Latest / Merryn Talks Money / What 2024 Holds for the UK Economy with Simon French and Laura Foll

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What 2024 Holds for the UK Economy with Simon French and Laura Foll · Merryn Talks Money

• 0:04
  Speaker 1: Welcome to Marin Talks Money, the podcast in which are
• 0:07
  Speaker 1: people who know the markets explain the markets. This week
• 0:10
  Speaker 1: we're looking ahead to the rest of twenty twenty four,
• 0:12
  Speaker 1: and yes we do know that just because the year
• 0:14
  Speaker 1: has changed doesn't mean that things have automatically changed. But
• 0:16
  Speaker 1: we still just want to take this moment to talk
• 0:18
  Speaker 1: about Wat's in store for the UK economy, Watson Store
• 0:21
  Speaker 1: for global markets.
• 0:22
  Speaker 2: To do that with me as ever senior reporter and
• 0:24
  Speaker 2: Money You's.
• 0:24
  Speaker 1: Sort author, the great John Steppeck also in our London
• 0:27
  Speaker 1: studio today we are very lucky to have Simon French,
• 0:30
  Speaker 1: chief economist and head of Research at UK investment bank
• 0:33
  Speaker 1: Panmea Gordon and Laura Folt, portfolio manager at Janie Henderson Investors.
• 0:37
  Speaker 1: Thank you both so much for joining us, and thank
• 0:39
  Speaker 1: you John for being with me for the entire podcast today.
• 0:43
  Speaker 2: Ye yay, Simon.
• 0:46
  Speaker 1: I want to talk to you because a you write
• 0:49
  Speaker 1: excellent notes which I love to read, Thank you very much.
• 0:51
  Speaker 1: And you also are inventing your own vocabulary to go
• 0:56
  Speaker 1: in those notes. So the most recent one started whispering
• 0:59
  Speaker 1: quietly at risk of angering the declinists, but UK economic
• 1:03
  Speaker 1: data has had a good couple of weeks. So let's
• 1:05
  Speaker 1: talk about those declinists. We know, I think what they are.
• 1:07
  Speaker 1: Where are they wrong?
• 1:09
  Speaker 3: It's something that I've seen a lot emerge in UK
• 1:12
  Speaker 3: andacro economic commentary probably over the last six seven years.
• 1:17
  Speaker 3: It is never to be linked to the Brexit referendum.
• 1:20
  Speaker 3: A lot of individuals who had their political nose put
• 1:24
  Speaker 3: out a joint their economic nose put out a joint struggle.
• 1:30
  Speaker 3: I think to give an objective assessment on UK economic
• 1:35
  Speaker 3: data and benchmarket appropriately, so a declinist will point out
• 1:39
  Speaker 3: all the challenges facing a particular economy such as the UK,
• 1:46
  Speaker 3: without benchmarking the same Let's say industrial disputes. Yes, we
• 1:51
  Speaker 3: have industrial disputes and quite disruptive industrial disputes in the UK.
• 1:55
  Speaker 3: But look at German macro look at the impact on
• 1:58
  Speaker 3: the German economy from industrial action. When one is looking
• 2:01
  Speaker 3: at the impact of energy costs on real incomes, again
• 2:04
  Speaker 3: a very UK centric downbeat view on the impact done
• 2:07
  Speaker 3: to real purchasing power. Similar impacts around the world. And
• 2:12
  Speaker 3: so if I try and do anything in my analysis
• 2:15
  Speaker 3: and then thank you for your kind words to the outset,
• 2:17
  Speaker 3: is to try and provide an objective assessment rather than
• 2:20
  Speaker 3: something that I think is colored to the outset.
• 2:23
  Speaker 1: Yeah, do you know what I think we'd really like
• 2:24
  Speaker 1: that I'm not going to ask you for is we'd
• 2:26
  Speaker 1: like a list of those declinists.
• 2:27
  Speaker 2: Certainly John so so so that declinist. I'd enjoy that.
• 2:34
  Speaker 2: I'd enjoy that a lot.
• 2:36
  Speaker 4: We can mind it with the secret lest that we keep.
• 2:39
  Speaker 1: Right, Simon. So tell me then, what's going to go
• 2:43
  Speaker 1: right for the UK this year? Because I want this
• 2:46
  Speaker 1: to be a reasonably upbeat podcast. I accept it cannot
• 2:49
  Speaker 1: be fully upbeat, but I want to be pretty upbeaten.
• 2:52
  Speaker 1: I think, and I think you agree that there's quite
• 2:55
  Speaker 1: a lot that could go right this year.
• 2:57
  Speaker 2: Tell us about those things.
• 2:59
  Speaker 3: There's something which I've described as something of a relay handoff.
• 3:04
  Speaker 3: You remember that, you know, the last day of an Olympics,
• 3:06
  Speaker 3: where inevitably the GB relay team drop the baton, don't
• 3:12
  Speaker 3: they in the four by one hundred? They even sometimes
• 3:14
  Speaker 3: I anagine in the four by four hundred. But I
• 3:16
  Speaker 3: see it as an economic baton passing from the last
• 3:19
  Speaker 3: eighteen months where households in the UK, which drive economic
• 3:22
  Speaker 3: activity consumer spending, have had to use their balance sheets,
• 3:26
  Speaker 3: their excess savings, take on a bit of extra leverage
• 3:28
  Speaker 3: to deal with this cost of living squeeze, the handoff
• 3:32
  Speaker 3: the baton pass and what I hope, not being a declinist,
• 3:36
  Speaker 3: what I hope will happen, is that real incomes will
• 3:41
  Speaker 3: take up the slack. So it's in corporate speak, it's
• 3:45
  Speaker 3: handing over from the balance sheet which households have had
• 3:48
  Speaker 3: to rely on to their p and L, their profit
• 3:51
  Speaker 3: and loss and count because the headline rate of inflation
• 3:54
  Speaker 3: will dip below nominal income growth you get real income growth.
• 3:58
  Speaker 3: It's very difficult in mar economic model, short of a
• 4:02
  Speaker 3: massive spike in the precautionary savings of the UK households,
• 4:05
  Speaker 3: to see an economic recession when you've got the kind
• 4:08
  Speaker 3: of real income growth we're anticipating in twenty twenty four exactly.
• 4:12
  Speaker 5: So you very rarely see a recession in periods of
• 4:15
  Speaker 5: real wage growth, which we're back in now. Something you
• 4:17
  Speaker 5: talk about falling inflation, We've already got inflation sub four.
• 4:20
  Speaker 5: We've got nominal wage growth, you know whatever, it is,
• 4:22
  Speaker 5: six to seven for the last estimates, so consumers are
• 4:24
  Speaker 5: already back in decent real wage growth. We've had some
• 4:28
  Speaker 5: tax cuts already we might go on to talk about
• 4:30
  Speaker 5: the budget, we might have some more on most estimates,
• 4:33
  Speaker 5: the household cash flow after everything they need to spend
• 4:36
  Speaker 5: on energy, fuel, et cetera, et cetera, is up seven
• 4:41
  Speaker 5: maybe eight percent this year. You know that's actually looking
• 4:43
  Speaker 5: like a good year for the household, and we know
• 4:47
  Speaker 5: that you can can just bring it on too equities.
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  Speaker 5: For is that we know that UK equities aren't just
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  Speaker 5: a proxy for the domestic economy, but there are a
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  Speaker 5: lot of small and medium sized companies listed here in
• 4:56
  Speaker 5: the UK that have been out of favor for a
• 4:59
  Speaker 5: very long time. So if we can have a year
• 5:01
  Speaker 5: that actually the household's doing a bit better, then surely
• 5:04
  Speaker 5: it's a time to potentially take a look at some
• 5:06
  Speaker 5: of those more domestically focused equities in the UK.
• 5:10
  Speaker 1: If that is the case, if we are expecting to
• 5:12
  Speaker 1: see sustained real wage growth, if we are expecting to
• 5:15
  Speaker 1: see households and significantly better shape, if for optimistic all
• 5:18
  Speaker 1: round about the UK economy on that basis, can we
• 5:22
  Speaker 1: also expect interest rate cuts?
