Britain back a little bit.
• 17:17
  Speaker 2: Well, lots of things are kind of terrible to be fair.
• 17:21
  Speaker 1: Actually, there's one thing that I do think, is it.
• 17:23
  Speaker 1: So you were talking about technology. One risk is staculation.
• 17:27
  Speaker 1: Another risk is, Okay, you have got way more exposure
• 17:30
  Speaker 1: to technology than you probably realize. It's not just how
• 17:33
  Speaker 1: much you've got the tech sector, because Amazon, Tesla or
• 17:36
  Speaker 1: Consumer Discretionary Alphabet are actually in communication services. So there's
• 17:41
  Speaker 1: a bunch of stuff which are not called IT but
• 17:43
  Speaker 1: which are tech companies really, and that takes a number
• 17:46
  Speaker 1: of higher But then you've got things like stuff which
• 17:49
  Speaker 1: people would have thought of as being nice defensive sectors
• 17:52
  Speaker 1: which are actually, to my mind, starting to become more
• 17:55
  Speaker 1: correlated with AI. So utilities, a lot of utilities are
• 17:59
  Speaker 1: the picks and shovel of the AI trade because the
• 18:01
  Speaker 1: energy needs are so great. And if you look at
• 18:03
  Speaker 1: the performance of some of the US utilities, they're like memestocks.
• 18:06
  Speaker 1: It's like we're talking hundreds of percent returns. This is
• 18:09
  Speaker 1: not boring just dividend plays. Even like real estate. One
• 18:13
  Speaker 1: of the biggest sectors of the reached market is data centers.
• 18:16
  Speaker 1: So there are more parts of the portfolio which people
• 18:19
  Speaker 1: might have traditionally thought of would hedge AI risk or
• 18:22
  Speaker 1: tech risk which are actually now going to become more correlated.
• 18:25
  Speaker 1: So the question then, if you're worried about an AI selloff,
• 18:29
  Speaker 1: where can you hide? I'm not convinced that just simple
• 18:31
  Speaker 1: sectors will do it, because it's getting it everywhere. Yeah,
• 18:35
  Speaker 1: I can make a good case for international diversification in
• 18:38
  Speaker 1: terms of valuations outlook everybody being to downbeat about non
• 18:41
  Speaker 1: US companies. But do I think that international diversification will
• 18:45
  Speaker 1: bail you out if there's an AI driven sell off?
• 18:48
  Speaker 1: I'm skeptical. The biggest stocks in em are all massive
• 18:50
  Speaker 1: AI tech plays, so you're going to get hurt there.
• 18:54
  Speaker 1: And then I spent a lot of time doing work
• 18:55
  Speaker 1: I think, are there any parts of the market that
• 18:57
  Speaker 1: actually could hedge that risk? Again prepared, don't predict, not
• 19:01
  Speaker 1: saying it will happen, but what might do well if
• 19:03
  Speaker 1: it falls over? And one area that I found actually
• 19:06
  Speaker 1: was value equities. And I look back at data going
• 19:08
  Speaker 1: all the way back to nineteen ninety six, and I
• 19:11
  Speaker 1: used semiconductors just as a proxy for AI stocks and
• 19:14
  Speaker 1: looked at all the quarters where semiconductors fell in value, and
• 19:18
  Speaker 1: when they fell in value, the average fall was twelve percent.
• 19:22
  Speaker 1: The average fall for value equities was zero, so flat,
• 19:25
  Speaker 1: and maybe you're worried about big falls, not just any fall.
• 19:29
  Speaker 1: So I looked at falls that were more than five percent,
• 19:31
  Speaker 1: and then actually, on average you'd lose fifteen percent in
• 19:33
  Speaker 1: semiconductors and one in value. So value won't always work,
• 19:39
  Speaker 1: but it looks like it has a historical track record
• 19:42
  Speaker 1: of doing well at the very precise time that many
• 19:45
  Speaker 1: other parts of your portfolio might all start to fall
• 19:47
  Speaker 1: over all at once. So I think there's a very
• 19:49
  Speaker 1: strong case we can make for people thinking more about
• 19:51
  Speaker 1: value as an investment strategy today.
• 19:54
  Speaker 2: When you do these screens, how are you defining value?
• 19:58
  Speaker 1: Excellent question, So this gets to a problem, I think. So.