• 5:24
  Speaker 3: Well, the market certainly is telling you that. I'd be
• 5:28
  Speaker 3: cautious of over interpreting what the market is currently expecting
• 5:32
  Speaker 3: in terms of interest rates and reductions of four or
• 5:36
  Speaker 3: five or four or five rate cuts for one hundred and
• 5:41
  Speaker 3: twenty five to one hundred and fifty basis points over
• 5:43
  Speaker 3: the course the next twelve months. That feels a bit
• 5:45
  Speaker 3: rich for me. While encouragingly and hopvily saw it in
• 5:49
  Speaker 3: the last note on a three month annualized basis, core
• 5:52
  Speaker 3: inflation now in the UK is just one point four percent,
• 5:56
  Speaker 3: and that provides the data perhaps for the banking and
• 6:00
  Speaker 3: to think about moving interest rates back closer to what
• 6:03
  Speaker 3: it thinks as a neutral rate. I think we do
• 6:06
  Speaker 3: have to get through what is going to be quite
• 6:08
  Speaker 3: a crucial April for core inflation. And why do I
• 6:11
  Speaker 3: focus on April? It seems an odd month of the
• 6:14
  Speaker 3: year to focus on. But last year, if you decompose
• 6:18
  Speaker 3: UK macro, you saw that there was a big uprating
• 6:21
  Speaker 3: event of benefits, pensions, the National living wage that generated
• 6:27
  Speaker 3: some quite aggressive core inflationary prints in April, May and
• 6:30
  Speaker 3: June of last year. Now, while not quite in the
• 6:33
  Speaker 3: same nominal ballpark, they're still well above the rate of
• 6:36
  Speaker 3: inflation with the rate of increases to the pension, to
• 6:39
  Speaker 3: universal credit and to the National living wage, and therefore
• 6:42
  Speaker 3: I think the Bank of England certy. If I was
• 6:43
  Speaker 3: on the Munety Policy Committee, I'd be saying, look, I
• 6:46
  Speaker 3: want to see some assurance that you're not going to
• 6:49
  Speaker 3: have some second round effects of all of that before
• 6:52
  Speaker 3: you go with the first rate cut. So my model
• 6:55
  Speaker 3: so you get the first rate cut in August when
• 6:57
  Speaker 3: you start to get some of that data, and you
• 6:59
  Speaker 3: maybe get one two more by the end of the year.
• 7:01
  Speaker 3: But for me, the market's a bit too rich on
• 7:03
  Speaker 3: anticipating the scale of rate cuts. It's pricing into the moment.
• 7:07
  Speaker 5: I don't disagree with Simon, but what I would say
• 7:09
  Speaker 5: is I almost think to an extent it doesn't matter
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  Speaker 5: in the market is pricing in what it's pricing in,
• 7:15
  Speaker 5: and it's already filtering through to mortgage rates. So you're
• 7:18
  Speaker 5: seeing five year mortgage rates. You know, I saw there
• 7:21
  Speaker 5: was one I think starting with the three this morning
• 7:22
  Speaker 5: from HSBC on a five That is what really matters
• 7:26
  Speaker 5: to your average household. You know, the average household doesn't
• 7:29
  Speaker 5: necessarily follow exactly what the Bank of England is going
• 7:32
  Speaker 5: to do. You know, in every month's NBC meeting, what
• 7:34
  Speaker 5: matters to them is what they're going to pay on
• 7:36
  Speaker 5: their mortgage and you're already seeing that effectually having a
• 7:39
  Speaker 5: stimulating effect on household finances today. So as long as
• 7:42
  Speaker 5: the market's not completely wrong about the direction of travel,
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  Speaker 5: I think that's that's what ultimately matters.
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  Speaker 1: What about savings rates though, And one of the things
• 7:49
  Speaker 1: that saved the economy last year, of course was the
• 7:52
  Speaker 1: like that well, interest rates on debt weren't episode did
• 7:55
  Speaker 1: interest rates on deposit accounts, and we know that had
• 7:59
  Speaker 1: a great effect on household confidence.
• 8:02
  Speaker 3: Yes, and then credit to Bloomberg and because of a
• 8:06
  Speaker 3: Bloomberg podcast, But I think Bloomberg Analysis was the first
• 8:09
  Speaker 3: to pick up on that about six to nine months ago.
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  Speaker 3: The Resolution Foundation made a bit of a splash of
• 8:16
  Speaker 3: it last week. I think we were somewhere in between
• 8:19
  Speaker 3: in terms of picking out the trends from the pace
• 8:22
  Speaker 3: with which UK retail banks passed on base rate increases
• 8:29
  Speaker 3: to savers, partly not not because they're charitable organizations, but
• 8:33
  Speaker 3: partly because most are on floating rate products and to
• 8:37
  Speaker 3: remain competitive, they matched to some extent the increase, whereas
• 8:42
  Speaker 3: the debt structure, particularly household mortgages, you're on much more
• 8:45
  Speaker 3: of a fixed term and therefore lagged through the refinancing
• 8:50
  Speaker 3: cycle meant that at a household cash flow level, interest
• 8:55
  Speaker 3: rate increases were initially and are still stimulative. Now because
• 8:59
  Speaker 3: of the composition of who gets the interest rates, who
• 9:01
  Speaker 3: gets these additional interest payments, and who actually pays them,
• 9:04
  Speaker 3: we don't think it is macro stimulative. And also one
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  Speaker 3: also needs to look at the corporate sector, which gets
• 9:10
  Speaker 3: somewhat drowned out by all of this. A lot of
• 9:12
  Speaker 3: the debt held by the UK corporate sector is linked
• 9:16
  Speaker 3: to Sonya, so the overnight bank rate and which man
• 9:20
  Speaker 3: marked the increase in the policy rate. So I think
• 9:25
  Speaker 3: some people have over interpreted this analysis and meaning interest
• 9:28
  Speaker 3: rates were stimulative overall for the economy. I don't think
• 9:30
  Speaker 3: that is right at all. But certainly the scale of
• 9:35
  Speaker 3: demand destruction from interest rate increases have been considerably low
• 9:39
  Speaker 3: in this cycle than it has been in previous cycles.
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  Speaker 4: But I was just going to see the Lada how
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  Speaker 4: this is being made a pardon and the companies that
• 9:49
  Speaker 4: you're talking to, because obviously small companies in a regular basis,
• 9:54
  Speaker 4: what is there feeling does it reflect that can relative
• 9:58
  Speaker 4: optimism that we've.
• 9:59
  Speaker 5: Got is in the outlook for the year ahead. I
• 10:02
  Speaker 5: think what's quite interesting is most companies are still pretty
• 10:06
  Speaker 5: cautious with some ecceteraents. We saw next report last week,
• 10:09
  Speaker 5: actually that was that was a pretty good, pretty good numbers.
• 10:11
  Speaker 5: We might see know famous last weeks, we might see
• 10:14
  Speaker 5: good numbers from them ans and they haven't come out
• 10:16
  Speaker 5: at the time recording. But most companies when you speak
• 10:20
  Speaker 5: to them, are relatively cautious because they've had a difficult
• 10:23
  Speaker 5: couple of years. Right, They've had COVID was not that
• 10:25
  Speaker 5: long ago. They've had all sorts of problems with supply chains,
• 10:27
  Speaker 5: with cost pressures, with labor shortages. But what you'll tend
• 10:32
  Speaker 5: to find, and again sort of famous last words, is
• 10:34
  Speaker 5: that that cautiousness I think is now crept into analyst
• 10:38
  Speaker 5: fore costs, which is what really matters when you look ahead.
• 10:42
  Speaker 5: If earnings numbers are in the right place for twenty
• 10:45
  Speaker 5: twenty four, and you're starting at evaluation on the UK,
• 10:48
  Speaker 5: which is lower than historical average, is lower than other
• 10:51
  Speaker 5: major developed markets, and you've got your earnings forecasts in
• 10:54
  Speaker 5: the right place, which when I look at individual companies,
• 10:58
  Speaker 5: I think, yeah, okay, I think that actually looked like
• 11:00
  Speaker 5: a reasonable forecast. Now not too optimistic doesn't assume a
• 11:03
  Speaker 5: big pickup in the economy because you know, who knows ultimately,
• 11:05
  Speaker 5: who knows what happens. That to me feels like a
• 11:09
  Speaker 5: good place to start. UK company management teams. Again, obviously
• 11:13
  Speaker 5: with some exception, do you tend to be a pretty
• 11:15
  Speaker 5: conservative bunch, and so do UK investors, And I think
• 11:18
  Speaker 5: that's actually, you know, that's that's a good backdrop to
• 11:22
  Speaker 5: start with.
• 11:23
  Speaker 4: So there's a lot of scope for positive subpises. Possibly,
• 11:26
  Speaker 4: I think there's there's some scope.
• 11:28
  Speaker 5: I mean, well, what you've got to remember is that
• 11:30
  Speaker 5: there are pockets of We always tend to talk in
• 11:32
  Speaker 5: this type of thing about the UK economy, but actually
• 11:35
  Speaker 5: there are so many individual sub sectors with a huge
• 11:39
  Speaker 5: numbers of different their markets, and actually pockets of the
• 11:41
  Speaker 5: UK have effectually been in recession for the last twelve
• 11:45
  Speaker 5: eighteen months. If you look at things like house building
• 11:47
  Speaker 5: volumes have been down, you know, comfortable volumes are down
• 11:50
  Speaker 5: comfortably double digit. You know, the building materials companies are
• 11:53
  Speaker 5: talking about volumes down thirty percent. You've got advertising companies,
• 11:57
  Speaker 5: you know, the likes of ITV, the likes for some
• 11:59
  Speaker 5: of the print media come again, proper, proper recessionary conditions
• 12:03
  Speaker 5: already and yet you know, the likes and exce likes
• 12:06
  Speaker 5: for feminists are having good time. You know, there's a
• 12:08
  Speaker 5: value to talking about averages for the economy. There's also
• 12:10
  Speaker 5: a value about drilling down and seeing that some end
• 12:13
  Speaker 5: markets have already had a very tough time and could
• 12:16
  Speaker 5: start to come out of the other side of that
• 12:18
  Speaker 5: because of stimulating effects of mortgage rate etc.