• 20:03
  Speaker 1: I think that one of the trends we've seen in
• 20:06
  Speaker 1: recent years, like the last decade or so, has been
• 20:09
  Speaker 1: the big move from active towards passive in terms of
• 20:11
  Speaker 1: fun flows. Investors, partly because they're unhappy with the performance
• 20:16
  Speaker 1: of their active managers, have been putting money into passive trackers.
• 20:21
  Speaker 1: I worry significantly that if people allocate to passive value
• 20:26
  Speaker 1: strategies as a way to hedge AI risk, we are
• 20:29
  Speaker 1: going to see them very, very disappointed. When you look
• 20:32
  Speaker 1: to the future and I'll tell you why. So let's
• 20:35
  Speaker 1: look at some of the biggest value indices in the
• 20:38
  Speaker 1: US so MACI USA Value and it's top five stocks.
• 20:42
  Speaker 1: You've got Alphabet Meta MCI USA Value Weighted. You've got Apple, Microsoft,
• 20:48
  Speaker 1: Amazon Enhanced Value. You've got Micron, Cisco, Intel, Robert Russell. Well,
• 20:53
  Speaker 1: then you've got Alphabet Amazon SMP Value, Apple, Amazon, Tesla
• 20:58
  Speaker 1: SMP five hundred Value Index. That's ISLA and it's top
• 21:01
  Speaker 1: five stocks. If you are seeking to.
• 21:03
  Speaker 2: Hedge AI risk, this is not where you want.
• 21:05
  Speaker 1: These are not going to deliver. And that's why I
• 21:07
  Speaker 1: really really worry that people. If you're going to do this,
• 21:11
  Speaker 1: do it properly, And to do it properly means, in
• 21:13
  Speaker 1: my mind, doing it actively. I think that it is
• 21:17
  Speaker 1: a real risk that performance is going to disappoint in
• 21:20
  Speaker 1: some of these strategies. If your primary reason for buying
• 21:23
  Speaker 1: them is to HEGAI risk, it's the same stocks. It's
• 21:27
  Speaker 1: not going to hedge that risk. It's the same stocks.
• 21:29
  Speaker 2: Okay, interesting, So you need to go and find an
• 21:32
  Speaker 2: actively managed value fund that doesn't have these names in it.
• 21:36
  Speaker 2: But then you can find one of those actively managed
• 21:39
  Speaker 2: value funds might go back and say, well, look at
• 21:41
  Speaker 2: that in the video. Is the cheapest just been in
• 21:42
  Speaker 2: a decade. It's a value stock.
• 21:44
  Speaker 1: Yeah. I've chatted to one of our head of value
• 21:48
  Speaker 1: equities and Simon Adler, and he was saying that there's
• 21:51
  Speaker 1: no hard and fast rules. They'll be looking at some
• 21:53
  Speaker 1: software names. He's looking at kin stocks and single digit pees,
• 21:56
  Speaker 1: so he's looking at ones that are even cheaper. But
• 21:58
  Speaker 1: there's no reason to say that some of these software
• 22:00
  Speaker 1: techniques could not go on their radar if they felt
• 22:02
  Speaker 1: to valuations which they thought were appealing enough. Actually, the
• 22:05
  Speaker 1: other interesting point he made was in past years, value
• 22:08
  Speaker 1: used to often be quite a very big sector tilts.
• 22:12
  Speaker 1: It was a sector play as much as what's a
• 22:14
  Speaker 1: stock play, whereas he says, nowadays he is finding stocks
• 22:18
  Speaker 1: in many more sectors than he can remember, so he's
• 22:20
  Speaker 1: able to build actually a much more diversified by sector
• 22:23
  Speaker 1: portfolio than would have been the case in the past.
• 22:26
  Speaker 1: So lots of great opportunities. Okay, narratives take a long
• 22:29
  Speaker 1: time to change. So if you go and talk to
• 22:30
  Speaker 1: most people on the street, they're going to tell you
• 22:32
  Speaker 1: that Budink's performing best, it's going to be AI stocks,
• 22:35
  Speaker 1: tech stocks, American stocks. That's that's what the general narrative is.
• 22:39
  Speaker 1: Except actually I did some work recently and it was
• 22:41
  Speaker 1: like UK value stocks have outperformed the S and P
• 22:44
  Speaker 1: five hundred over the last kind of three or five years.