• 12:21
  Speaker 1: Etca.
• 12:22
  Speaker 5: So it's always worth well, that's my job effetually to
• 12:25
  Speaker 5: look at individual companies, and there are companies where you
• 12:26
  Speaker 5: can just start to see the greed and shoots I think, I.
• 12:29
  Speaker 3: Mean, Laura makes it an excellent point, which is this
• 12:31
  Speaker 3: has been in a very uneven recovery in consumer spending,
• 12:34
  Speaker 3: and I think we're still living with the impact of
• 12:39
  Speaker 3: the pandemic in terms of consumer demand. If one looks
• 12:41
  Speaker 3: at the data release this morning at the time of
• 12:44
  Speaker 3: recording this podcast from Barkercard on spending in December, still
• 12:48
  Speaker 3: huge demand for travel and leisure, which feels again something
• 12:53
  Speaker 3: of a pent up frustration from periods of time from
• 12:56
  Speaker 3: households who could not consume that, and that is bulletproof,
• 12:59
  Speaker 3: really bulletproof spending. And you contrast that, of course to
• 13:04
  Speaker 3: the real estate sector, building materials sector, very very different picture.
• 13:09
  Speaker 3: If I can just throw in the economic data on
• 13:12
  Speaker 3: business confidence and related back to Marrin's opening question about declinism,
• 13:17
  Speaker 3: you've got Pan Europan Euro's own business confidence surveys the
• 13:22
  Speaker 3: only country major European country whereas business confidence is above
• 13:27
  Speaker 3: its long term averages in the UK running for later
• 13:32
  Speaker 3: in the week.
• 13:34
  Speaker 4: The other thing I just actually wanted to pick up
• 13:36
  Speaker 4: quickly there was I've noticed the recruitment sector there's a
• 13:39
  Speaker 4: there's a clear evidence of us in the air. Is
• 13:43
  Speaker 4: that reflecting issues in the jobs market or do you
• 13:47
  Speaker 4: feel that is more of a it's almost like a
• 13:51
  Speaker 4: COVID pick through the pathon things. There was a boom
• 13:55
  Speaker 4: and the in relative term just coming down.
• 13:58
  Speaker 5: I think it's a latively hard one to answer. So
• 14:01
  Speaker 5: the context of this is that at the time we're recording, Hayes,
• 14:03
  Speaker 5: one of the big recruiters, had a profit warning this
• 14:05
  Speaker 5: morning shares are down to ten opsent. What it's hard
• 14:08
  Speaker 5: to know is, Okay, this is literally one month of
• 14:12
  Speaker 5: slowdown in December that they're reporting on. So far everyone
• 14:15
  Speaker 5: was expecting to slow down.
• 14:16
  Speaker 3: The shares.
• 14:16
  Speaker 5: Generally recruiters have not performed brilliantly, and here we are
• 14:19
  Speaker 5: and it's happened and we've had a profit wanting The
• 14:21
  Speaker 5: question is is this one month just before Christmas where
• 14:25
  Speaker 5: people go, actually, I don't want to move jobs right now.
• 14:26
  Speaker 5: Leave we tok the new year and I'll make a
• 14:28
  Speaker 5: decision then, or is it the start of a much more,
• 14:31
  Speaker 5: a much broader slowdown. And that's almost what people have
• 14:36
  Speaker 5: been waiting for in this type of sector. I don't
• 14:38
  Speaker 5: actually only any recruiters, so it's not what I follow
• 14:40
  Speaker 5: particular closely. But in this type of sector, the shares
• 14:44
  Speaker 5: have performed poorly, are waiting a downgrade. We now have
• 14:48
  Speaker 5: the downgrade. So the question is are we done or
• 14:52
  Speaker 5: is there more to go?
• 14:54
  Speaker 3: John? I credit you for not using the two of
• 14:57
  Speaker 3: my most hated words together, which is soft landing. It's
• 15:02
  Speaker 3: regularly banded around and no one actually defines it. I
• 15:04
  Speaker 3: despise it almost as much as hard landing. But what
• 15:09
  Speaker 3: you are looking at is a situation where in the
• 15:12
  Speaker 3: UK economy we have about nine hundred and fifty thousand
• 15:14
  Speaker 3: vacancies versus a long term average of about seven hundred
• 15:17
  Speaker 3: thousand the last twenty years. So suggestions if you just
• 15:21
  Speaker 3: took that metric alone of excess demand versus its long
• 15:25
  Speaker 3: term average and the degree to which you can gradually
• 15:29
  Speaker 3: as particularly a lot and I've been interesting to get
• 15:33
  Speaker 3: Laura's view is a lot of companies through the pandemic
• 15:37
  Speaker 3: over resourced on the labor side because they didn't know
• 15:40
  Speaker 3: who was going to get those dreaded to red lines
• 15:42
  Speaker 3: on their COVID tests and therefore can come into work,
• 15:45
  Speaker 3: and therefore they overresourced. And we're still getting something what
• 15:47
  Speaker 3: I've called the right sizing of labor share phraseology isn't it,
• 15:53
  Speaker 3: But what you have there is, as that right sizes,
• 15:56
  Speaker 3: can it elegantly go back to its long time average
• 16:00
  Speaker 3: without undershooting? And that is the delicate balance. And you
• 16:03
  Speaker 3: alluded to interest rates, and the criticism that will come
• 16:06
  Speaker 3: the way of central banks is if they have underestimated
• 16:10
  Speaker 3: the lagged impact of some of these rate increases, and
• 16:13
  Speaker 3: it's going to mean that they're currently making interest rate
• 16:16
  Speaker 3: financial conditions decisions that will impact in two years time
• 16:22
  Speaker 3: the labor market in terms of labor demand will look
• 16:25
  Speaker 3: very very different to those aforementioned manundar of fifty thousand
• 16:27
  Speaker 3: vacancies we've got today.
• 16:29
  Speaker 5: I mean just from the perspective of companies and what
• 16:30
  Speaker 5: I often hear them say they worked very hard to
• 16:33
  Speaker 5: recruit people during the pandemic and not know the worst
• 16:36
  Speaker 5: skills shortages like I mentioned before, and took in some
• 16:39
  Speaker 5: cases many years to fill. And now even if they
• 16:42
  Speaker 5: are seeing some downturn in demand, whether it's modest, whether
• 16:45
  Speaker 5: it's to do, they're very keen to keep those people
• 16:48
  Speaker 5: that they took a long time to find, that they've
• 16:50
  Speaker 5: trained up over a couple of years. And so what
• 16:52
  Speaker 5: you often hear is we're going to keep what is
• 16:55
  Speaker 5: probably over capacity for a short period of time and
• 16:58
  Speaker 5: not let those people go. And you can as times
• 17:00
  Speaker 5: you can't see that in the jobs numbers. You know,
• 17:02
  Speaker 5: unemployment is remaining very low in the face of what's
• 17:05
  Speaker 5: been an incredibly steep pace of interest rate rise. Is
• 17:07
  Speaker 5: that we're fairly long in the two zone now. It
• 17:10
  Speaker 5: has been a good twelve to eighteen months.
• 17:12
  Speaker 1: Can we move on from talking about the economy as
• 17:14
  Speaker 1: a whole. I think let's all agree that we're not
• 17:16
  Speaker 1: going to be declinists and that we expect a reasonably
• 17:19
  Speaker 1: good year from the UK that we feel although I'm
• 17:22
  Speaker 1: pretty unconvinced on this that inflation is controlled for now.
• 17:25
  Speaker 2: I'm not convinced on that at all.
• 17:27
  Speaker 1: That was the headline in one of the papers this
• 17:28
  Speaker 1: morning saying that team transitory could take about and I thought, well,
• 17:31
  Speaker 1: on that basis, pretty much all inflation is transitory, right,
• 17:34
  Speaker 1: If three years is transitory, then what isn't transitory? So
• 17:37
  Speaker 1: I'm yet to be convinced on inflation. But let's let's
• 17:42
  Speaker 1: say for now that looks fine, that there may be
• 17:44
  Speaker 1: some interest rate cuts towards the end of the year,
• 17:46
  Speaker 1: that we're going to see a little were real wage growth,
• 17:48
  Speaker 1: but the UK is actually going to look quite good
• 17:51
  Speaker 1: relative to some of the European economies, if not relative
• 17:54
  Speaker 1: to the US economy. And that with that, the UK
• 17:59
  Speaker 1: stock market all levels remains phenomenally cheap. What might happen
• 18:04
  Speaker 1: that might make the rest of the world notice, or
• 18:06
  Speaker 1: even domestic investors notice and actually buy some UK stocks?
• 18:11
  Speaker 1: What might change the flow here? Laura, have you any
• 18:15
  Speaker 1: thoughts on what might actually bring people back into some
• 18:18
  Speaker 1: of the funds that you manage?
• 18:19
  Speaker 2: Thanks for that, mar.
• 18:29
  Speaker 5: You honestly my most asked and if I'm being honest,
• 18:33
  Speaker 5: most frustrating question, because I think I honestly think no
• 18:39
  Speaker 5: one can ever tell you what a catalyst is before
• 18:41
  Speaker 5: it happens. If I could sit here and say, oh,
• 18:43
  Speaker 5: here's what's going to happen, then then wouldn't it have
• 18:45
  Speaker 5: already happened in December? And I'm really clutching its raws here?
• 18:51
  Speaker 5: There was a slight increase in months on month positioning
• 18:54
  Speaker 5: if you look at the Meryls Farm Manager Service, everyone
• 18:57
  Speaker 5: of global farm manager positioning in December, there was a
• 19:00
  Speaker 5: slight increase in allocation to the UK.
• 19:03
  Speaker 2: Now it remains it's a turnaround.
• 19:05
  Speaker 4: It's a turn around, it's the beginning. You heard it
• 19:08
  Speaker 4: here first.
• 19:09
  Speaker 5: But in terms of that, it's still a big underweight,
• 19:12
  Speaker 5: you know, to put it in an absolute context, the
• 19:14
  Speaker 5: UK is one of the biggest underweight still. But there
• 19:16
  Speaker 5: was a very slight increase in allocation. Now my view
• 19:20
  Speaker 5: is always that it becomes a self fulfilling property, i e.
• 19:23
  Speaker 5: If the UK starts to outperform, then other fund managers
• 19:26
  Speaker 5: get go, oh, hang on, what have you got over there?
• 19:28
  Speaker 5: You know, it's such a rally totally, it's such a
• 19:31
  Speaker 5: relative game.
• 19:32
  Speaker 1: But it's gown the other way for so long. I mean,
• 19:34
  Speaker 1: it's hard to see. For example, the UK's big wealth
• 19:38
  Speaker 1: managers Caspent forever cutting their exposure to UK equades. It's
• 19:42
  Speaker 1: hard to see them suddenly turning around and going or,
• 19:44
  Speaker 1: what's we were wrong about about having eighty percent exposure
• 19:47
  Speaker 1: to the US, We're going to come back in and
• 19:48
  Speaker 1: by a little more or UK. And it's unlikely that
• 19:51
  Speaker 1: you'd suddenly see them turning around and go, bother. We
• 19:53
  Speaker 1: wish we hadn't neglected UK small caps, you said to me,
• 19:56
  Speaker 1: it seems like that it's so dug in now with
• 20:00
  Speaker 1: with these institutions, that the UK is the wrong place
• 20:02
  Speaker 1: to be.
• 20:05
  Speaker 5: I find some of the logic for that slightly wrong though,
• 20:09
  Speaker 5: in that sometimes you hear wealth managers go look, well
• 20:11
  Speaker 5: THEMSCI World rating is for and you think, well, okay,
• 20:16
  Speaker 5: these are clients with assets all in the UK, with
• 20:18
  Speaker 5: liabilities in the UK. Surely it's more logical to match
• 20:24
  Speaker 5: some of that with UK equities. And again I think
• 20:28
  Speaker 5: it is a relative game in that you know, if
• 20:30
  Speaker 5: X wealth manager goes, well, I'm going to up my
• 20:32
  Speaker 5: UK actually once and suddenly does better. I think the
• 20:35
  Speaker 5: same dynamics happen in the wealth management sector is in
• 20:37
  Speaker 5: the fun management sector. So I do think if we
• 20:41
  Speaker 5: start to see better performance, then it can feed on
• 20:45
  Speaker 5: itself and come back to valuation. There is this view
• 20:50
  Speaker 5: of your total dinosaur, etc. But ultimately, if you go
• 20:55
  Speaker 5: back historically, over very very long time periods of value
• 20:59
  Speaker 5: you're starting valuation makes a very big difference to your
• 21:02
  Speaker 5: ending total return. And I don't see why. I don't
• 21:07
  Speaker 5: see why this should be different. Now that's over a
• 21:09
  Speaker 5: very long time period. And you know, people are well
• 21:12
  Speaker 5: within their rights to say you could have said this
• 21:14
  Speaker 5: a couple of years ago, just saying it again.
• 21:16
  Speaker 2: Now, well you did say it a couple of years ago,
• 21:18
  Speaker 2: and I did, and we are here now will did.
• 21:22
  Speaker 5: But the valuation argument still holds.
• 21:25
  Speaker 3: Absolutely does look on catalysts, and I'm mindful of Laura
• 21:30
  Speaker 3: staring me and the point of saying, I don't believe
• 21:33
  Speaker 3: anybody who can attribute to catalysts potential rally. I do
• 21:38
  Speaker 3: think there are two policy proposals, and maybe we're coming
• 21:41
  Speaker 3: on to talk about the budget that I think the
• 21:43
  Speaker 3: government are now actively looking at and not before time.
• 21:46
  Speaker 3: And I'm just going to stand on my soapbox slightly
• 21:48
  Speaker 3: in terms of just the the way the UK Regulator
• 21:55
  Speaker 3: and the government has approached its savings industry is to
• 22:03
  Speaker 3: think of it solely through the lens of returns available
• 22:08
  Speaker 3: to two savers rather than the economic blowback in terms
• 22:11
  Speaker 3: of the cost of capital for the UK corporate sector.
• 22:15
  Speaker 3: And that has meant that a combination of that geography
• 22:21
  Speaker 3: agnostic approach which isn't matched in any other major economy.
• 22:24
  Speaker 3: The Capital Markets Industry Task Force did a very good
• 22:28
  Speaker 3: letter ahead of the Autumn Statement on this, laying out
• 22:30
  Speaker 3: how rather than having a home bias, we have an
• 22:33
  Speaker 3: active or we do have an active home bias but
• 22:35
  Speaker 3: against our home market in our pension industry. We're the
• 22:38
  Speaker 3: only major economy that does that. If we think that,
• 22:41
  Speaker 3: if we we've been very naive, if we don't think
• 22:44
  Speaker 3: that has a blowback on business investment, heard or rates, etc.
• 22:47
  Speaker 3: So I do think that part of the solution, this
• 22:49
  Speaker 3: is where I come to a policy proposal, has to
• 22:52
  Speaker 3: be to reorientate our pension system to have more of
• 22:55
  Speaker 3: a home bias in ast allication. Now that may be
• 22:58
  Speaker 3: very uncomfortable with some people, particularly those on the saver's lobby,
• 23:02
  Speaker 3: who want it to be geographically agnostic, but the reality
• 23:07
  Speaker 3: is that the economic growth with which we are all
• 23:10
  Speaker 3: beneficiaries of stems from having healthy capital markets. And if
• 23:16
  Speaker 3: we if we deny our own market, that that capital
• 23:20
  Speaker 3: that's that's impediment. The way through, initially I think, is
• 23:24
  Speaker 3: through public sector define benefit schemes. Why do I pick
• 23:27
  Speaker 3: that cohort of pensions Because if you yield a positive
• 23:32
  Speaker 3: externality in economic parlance or economic growth, it comes back
• 23:36
  Speaker 3: to the exchequer in terms of tax receipts. Who is
• 23:38
  Speaker 3: the ultimate guarranteur for the investment risk on defined benefit
• 23:42
  Speaker 3: public sector schemes. It's very different with a private dB
• 23:47
  Speaker 3: scheme where it's the trustees or the underlying firm or
• 23:50
  Speaker 3: indeed DC schemes. So that's why those big behemoth public
• 23:56
  Speaker 3: sector dB schemes need to be given a deminimus allocation
• 23:58
  Speaker 3: to UK equity and there probably need to be quite
• 24:02
  Speaker 3: material double digits. We were back of forty percent in
• 24:05
  Speaker 3: nineteen ninety without four percent a day. We probably need
• 24:08
  Speaker 3: to go back probably somewhere between the two. The other thing,
• 24:11
  Speaker 3: which is it was in the news again, is the
• 24:13
  Speaker 3: idea of tapping into the retail saver through a brit iSER.
• 24:18
  Speaker 3: It's something I've put my name to as being an
• 24:20
  Speaker 3: advocate of, not because it's perfect by any sense. But again,
• 24:24
  Speaker 3: if one looks at the US economy and the Chips Act,
• 24:28
  Speaker 3: the Inflation Reduction Act, they are actively subsidizing their domestic
• 24:31
  Speaker 3: cost of capital. And yet we are giving tax breaks
• 24:34
  Speaker 3: to UK savers to subsidize the cost of capital for Nvidia,
• 24:38
  Speaker 3: for Tesla, for Microsoft, for Meta. It's madness and I
• 24:42
  Speaker 3: think the government are waking up to that. So look
• 24:44
  Speaker 3: two proposals that could change the direction of flows. It's
• 24:48
  Speaker 3: not with our political cost. And it's my decent understanding
• 24:52
  Speaker 3: that the Treasury lost their nerve back in November from
• 24:56
  Speaker 3: doing this very very close to the to the autumn
• 24:59
  Speaker 3: statement dead line. But I think they may have more
• 25:02
  Speaker 3: bravery in March, or at least I hope they will.