• 22:47
  Speaker 1: And I don't think many people believe that because it's
• 22:49
  Speaker 1: not what the narrative is, it's not what the consensus
• 22:51
  Speaker 1: would be. So I think that even though value has
• 22:54
  Speaker 1: started performing much better, I don't think that that sentiment
• 22:58
  Speaker 1: has necessarily filtered through too many investors.
• 23:01
  Speaker 2: No, entirely, I don't think it has. Either. It's the
• 23:04
  Speaker 2: same as Little Gould has had a pretty nasty time
• 23:06
  Speaker 2: of the last few months, but you know, it's still
• 23:10
  Speaker 2: outperformed pretty much everything over the last decade. And I
• 23:12
  Speaker 2: don't think that's something that is almost people's readar either.
• 23:15
  Speaker 2: There a view of what is that performing and what
• 23:17
  Speaker 2: is not quite fit with reality.
• 23:20
  Speaker 1: Yeah, another thing that I hear from people is the
• 23:23
  Speaker 1: point you made about the fit eleven thousand, kid of Oh.
• 23:26
  Speaker 1: Markets are near an all time highs. The first thing
• 23:29
  Speaker 1: you're and it was taught is by low sell high
• 23:32
  Speaker 1: market all time high? That sounds scary? Does that mean
• 23:34
  Speaker 1: I should sell? And what I did again, this was
• 23:37
  Speaker 1: US data. Again. Apologies, but it's just because I had
• 23:39
  Speaker 1: the longest data series. But I looked at data going
• 23:41
  Speaker 1: back to the nineteen twenties and then looked at it, well,
• 23:45
  Speaker 1: what was your return over the next twelve months in
• 23:47
  Speaker 1: inflation of justed terms, if you invested when the market
• 23:49
  Speaker 1: was an all time high or if you invested at
• 23:51
  Speaker 1: any other time. It was just to test should you
• 23:53
  Speaker 1: be worried about this? And it might surprise people to
• 23:56
  Speaker 1: learn that know, your returns were actually better if you
• 23:59
  Speaker 1: invest when the market's at an all time high than
• 24:01
  Speaker 1: if you invest any other time.
• 24:03
  Speaker 2: There are urns of kind of time period, of what
• 24:06
  Speaker 2: kind of time period.
• 24:06
  Speaker 1: So that was on a twelve month basis, on a
• 24:08
  Speaker 1: two year basis, a three year basis, there's basically no difference.
• 24:11
  Speaker 1: The reason why it happened is actually if think about
• 24:13
  Speaker 1: what happens to the stock market over time, it goes
• 24:16
  Speaker 1: up or it's gone up, which means it's actually hitting
• 24:19
  Speaker 1: all time highs all the time. So it's like it's
• 24:22
  Speaker 1: actually over thirty percent of the time the market's at
• 24:24
  Speaker 1: an all time high. So we like to write headlines
• 24:27
  Speaker 1: about some of these rounds numbers that markets make it's
• 24:30
  Speaker 1: not unusual. It is perfectly normal market behavior. And almost
• 24:34
  Speaker 1: just to hammer that home, I did a little scenario
• 24:36
  Speaker 1: which said, let's say you freak out when the market's
• 24:39
  Speaker 1: at an all time high and you've into cash, and
• 24:41
  Speaker 1: then whenever it's not an all time high, you go
• 24:42
  Speaker 1: back into the stock market. You might just do it
• 24:44
  Speaker 1: for one month, depends how long the markets at an
• 24:46
  Speaker 1: all time high for you might be out of the market
• 24:49
  Speaker 1: for six months at be year in cash, and then
• 24:50
  Speaker 1: you go back in again and again. Using data over
• 24:53
  Speaker 1: the last one hundred years, compare those two portfolios, one
• 24:56
  Speaker 1: which stays invested throughout and one which decides to get
• 25:00
  Speaker 1: scared by all time highs. The one that gets scared
• 25:02
  Speaker 1: by all time highs would have destroyed more than ninety
• 25:05
  Speaker 1: percent of the wealth. So if your listeners are sitting
• 25:09
  Speaker 1: here thinking I'm a bit nervous by the market being
• 25:11
  Speaker 1: an all time high, there are reasons you might want
• 25:14
  Speaker 1: to be nervous. Please please, please do not start thinking
• 25:18
  Speaker 1: you need to sell your stocks just because they're an
• 25:19
  Speaker 1: all time high. Historically it would have been hugely damaging
• 25:23
  Speaker 1: to your wealth if you were to have done that.