• 25:04
  Speaker 1: Simon, do you think a britte is a britt iSER
• 25:07
  Speaker 1: should be additional to the ISOs we already have or
• 25:10
  Speaker 1: folded into the current ISO structure, folded in, folded in,
• 25:15
  Speaker 1: So maybe you'd have an ISO wrapper in which say
• 25:18
  Speaker 1: fifty percent was a britt iSER had to go into
• 25:22
  Speaker 1: UK assets and the rest was allowed to go abroad.
• 25:24
  Speaker 2: That kind of thing, Well.
• 25:25
  Speaker 3: I'd go one hundred percent and I negotiate down if
• 25:27
  Speaker 3: you want to look. And by the way, I know
• 25:32
  Speaker 3: there'll be people screaming at their radio or their PC
• 25:35
  Speaker 3: listening to this going you're talking your own book. You
• 25:37
  Speaker 3: work at a UK investment bank. I recognize the seat.
• 25:41
  Speaker 3: The tiny in makes it difficult for me to make
• 25:43
  Speaker 3: this agenda. This is why whenever I've put public commentary,
• 25:46
  Speaker 3: either through my column or in podcasts like this, I've
• 25:50
  Speaker 3: always come back to the economics of all of this,
• 25:53
  Speaker 3: which is we simultaneously bemoan the lack of investment that's
• 25:58
  Speaker 3: taken place in the UK economy gross fixed capital formation
• 26:01
  Speaker 3: within national accounts averaging about eighteen percent of GDP compared
• 26:04
  Speaker 3: to twenty four percent in France, twenty three percent in
• 26:08
  Speaker 3: Germany G seven average about twenty one percent. That under
• 26:11
  Speaker 3: investment of capital running a CAPEX light economy gets its
• 26:16
  Speaker 3: lack of stimulus from the fact that are over many decades,
• 26:20
  Speaker 3: and this is a politically agnostic comment. We have moved
• 26:23
  Speaker 3: away from allocating capital to our domestic market and we
• 26:27
  Speaker 3: wonder why Laura will tell me if a company can
• 26:30
  Speaker 3: inflate its short term earnings by cutting its capital expenditure,
• 26:35
  Speaker 3: and that can look very attractive initially to shareholders, but
• 26:38
  Speaker 3: it does untold damage their long term earnings capability, and
• 26:41
  Speaker 3: I think that's what we're seeing now.
• 26:42
  Speaker 5: I mean, maybe if I could just add to that.
• 26:44
  Speaker 5: You know, sometimes when I'm talking to my friends, most
• 26:46
  Speaker 5: of my friends don't work in finance. I'm trying to
• 26:47
  Speaker 5: explain de equitization, i e. The shrinking of our equity
• 26:51
  Speaker 5: market does matter to people that work outside of finance.
• 26:54
  Speaker 5: Assignment was explained. You know, listed companies invest UK, listed
• 26:58
  Speaker 5: companies invest more in the UK. We have had a
• 27:02
  Speaker 5: massive productivity problem in the UK economy, partly due to
• 27:05
  Speaker 5: lack of capex. I think deecuitization, I either shrinking of
• 27:09
  Speaker 5: our market by takeovers, by share buybacks, et cetera has
• 27:13
  Speaker 5: quite a bit to do with that. So if we
• 27:15
  Speaker 5: can reverse it, whether it's this brit I so yes,
• 27:18
  Speaker 5: it restricts people's choice a bit. You know, they might
• 27:21
  Speaker 5: have to invest in glackso not phiz them if they want.
• 27:23
  Speaker 5: If they want that tax wrapper, of course you can
• 27:25
  Speaker 5: go and invest in whatever you like is not within
• 27:27
  Speaker 5: Lisa wrapper. That could ultimately and we'll have to wait,
• 27:30
  Speaker 5: you know, five ten years to see the results. But
• 27:33
  Speaker 5: if it means that deecoralization of the market is stopped
• 27:37
  Speaker 5: or reduced. I do think it will have an impact
• 27:40
  Speaker 5: on the UK economy, but that we won't see immediately,
• 27:43
  Speaker 5: of course we won't, but over a long term time period.
• 27:47
  Speaker 5: So yes, you're restricting choice in the short term, but
• 27:50
  Speaker 5: it isn't just for the purposes of us in the
• 27:52
  Speaker 5: city talking our own book. It's actually for the for
• 27:55
  Speaker 5: the health of the UK economy over the long term.
• 27:58
  Speaker 1: Do you think another thing that could come up on
• 28:00
  Speaker 1: the budget that might be useful would be a reduction
• 28:02
  Speaker 1: in stamp duty and that our level of stamp duty
• 28:05
  Speaker 1: when it comes to extity trading is significantly higher than
• 28:08
  Speaker 1: most other countries. Do you think that's any kind of
• 28:11
  Speaker 1: a barrier for the UK market and something that we
• 28:13
  Speaker 1: could change.
• 28:15
  Speaker 3: Well, again, it cuts across Laura, but the I mean,
• 28:20
  Speaker 3: I give a lot of credit to Charles Hall from
• 28:22
  Speaker 3: Peel Hunt, my equivalent head of research over there, for
• 28:25
  Speaker 3: pushing this as one of the policy proposals, and I
• 28:28
  Speaker 3: think he's on something. And also anecdotally speaking to US
• 28:31
  Speaker 3: fund managers who are looking when I first started writing
• 28:35
  Speaker 3: you talk about stale bulls of the UK valuation story,
• 28:38
  Speaker 3: I'm a probably six to seven year staale bull on
• 28:40
  Speaker 3: this one. Well, yeah, mutual support group, aren't we But
• 28:47
  Speaker 3: USFO manager you know who many of his contemporaries six
• 28:52
  Speaker 3: seven years ago said, oh, it's what you're not missing.
• 28:55
  Speaker 3: It's compositional, compositional or they made some excuse why the
• 28:59
  Speaker 3: UK wasn't underval You don't get that anymore. So we
• 29:02
  Speaker 3: have gone on a journey where everybody almost diagnostic of
• 29:06
  Speaker 3: where they sit, where their seat is as an investor
• 29:09
  Speaker 3: recognizes the valuation opportunity in the UK, but also thinks
• 29:14
  Speaker 3: there has to be a policy catalyst. We've talked about
• 29:17
  Speaker 3: a natural buyer through public sector dB schemes. We've talked
• 29:19
  Speaker 3: about a natural buyer potentially through the brit isser. You're
• 29:22
  Speaker 3: absolutely right. Reducing one of the impediments to owning UK cots,
• 29:27
  Speaker 3: which is the transactional costs associated with stamp duty, is
• 29:29
  Speaker 3: another one of those. The reason I haven't thrown my
• 29:34
  Speaker 3: weight behind that one is simply because my history of
• 29:37
  Speaker 3: working in the Treasury in the civil service means I
• 29:41
  Speaker 3: think this point in the cycle, the Treasury is going
• 29:46
  Speaker 3: to be reluctant to give up on at least near
• 29:48
  Speaker 3: term tax revenue and if it has a long term payoff.
• 29:51
  Speaker 5: Interesting. I didn't know you used to work in the
• 29:52
  Speaker 5: civil service on.
• 29:54
  Speaker 2: Dec everybody knows that he write it in his notes
• 29:58
  Speaker 2: all the time.
• 30:01
  Speaker 5: I mean, Charles Hall. If you ever look at the
• 30:03
  Speaker 5: Peel Hunts and for that, there's a long list of
• 30:05
  Speaker 5: suggestions in there around the brit isis damp duty, inheritance
• 30:09
  Speaker 5: tax et cetera, et cetera. And I think I think
• 30:12
  Speaker 5: a combination even one of the above, you know, would help.
• 30:16
  Speaker 5: I don't think any of them are going to be
• 30:17
  Speaker 5: a silver bullet, but I think it would really encourage
• 30:20
  Speaker 5: me to know that the Treasury are looking at these
• 30:23
  Speaker 5: initiatives and just as I said one, even just one
• 30:27
  Speaker 5: would would help the market.
• 30:28
  Speaker 4: At this point, you're kin of saying that the UK market,
• 30:32
  Speaker 4: and I suppose people have a your this in the past,
• 30:35
  Speaker 4: it's basically just too open and doesn't protect itself sufficiently.
• 30:39
  Speaker 5: It's almost like we in the UK believe in perfect
• 30:43
  Speaker 5: capital markets when which is noble in a way, when
• 30:49
  Speaker 5: when none of the other major geographies do you know
• 30:55
  Speaker 5: in a perfect world what we do here? As you say,
• 30:57
  Speaker 5: very open capital markets open to things M and a
• 31:00
  Speaker 5: as well. Historically, and we've seen the effects of that,
• 31:04
  Speaker 5: but it's not replicated elsewhere, so I think that's the problem.
• 31:10
  Speaker 3: And there are parallels here, aren't there. With the Brexit
• 31:16
  Speaker 3: what do we call it? A period of UK macro
• 31:20
  Speaker 3: where I would love the UK to be able to
• 31:26
  Speaker 3: unilaterally lower all its tariffs and trade barriers and every
• 31:29
  Speaker 3: other country follows suit. And there are many on the
• 31:33
  Speaker 3: libertarian wing of the Conservative Party who would like that
• 31:37
  Speaker 3: to happen. And they will be looking over their shoulder
• 31:39
  Speaker 3: to see whether the Europeans, or the Americans or the
• 31:41
  Speaker 3: Chinese are going to follow suit, and they will see
• 31:43
  Speaker 3: themselves to be alone. So there's much in modern it's
• 31:47
  Speaker 3: not just economics but actually modern politics where you would
• 31:50
  Speaker 3: very much like everybody collectively to move to a new,
• 31:55
  Speaker 3: better equilibrium when it comes to official market hypothesis free
• 32:01
  Speaker 3: flow of capital. We live in the world we live in,
• 32:05
  Speaker 3: not the world we want to live in.
• 32:07
  Speaker 2: Yeah, we tell our guess that a lot.
• 32:12
  Speaker 1: This could bring me back to weight loss drugs, but
• 32:13
  Speaker 1: apparently I'm not allowed to talk about those today. Leave
• 32:17
  Speaker 1: those for now, and I'll tell you what the world
• 32:19
  Speaker 1: people want to live in, not the world they do
• 32:21
  Speaker 1: live in.
• 32:21
  Speaker 2: House prices. I know John wants to ask you about
• 32:24
  Speaker 2: house prices, don't you, John, I.
• 32:27
  Speaker 4: See yes, So no Simon, I'm going to go with
• 32:30
  Speaker 4: Simon Fostiologist because I know he's actually got You had
• 32:33
  Speaker 4: that thesis on this and it was very similar to
• 32:35
  Speaker 4: mein which is the thirty percent real terms fall probably
• 32:39
  Speaker 4: over the course of about two ash years from peak
• 32:42
  Speaker 4: to trough. Boy, are you thinking no? Because if I'm
• 32:48
  Speaker 4: being honest, then okay, trace is down. It be fourteen
• 32:51
  Speaker 4: fifteen percent in real terms. So far I struggle givin
• 32:57
  Speaker 4: the fact that I'm mordalately optimistic on the UK coining
• 33:00
  Speaker 4: me in twenty twenty four to think that they're going
• 33:03
  Speaker 4: to go down much further even in real terms. And
• 33:06
  Speaker 4: if I'm mons, I'm surprised that they only weren't doing
• 33:10
  Speaker 4: weight three or four percent in norminal terms this year
• 33:12
  Speaker 4: also last year. So I'm clean of curious to see
• 33:15
  Speaker 4: what your remainder's on that.
• 33:17
  Speaker 3: Or lies, damn lies and haalth price statistics. So, for example,
• 33:24
  Speaker 3: while nationwide Halifax may tell you that there are very
• 33:28
  Speaker 3: small single digit declines in UK house price in the
• 33:31
  Speaker 3: last twelve months, if you go to the Land Registry
• 33:33
  Speaker 3: and look at the total number of transactions and the
• 33:37
  Speaker 3: average transaction price in twenty twenty three verus T twenty two,
• 33:41
  Speaker 3: it's down about seven percent, and it's down about eleven
• 33:46
  Speaker 3: percent from its peak, and that in nominal terms, so
• 33:48
  Speaker 3: you start to get towards the numbers we were talking
• 33:50
  Speaker 3: about if you had an inflation over that that period.
• 33:53
  Speaker 3: Now that is just a It's not a better methodology
• 33:57
  Speaker 3: than Halifax, because you've got some compositional effects in there,
• 34:00
  Speaker 3: but it's just too if you like, perhaps defend some
• 34:05
  Speaker 3: of those bearish forecasts that I put out there on
• 34:07
  Speaker 3: the UK housing market going forward, though we have to
• 34:11
  Speaker 3: be mindful of something, or I hope you're mindful of
• 34:13
  Speaker 3: something I said about ten fifty minutes ago, which is
• 34:15
  Speaker 3: that delayed lag of interest rate increases. So while the economy,
• 34:20
  Speaker 3: I think because of the P and L, the real
• 34:23
  Speaker 3: earnings picture will improve, we're going to have cohorts, particularly
• 34:28
  Speaker 3: exposed to not just first time buyers, but also secondary
• 34:33
  Speaker 3: activity in the market who are going to come to
• 34:36
  Speaker 3: a refinancing moment, which, even if and Laura is spot on,
• 34:40
  Speaker 3: the products now available at less than four percent, although
• 34:44
  Speaker 3: svrs are still up six and a half seven percent,
• 34:47
  Speaker 3: there's still some painful refinancing to come for millions of households,
• 34:51
  Speaker 3: which makes me nervous that this market is out of
• 34:56
  Speaker 3: the wood.
• 34:57
  Speaker 5: Ah, it's center interesting, I think, coming at it from
• 35:00
  Speaker 5: a house builder perspective, are some of the listed companies.
• 35:04
  Speaker 5: What they did this time last year was they saw
• 35:08
  Speaker 5: the dynamics happening in terms of interest rates, and they
• 35:11
  Speaker 5: sharply pulled back on volumes. And that's what's impacted the
• 35:14
  Speaker 5: likes of the building materials companies that I was talking
• 35:16
  Speaker 5: about earlier. So they effectually pulled the lead. They didn't
• 35:20
  Speaker 5: they never want to pull the price lever right, because
• 35:22
  Speaker 5: you drop a pound of price, it drops very quickly
• 35:26
  Speaker 5: through to your ownings. So they pulled back on land purchases,
• 35:29
  Speaker 5: they pulled back on their building activity, and now rates
• 35:34
  Speaker 5: have come down, as in mortgage rates have come down.
• 35:36
  Speaker 5: The problem that the house builders have potentially got for
• 35:39
  Speaker 5: this year is actually that they didn't buy land last year.
• 35:42
  Speaker 5: So even if the housing market gets better, does pick up,
• 35:46
  Speaker 5: I don't know if it will, but just say it does,
• 35:48
  Speaker 5: it's effectively it's effectually too late for this year because
• 35:53
  Speaker 5: they haven't got the land, they haven't got the houses
• 35:55
  Speaker 5: half built or not in the volumes that they could
• 35:57
  Speaker 5: potentially need, so that the housing market always comes with
• 36:00
  Speaker 5: with a lag. So this year, if they want to respond,
• 36:03
  Speaker 5: it's the opposite. They'll have to use pricing as in prices. Well,
• 36:07
  Speaker 5: it's not volumes, it's pricing for this year. So how's
• 36:12
  Speaker 5: calling house prices? I know it's for national part, But
• 36:17
  Speaker 5: this year, if you're a house builder and you can't
• 36:19
  Speaker 5: ramp up your volumes quickly, what do you do? You
• 36:21
  Speaker 5: put up the price or you reduce the incentives?
• 36:25
  Speaker 2: Okay, house price is called in opposite directions.
• 36:27
  Speaker 3: I like that. Well, but blaking it back to the conversation,
• 36:31
  Speaker 3: we just had an equity market. The US residential property
• 36:35
  Speaker 3: market is about forty seven trillion dollars of value, and
• 36:39
  Speaker 3: so is the US stock market, so one for one,
• 36:43
  Speaker 3: and yet our residential market is eight and a half
• 36:47
  Speaker 3: trillion and our stock market is two and a half trillion,
• 36:49
  Speaker 3: so we're kind of three and a half to one.
• 36:52
  Speaker 3: If you're looking at a misallocation, systematic misallocation of capital
• 36:57
  Speaker 3: many many, many years, just look at ratio alone.
• 37:01
  Speaker 4: When do you get your own here? Just write a
• 37:03
  Speaker 4: B whose place is honestly me? And could the week
• 37:08
  Speaker 4: or let's not do this anymore.
• 37:10
  Speaker 2: Let's just have them do it every week.
• 37:11
  Speaker 1: Anyway, when the UK equity market turns around, that ratio
• 37:15
  Speaker 1: is going to change, Simon, So you know we'll be
• 37:17
  Speaker 1: will be fine. If John House price falls go through,
• 37:21
  Speaker 1: and you too are right on UK equities being cheap
• 37:24
  Speaker 1: will be one to one by the beginning of next year,
• 37:28
  Speaker 1: It's probably fine. It will be fine. Now listen Onto Onto,
• 37:33
  Speaker 1: Everything's going to be wonderful. UK equity is going to
• 37:36
  Speaker 1: do brilliantly. Laura, what do we buy? Tell us about
• 37:39
  Speaker 1: some of your favorite stocks.
• 37:41
  Speaker 5: Okay, start the top more domestic companies, I think are
• 37:45
  Speaker 5: where is where the biggest valuation opportunity is if you
• 37:49
  Speaker 5: go you know, Simon's mentioned Brexit. I know it feels
• 37:52
  Speaker 5: odd to still be talking about Brexit. We're in twenty
• 37:54
  Speaker 5: twenty four. But if you look at how domestic so
• 37:57
  Speaker 5: this is just UK shares, but how in national earners
• 38:00
  Speaker 5: within the UK of don relative to domestic owners within
• 38:03
  Speaker 5: the UK the gap is huge. You know, we're talking
• 38:06
  Speaker 5: thirty to forty percent difference in total return since that
• 38:09
  Speaker 5: Brexit vote. If you go before that, there isn't much
• 38:12
  Speaker 5: of a difference.