• 25:25
  Speaker 2: All right, but that's across the market, So you can
• 25:29
  Speaker 2: do a lot of useful things to yourself. At the moment.
• 25:31
  Speaker 2: You can stay in the market, but you can move
• 25:33
  Speaker 2: your portfolio around to diversify it and defend it better
• 25:38
  Speaker 2: against the things that might happen.
• 25:40
  Speaker 1: Yeah, exactly, So I have to make it simple. I'd
• 25:42
  Speaker 1: stay invested, diversify outside the US, and then bolster your
• 25:48
  Speaker 1: AI exposure with some value exposure just to manage some
• 25:50
  Speaker 1: of that risk. But absolutely stay invested.
• 25:53
  Speaker 2: Yeah, okay, fascinating, fascinating, and I think that's incredible, incredibly
• 25:58
  Speaker 2: useful advice. Let me ask you one more thing. Have
• 26:01
  Speaker 2: you been on your holidays yet? Duncan I have?
• 26:03
  Speaker 1: I went to Croatia?
• 26:04
  Speaker 2: Oh nice? And what did you read while you were there?
• 26:07
  Speaker 1: It was Caught Judus sixty two. It's like it's a
• 26:11
  Speaker 1: spy series on the box eighty eight. With the series.
• 26:15
  Speaker 1: The reason is I spend a lot of my time
• 26:17
  Speaker 1: actually setting thinking about markets, reading about markets, and I
• 26:22
  Speaker 1: am just a sucker for fiction for pure escape, isn't
• 26:25
  Speaker 1: I want to switch off? So I'm very much into
• 26:29
  Speaker 1: just trying to read spy novels, sci fi novels, things
• 26:33
  Speaker 1: like that that just take me away from the day
• 26:35
  Speaker 1: job and allow me to relax.
• 26:37
  Speaker 2: Yeah, no, quite right. And in the day job, have
• 26:40
  Speaker 2: you got anything sitting on your sitting on your desk
• 26:44
  Speaker 2: on the investment or economic side that you feel that
• 26:47
  Speaker 2: we should be reading.
• 26:48
  Speaker 1: So I've got two pieces of work that are in
• 26:51
  Speaker 1: the works, not yet out, but which I think you
• 26:53
  Speaker 1: will find your readers will find interesting. One is looking
• 26:58
  Speaker 1: at whether corporate bond are expensive. But everybody who does
• 27:03
  Speaker 1: this uses data which goes back to the mid nineties,
• 27:05
  Speaker 1: just because that's simply when lots of the data is available.
• 27:07
  Speaker 1: But I've instead looked at data going back one hundred
• 27:10
  Speaker 1: years and actually you find its credit spreads were more
• 27:14
  Speaker 1: expensive than where they are right now for several decades
• 27:17
  Speaker 1: after the Second World War, And then I look at
• 27:19
  Speaker 1: what were the reasons behind that and how many of
• 27:21
  Speaker 1: those could repeat today. So almost to challenge people that
• 27:24
  Speaker 1: when they're saying spreads are really expensive, is it possible
• 27:28
  Speaker 1: that they could stay where they are for an extended
• 27:30
  Speaker 1: period rather than go up to some twenty year average.