• 38:13
  Speaker 2: I e.
• 38:13
  Speaker 5: It's not the case that domestic companies always underperform. You know,
• 38:17
  Speaker 5: you're picking exhibit it's irrelevant, it's not. There is a
• 38:20
  Speaker 5: big disjoint that happens around the time of the Brexivote,
• 38:23
  Speaker 5: and that domestic pe if you like, has been almost
• 38:28
  Speaker 5: sustainably with a few exceptions around elections, it's been almost
• 38:31
  Speaker 5: sustainably de rated since that oat.
• 38:35
  Speaker 2: Just be clear Laurd the listeners.
• 38:36
  Speaker 1: We're talking about evaluation difference, not about a business performance difference.
• 38:42
  Speaker 5: Very good point. Yes, sorry, we're talking about valuation difference.
• 38:45
  Speaker 3: I e.
• 38:46
  Speaker 5: Domestic UK has been sustained has suffered a sustained de
• 38:51
  Speaker 5: rating since the Brexivote. It's not that these shares have
• 38:54
  Speaker 5: perennially underperformed. It's that people have had a preference for
• 38:59
  Speaker 5: the more international end of the market, the unilevers to
• 39:01
  Speaker 5: gsks of the world, rather than the more domestic businesses.
• 39:05
  Speaker 5: So my starting point is that it is the more
• 39:08
  Speaker 5: domestic businesses that present the clearest value opportunity. They tend
• 39:14
  Speaker 5: to be found at the smaller cap end of the
• 39:15
  Speaker 5: market for very common sense reasons that you know, if
• 39:19
  Speaker 5: you're a small company, where are you going to serve
• 39:21
  Speaker 5: first you're going to serve your domestic market first, and
• 39:23
  Speaker 5: then if you're successful, you're going to go overseas. So
• 39:25
  Speaker 5: domestic companies have more of their sales, more of their
• 39:27
  Speaker 5: earnings here in the UK, whereas the fifty one hundred
• 39:30
  Speaker 5: is its three quarters roughly overseas. The reverse is true
• 39:34
  Speaker 5: for the FITSY small cap and once you get down
• 39:36
  Speaker 5: to aim. So that's that's my starting point. And then
• 39:39
  Speaker 5: beyond that, there are industries, some of which we've spoken
• 39:42
  Speaker 5: about already, that have been in recession conditions and where
• 39:45
  Speaker 5: earnings have halved, in some cases more than halved. You know,
• 39:49
  Speaker 5: the likes of building materials and the likes of some
• 39:52
  Speaker 5: advertising exposed companies. If you can buy a business where
• 39:56
  Speaker 5: earnings of half more than halved, and yet you're still
• 39:59
  Speaker 5: buying that business on evaluation that's below its long run average,
• 40:04
  Speaker 5: I you're buying low valuation on low earnings. To me,
• 40:08
  Speaker 5: that presents a pretty compelling opportunity for when those earnings
• 40:13
  Speaker 5: turn around. Now I can't sit here and say, you know,
• 40:15
  Speaker 5: with some of these building materials companies, it's going to
• 40:17
  Speaker 5: turn around this year. But what I can say is
• 40:20
  Speaker 5: that I think earnings will recover over a sustained period
• 40:24
  Speaker 5: of time. I can't give any to be clear, this
• 40:27
  Speaker 5: is not a stock recommendation. But if we're talking companies,
• 40:30
  Speaker 5: you know what type of companies am I talking about.
• 40:32
  Speaker 5: I'm talking about companies like say Ipstock, which is one
• 40:35
  Speaker 5: of the big brick manufacturers here in the UK. There
• 40:38
  Speaker 5: is no structural problem with that industry. You know, we
• 40:42
  Speaker 5: still deed houses. We build them out of bricks. It's
• 40:45
  Speaker 5: not super complicated. It's a very consolidated industry. There's only
• 40:48
  Speaker 5: a couple of players. But bricks have had a very
• 40:52
  Speaker 5: tough time for all the reasons we spoke about. Volumes
• 40:54
  Speaker 5: are down materially, so we've seen a company like that
• 40:57
  Speaker 5: lose roughly forty percent of its earning set for the
• 40:59
  Speaker 5: last cup years, and yet the valuation is lower than
• 41:04
  Speaker 5: its long run average. I think this is a particularly
• 41:07
  Speaker 5: interesting example because this is a company that was listed
• 41:10
  Speaker 5: my number of years ago now by private equity. It
• 41:12
  Speaker 5: was under invested at the time of IPO, It's gone
• 41:15
  Speaker 5: through a long period of catch up capex et cetera,
• 41:18
  Speaker 5: and it's lower than its IPO price. You know, it's
• 41:20
  Speaker 5: on a lower valuation than that, and it.
• 41:21
  Speaker 2: Would just run private equity.
• 41:24
  Speaker 5: Well quite, but it would just be the irritation of
• 41:27
  Speaker 5: my life if it got taken out, if it got
• 41:30
  Speaker 5: bid for. To be clear, there's no bid roomors whatsoever.
• 41:32
  Speaker 2: If it did big.
• 41:34
  Speaker 3: Rumors on every UK earlier, it's easier disclaimer.
• 41:39
  Speaker 5: It would be such an irritation if it got taken
• 41:42
  Speaker 5: out by private equity again at evaluation, you know, lower
• 41:46
  Speaker 5: than what it got listed for when we, as the
• 41:48
  Speaker 5: public markets have founded funded a ton of capex. For
• 41:51
  Speaker 5: it to be a much better invested business, for it
• 41:53
  Speaker 5: to be a better run business than when it was
• 41:55
  Speaker 5: listed just be so irritating and yet so typical. So
• 41:59
  Speaker 5: it's type of company that I'm looking at, you know that,
• 42:04
  Speaker 5: To be clear, we own a company like that already.
• 42:06
  Speaker 5: But I think that is the more interesting end of
• 42:09
  Speaker 5: the UK market. And it's not me saying that the
• 42:12
  Speaker 5: likes of you know, Glaxo Unilever are overvalued. You know,
• 42:16
  Speaker 5: there is still a valuation discount at that large cap
• 42:18
  Speaker 5: end of the market as well, but it's all about
• 42:21
  Speaker 5: you know, relative valuation, and to me it is the
• 42:26
  Speaker 5: smaller and more domestic businesses that present the best value opportunity.
• 42:29
  Speaker 5: But it's not to say that you know, the likes
• 42:31
  Speaker 5: of Burbery, Unilever, et cetera. Aren't low lever. It's just
• 42:33
  Speaker 5: about extremes within the UK market.
• 42:36
  Speaker 1: Yeah, and this is that the big danger that you've
• 42:39
  Speaker 1: mentioned is that these companies are so inexpensive and we
• 42:44
  Speaker 1: don't buy them, and eventually somebody else does and then
• 42:47
  Speaker 1: they're lost to us. As we're losing a lot of
• 42:49
  Speaker 1: companies at the smaller end of the market, aren't we.
• 42:52
  Speaker 3: Yeah.
• 42:53
  Speaker 5: I have a new Year's resolution for myself, which is
• 42:55
  Speaker 5: must do better at rejecting overly miserly takeover deals because
• 43:04
  Speaker 5: it's so tempting. You know, the day of a of
• 43:07
  Speaker 5: a takeover deal from private equity, it feels great for
• 43:09
  Speaker 5: your relative performance and you think, yes, I've been vindicated
• 43:12
  Speaker 5: this this company it was too cheap and a fifty
• 43:14
  Speaker 5: percent PREMI or whatever, you know, thirty fifty percent premium.
• 43:17
  Speaker 5: You think, yes, you know, I was right hah. But
• 43:19
  Speaker 5: then that company is gone. You know, we need to
• 43:22
  Speaker 5: get better at saying no, you know, and I have
• 43:27
  Speaker 5: we you know, we have occasionally voted for deals where
• 43:29
  Speaker 5: we feel really strongly. But I think as an industry
• 43:33
  Speaker 5: we could do better actually at publicly saying or not
• 43:39
  Speaker 5: even publicly, just privately voting voting deals down. And then
• 43:43
  Speaker 5: you know that is the power is effectively in our
• 43:46
  Speaker 5: hands to stop something, and we should do better at that.
• 43:50
  Speaker 3: This is error's wife. Well, this is why flows us
• 43:54
  Speaker 3: so important and why since twenty sixteen, I think it's
• 44:01
  Speaker 3: seventy eight out of ninety one quarters have seen outflows
• 44:04
  Speaker 3: from UK equity funds. The I'm not certainly not commenting
• 44:10
  Speaker 3: on Laura, but the backbone of fund managers to say
• 44:15
  Speaker 3: no becomes easier in a backdrop of inflows than it
• 44:18
  Speaker 3: does and sustained outflows. And so this comes back and
• 44:23
  Speaker 3: perhaps we can link it to the US market because
• 44:25
  Speaker 3: we think there's something esoteric about UK equity market pro cyclicality,
• 44:31
  Speaker 3: negative procyclicality of pricing. Look at the procyclicality going on
• 44:35
  Speaker 3: in the world's biggest stock market. We talk about this
• 44:38
  Speaker 3: magnificent seven. You are seeing performance bequeathing performance, liquidity bequeathing liquidity.