• 27:33
  Speaker 1: So that's interesting. And there's another one I'm looking at,
• 27:36
  Speaker 1: which is around one of the biggest props for the
• 27:40
  Speaker 1: US stock market is basically the US pension system. So
• 27:43
  Speaker 1: every single month, thousands millions of people through their four
• 27:47
  Speaker 1: to one k's and the other pension saving vehicles, put
• 27:50
  Speaker 1: money into the US stock market, irrespective of valuations, anything
• 27:54
  Speaker 1: else that's going on. It's a steady bid something we'd
• 27:56
  Speaker 1: love to have in the UK obviously to kind of
• 27:58
  Speaker 1: support our market. In the US, it's been a massive
• 28:01
  Speaker 1: help for it. And what I'm looking at is, well,
• 28:04
  Speaker 1: if we genuinely have an AI boom and that disrupts
• 28:07
  Speaker 1: the labor market and leads to unlike past tech revolutions
• 28:12
  Speaker 1: which impacted lower earners, well, this might start to impact
• 28:15
  Speaker 1: people who are in accountants, lawyers, financial services people. And actually,
• 28:19
  Speaker 1: what would the risk be to that buying support that
• 28:22
  Speaker 1: we have for the US stock market if we were
• 28:25
  Speaker 1: suddenly to find that the people who are backing it
• 28:28
  Speaker 1: every single month no longer have a job. Yeah, again,
• 28:31
  Speaker 1: it's not protecting it, but it's almost kind of saying,
• 28:33
  Speaker 1: let's map this out how this could go over the
• 28:35
  Speaker 1: next decade, and what are the risks if suddenly you
• 28:38
  Speaker 1: find that all of that steady pension fund buying kind
• 28:41
  Speaker 1: of starts to dribble away a little, So those the
• 28:44
  Speaker 1: corporate bond one and that where are both being worked on? Still?
• 28:46
  Speaker 2: Yeah, we've been wondering about that. Yeah, because you stop,
• 28:50
  Speaker 2: markets are all about flows, right. We can talk about
• 28:52
  Speaker 2: valuations and to the kasgama, but in the end, where's
• 28:54
  Speaker 2: the money going? That's the bit that mattered. And you know,
• 28:57
  Speaker 2: going back to your point on the UK, we've been
• 28:59
  Speaker 2: one if longer term the UK market will benefit hugely
• 29:03
  Speaker 2: from the shift of everyone towards defined contribution via order
• 29:06
  Speaker 2: enrollment and that amount of money that continues to flow
• 29:09
  Speaker 2: into the not all of it olvidly, but some of
• 29:12
  Speaker 2: it into the UK market. How that will work and
• 29:15
  Speaker 2: then looking across to the US as people begin to retire,
• 29:18
  Speaker 2: how that would work with the flows. But this is
• 29:21
  Speaker 2: a really fascinating and slightly scary you overlay. As you said,
• 29:25
  Speaker 2: people with high incomes losing their jobs and they're longer
• 29:28
  Speaker 2: contributing to four oh one k could make the most
• 29:30
  Speaker 2: enormous difference. Suddenly, instead of constant inflows, you get no
• 29:34
  Speaker 2: inflows and possibly outflows as people withdraw early and looking
• 29:37
  Speaker 2: forward to this one duncan.
• 29:39
  Speaker 1: Okay, thank you very much. I hope you like it.
• 29:41
  Speaker 2: I don't know if I'm gonna like it. I might
• 29:43
  Speaker 2: find it interesting. Well, I like it. These are different things.
• 29:47
  Speaker 1: To be honest. That is one of my main reservations
• 29:50
  Speaker 1: with it. It's not the most positive article, but I
• 29:53
  Speaker 1: think it's what I'm trying to do is think beyond
• 29:56
  Speaker 1: the first level and even maybe the second level and
• 29:58
  Speaker 1: paps of AI. It's not just about what does it
• 30:00
  Speaker 1: mean for jobs as well? What might that mean further
• 30:02
  Speaker 1: to like the rest of the chain. And we know
• 30:05
  Speaker 1: that kind of similar with taxis the higher ern or
• 30:09
  Speaker 1: are the ones that just proportionately pay Like smaller number
• 30:12
  Speaker 1: but greater in terms of the dollar value of the
• 30:14
  Speaker 1: taxis or the pound value same here, smaller in number,
• 30:17
  Speaker 1: but actually much greater in terms of the impact on
• 30:21
  Speaker 1: the flows that are really going here.
• 30:23
  Speaker 2: Okay, all absolutely fascinating, Duncan. Thank you very very much
• 30:27
  Speaker 2: for all those interesting ideas and tips by the way,
• 30:30
  Speaker 2: much appreciate it.
• 30:32
  Speaker 1: Fantastic. Thank you very much.
• 30:39
  Speaker 2: Thanks for listening this week's Marin Talks Money. If you
• 30:41
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• 30:44
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• 30:46
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• 30:48
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• 30:50
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• 30:54
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• 30:56
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• 30:59
  Speaker 2: MEP and special thanks of course to Duncan Lamont