• 44:45
  Speaker 3: You are seeing some of the legacy of the way
• 44:49
  Speaker 3: in which capital is allocated in those regulatory decisions manifesting
• 44:53
  Speaker 3: itself in how prices are discovered. It's not healthy from
• 44:56
  Speaker 3: an economic allocative efficiency standpoint, it's not healthy, and I
• 45:00
  Speaker 3: really hope, well, maybe my news resolution is just to
• 45:03
  Speaker 3: be able to make that economic argument as to why
• 45:07
  Speaker 3: if we only look at it through a capital agnostic
• 45:12
  Speaker 3: saver's lens, we do untold damage to the economic efficiency.
• 45:15
  Speaker 3: And I feel like the social function of capital markets,
• 45:18
  Speaker 3: which is a really great story on many story great
• 45:21
  Speaker 3: stories for bankers and investors to tell, but that is
• 45:24
  Speaker 3: a good socially conscious story to tell.
• 45:28
  Speaker 4: Is that just the clarify that slightly is that basically
• 45:33
  Speaker 4: because I was thinking O that the we're living in
• 45:36
  Speaker 4: the world, we are part of the big part of
• 45:38
  Speaker 4: the problem to me seems to be that every marginal
• 45:41
  Speaker 4: pond or dollar or even euro invested was any the
• 45:45
  Speaker 4: seven biggest stocks in America. That basically what talking about
• 45:50
  Speaker 4: passive flaw is just constantly pumping into the kind of
• 45:54
  Speaker 4: slate black hall of capital in the years.
• 45:58
  Speaker 3: Again, it's passive this part of the story. But again
• 46:02
  Speaker 3: I don't want to sound like I'm talking the active
• 46:05
  Speaker 3: industry book. There are other things as well, which is
• 46:08
  Speaker 3: the momentum trading, you performance bequeathing liquidity. The consolidation of
• 46:15
  Speaker 3: fund funds means that some of the smaller MidCap end
• 46:19
  Speaker 3: of the spectrum. We see a day to day we
• 46:22
  Speaker 3: try and get US investors into UK stocks and they
• 46:25
  Speaker 3: say to us, how much does it trade per day?
• 46:28
  Speaker 3: And we say, well, it trades two hundred thousand pounds
• 46:30
  Speaker 3: a day. I say, well, I love the company, I
• 46:32
  Speaker 3: love the management team, I love the valuation, but my
• 46:34
  Speaker 3: risk officer says that I can't do anything with sub
• 46:38
  Speaker 3: let's say two million pounds a day trading and if
• 46:41
  Speaker 3: you get yourself in a pro six little doom loop,
• 46:44
  Speaker 3: which is a I mean, I know this has been
• 46:46
  Speaker 3: a very up by podcast and I'm pleased it has,
• 46:48
  Speaker 3: but let's acknowledge we are in a pro little doom loop.
• 46:51
  Speaker 3: You need a catalyst to take you in the opposite direction,
• 46:56
  Speaker 3: because otherwise you are blocking pools of capital out from
• 47:00
  Speaker 3: making really attractive investment opportunities in where Laura are very,
• 47:03
  Speaker 3: very respected for manager in London recognizes the value is
• 47:08
  Speaker 3: and yet she's not alone. But there are too many
• 47:11
  Speaker 3: impediments amongst the big institutions from taking those stakes because
• 47:14
  Speaker 3: of lack of liquidity.
• 47:16
  Speaker 1: Okay, I don't ever want to hear the phrase pro
• 47:18
  Speaker 1: cyclical doom loop on this podcast again.
• 47:24
  Speaker 2: Write that down John, no more do.
• 47:27
  Speaker 4: Bind list?
• 47:28
  Speaker 1: Okay, on the subject of flows creating performance. This is
• 47:34
  Speaker 1: a week when everyone's talking about bitcoin, talking about possibility
• 47:37
  Speaker 1: of the arrival of bitcoin ETFs, etc. So we are
• 47:40
  Speaker 1: going to move on to our final question to both
• 47:42
  Speaker 1: of you, which we are obliged to ask every single
• 47:45
  Speaker 1: week because we are keeping a record of the answers,
• 47:48
  Speaker 1: and we'll come back to name and shame over the
• 47:50
  Speaker 1: next couple of years. On this one, if you had
• 47:53
  Speaker 1: to hold one asset of one I said, only for
• 47:55
  Speaker 1: ten years, and you weren't allowed to trade at all,
• 47:58
  Speaker 1: you just had to stick it in a room and
• 47:59
  Speaker 1: leave it there. Of course, difficult to stick something non
• 48:01
  Speaker 1: physical in a room, but you know what I mean.
• 48:03
  Speaker 1: If you had to do that, would you choose bitcoin,
• 48:07
  Speaker 1: gold or for the very cautious, we also offer a
• 48:11
  Speaker 1: cash option.
• 48:14
  Speaker 5: I'm going to pick gold you because I feel like
• 48:16
  Speaker 5: I don't understand bitcoin. As in, if someone can tell
• 48:21
  Speaker 5: me what it's used for, I would I'd be open
• 48:27
  Speaker 5: to that, But at the moment, I just feel like
• 48:30
  Speaker 5: I don't understand it, So I'm going to pick gold.
• 48:34
  Speaker 1: Distinct possibility that you do understand it. That's the other
• 48:37
  Speaker 1: thing to stink right, Simon, did you actually say cash?
• 48:44
  Speaker 3: I did.
• 48:46
  Speaker 1: You are?
• 48:48
  Speaker 2: Okay?
• 48:48
  Speaker 1: I know I just banned him because of the doom
• 48:50
  Speaker 1: loop thing, but I'm unbanning him.
• 48:52
  Speaker 2: Come on, Sack and tell.
• 48:52
  Speaker 3: Us why would I take cash against those other two options?
• 48:59
  Speaker 3: Because I think cash returns will I mean, certainly exceed
• 49:03
  Speaker 3: bitcoin on current valuations. It's a fraud hiding in plain sight,
• 49:09
  Speaker 3: greater full theory. All of these things characterize cryptocurrencies. It's
• 49:15
  Speaker 3: as old as the hills. Private currencies eventually trackeds, deviants,
• 49:23
  Speaker 3: and fraudsters, and bitcoin will be no different. It's just
• 49:27
  Speaker 3: in a digital form rather than a vegetable. And gold. Look,
• 49:33
  Speaker 3: I like gold, and to some extent, I'm going the
• 49:36
  Speaker 3: other side of the table to Laura because she said gold.
• 49:39
  Speaker 3: She went. But I can also make a decent argument, actually,
• 49:43
  Speaker 3: the cash returns over the next few years will be
• 49:46
  Speaker 3: better than a commodity that It's not far off it's
• 49:50
  Speaker 3: real terms high. It's very close to its nominal height.
• 49:53
  Speaker 3: It's very close to its real terms high as well,
• 49:55
  Speaker 3: so it's a little bit towards the top end of
• 49:57
  Speaker 3: its historical range. So yeah, I can make an argument
• 50:01
  Speaker 3: for cash.
• 50:02
  Speaker 1: Okay, brilliant thank you, and Simon, would you mind if
• 50:04
  Speaker 1: I make the headline to this podcast bitcoin fraud hiding
• 50:08
  Speaker 1: in plain sight, says Simon French.
• 50:11
  Speaker 3: Be delighted. That works for absolutely delighted.
• 50:15
  Speaker 2: Excellent. Thank you very much. We appreciate that that. We
• 50:18
  Speaker 2: like a bit of clickbait.
• 50:22
  Speaker 4: Oh wait, one one quick thing. I think Pepper waent
• 50:25
  Speaker 4: for cash as well. Yeah, yeah, she knocked back bitcoin
• 50:30
  Speaker 4: and Golden went for cash last remember, because I was
• 50:33
  Speaker 4: so struck by it. So you read You're only the
• 50:35
  Speaker 4: second personally.
• 50:39
  Speaker 2: Not to worry.
• 50:40
  Speaker 3: Case is a celside analyst, your second to the party black.
• 50:46
  Speaker 1: Thanks for listening to this week's Maren Talks Money. We'll
• 50:48
  Speaker 1: be back next week in the meantime. If you like
• 50:50
  Speaker 1: our show, rate review and subscribe wherever you listen to podcasts.
• 50:53
  Speaker 1: This episode was hosted by me Maren Sumsett Web was
• 50:56
  Speaker 1: produced by Sumersadi Dditional lessening by Blake Maple as well.
• 50:59
  Speaker 1: Thanks a lot of all, Simon French and John Steppek.
• 51:02
  Speaker 1: The short of sign up to John's daily news.
• 51:04
  Speaker 2: Letter Money Distilled. The link is in the show list