1 00:00:04,120 --> 00:00:06,320 Speaker 1: Welcome to the Fear and Greece Summer series, brought to 2 00:00:06,360 --> 00:00:10,200 Speaker 1: you by Montgomery Investment Management. I'm Sean Aylmer. Wrapping up 3 00:00:10,240 --> 00:00:12,240 Speaker 1: twenty twenty five. What to watch out for in twenty 4 00:00:12,240 --> 00:00:15,200 Speaker 1: twenty six. Best man for the job, Roger Montgomery, Founder 5 00:00:15,240 --> 00:00:19,320 Speaker 1: and Chief Investment Officer of Montgomery Investment Management. Roger, Welcome 6 00:00:19,400 --> 00:00:20,279 Speaker 1: back to Fear and Greed. 7 00:00:20,360 --> 00:00:21,560 Speaker 2: Always a pleasure to see, Sean. 8 00:00:21,760 --> 00:00:24,680 Speaker 1: So twenty twenty five, Yeah, what a year. 9 00:00:24,960 --> 00:00:27,360 Speaker 3: Okay, Well, it was another year that we did think 10 00:00:27,400 --> 00:00:30,720 Speaker 3: would be good for the stock market. So since twenty 11 00:00:30,760 --> 00:00:33,080 Speaker 3: twenty two, what we've pointed to are three things that 12 00:00:33,080 --> 00:00:35,479 Speaker 3: would drive the stock market, and it's all that matters 13 00:00:35,479 --> 00:00:39,800 Speaker 3: for investors to consider. Number One, liquidity, central bank liquidity. 14 00:00:39,960 --> 00:00:42,479 Speaker 3: Are the banks injecting money into the system or are 15 00:00:42,520 --> 00:00:45,640 Speaker 3: they pulling money out? And they injected trillions and trillions 16 00:00:45,640 --> 00:00:48,080 Speaker 3: of dollars into the system, which found its way into 17 00:00:48,080 --> 00:00:51,200 Speaker 3: banks to lend and also then into the main street 18 00:00:51,320 --> 00:00:54,400 Speaker 3: as well. So that's number one. Number two since the 19 00:00:54,480 --> 00:00:58,960 Speaker 3: nineteen seventies, if you've seen this is two and three. 20 00:00:59,000 --> 00:01:02,600 Speaker 3: By the way, you've seen this combination innovative stocks with 21 00:01:02,640 --> 00:01:05,560 Speaker 3: pricing power have always done well. And the combination is 22 00:01:05,600 --> 00:01:10,480 Speaker 3: this disinflation. So that is not deflation, its. 23 00:01:10,319 --> 00:01:11,880 Speaker 1: Consumer prices going down inflation. 24 00:01:11,920 --> 00:01:13,600 Speaker 2: It's falling levels of inflation. That's right. 25 00:01:13,600 --> 00:01:16,759 Speaker 3: You see consecutive prints of lower inflation numbers. So if 26 00:01:16,800 --> 00:01:18,600 Speaker 3: last year was six percent, this year is four percent, 27 00:01:18,680 --> 00:01:22,039 Speaker 3: next to three percent and so on. That combined with 28 00:01:22,160 --> 00:01:26,280 Speaker 3: positive economic growth, even if it's anemic. So even if 29 00:01:26,319 --> 00:01:31,040 Speaker 3: it's just point zero one percent growth economic growth GDP growth, 30 00:01:31,400 --> 00:01:33,280 Speaker 3: that's enough. And if you get the combination of those 31 00:01:33,319 --> 00:01:36,640 Speaker 3: three things, what you generally find is innovative companies do well. 32 00:01:36,840 --> 00:01:40,440 Speaker 3: And what's done well since twenty twenty two innovative companies AI, 33 00:01:41,400 --> 00:01:44,200 Speaker 3: you know the Magnificent seven. That's what's done well, and 34 00:01:44,240 --> 00:01:47,760 Speaker 3: that continued in twenty twenty five. Now, when you get 35 00:01:47,800 --> 00:01:52,080 Speaker 3: lots of liquidity in markets, people find things to bet on, 36 00:01:52,760 --> 00:01:56,040 Speaker 3: and the theme was AI, let's bet on this. So 37 00:01:56,200 --> 00:01:59,640 Speaker 3: there was this coalescing of a new thematic and new 38 00:01:59,640 --> 00:02:03,840 Speaker 3: we ex general purpose technology with ample liquidity, and hey, 39 00:02:04,160 --> 00:02:07,400 Speaker 3: there's no danger from inflation. We had disinflation, there's no 40 00:02:08,040 --> 00:02:10,720 Speaker 3: danger of a recession, we had positive economic growth. Let's 41 00:02:10,800 --> 00:02:13,200 Speaker 3: go in all in on these AI stocks, and up 42 00:02:13,240 --> 00:02:16,200 Speaker 3: they went and that continued into twenty twenty five. That 43 00:02:16,320 --> 00:02:17,920 Speaker 3: explains twenty twenty. 44 00:02:17,680 --> 00:02:21,400 Speaker 1: Five, Okay, hard a question, Yeah, twenty twenty six. 45 00:02:21,760 --> 00:02:23,280 Speaker 2: Okay, it is going. 46 00:02:23,360 --> 00:02:27,080 Speaker 3: Yeah, it is harder because we've got challenges to liquidity, 47 00:02:28,160 --> 00:02:31,720 Speaker 3: so we've got challenges to disinflation. We you know, we're 48 00:02:31,720 --> 00:02:34,440 Speaker 3: just hearing stories at the moment about the Reserve Bank 49 00:02:34,480 --> 00:02:38,880 Speaker 3: of Australia maybe leading the world in raising rates because 50 00:02:38,880 --> 00:02:42,519 Speaker 3: inflation has surprised on the upside. And we've got concerns 51 00:02:42,520 --> 00:02:45,680 Speaker 3: about economic growth. Now you've seen in the United States 52 00:02:45,680 --> 00:02:49,040 Speaker 3: the jobs reports, unemployment is actually going up, ticking up, 53 00:02:49,760 --> 00:02:52,679 Speaker 3: and the employment sector and the consumer sector over there 54 00:02:52,960 --> 00:02:56,240 Speaker 3: very very weak, and so you know, there's questions about 55 00:02:56,280 --> 00:02:56,720 Speaker 3: all of. 56 00:02:56,680 --> 00:02:57,440 Speaker 2: The three. 57 00:02:58,960 --> 00:03:02,840 Speaker 3: Concerns, all of the three factors that normally drive markets 58 00:03:02,960 --> 00:03:05,639 Speaker 3: and generate great returns. And then on top of all 59 00:03:05,680 --> 00:03:09,080 Speaker 3: of that, we've got the potential unwinding of the AI boom, 60 00:03:09,800 --> 00:03:13,040 Speaker 3: and it's following the path of all previous general purpose 61 00:03:13,040 --> 00:03:15,720 Speaker 3: technology booms. So I think what we're going to see 62 00:03:15,760 --> 00:03:20,440 Speaker 3: next year are lower returns and more volatility, and that 63 00:03:20,520 --> 00:03:24,280 Speaker 3: volatility will come from that unwinding of the AI boom, 64 00:03:24,400 --> 00:03:28,000 Speaker 3: and also the fact that we've got a Republican in 65 00:03:28,880 --> 00:03:33,960 Speaker 3: the White House, and during presidential terms where Republicans are 66 00:03:33,960 --> 00:03:36,640 Speaker 3: in charge, we tend to get more volatility anyway, and 67 00:03:36,640 --> 00:03:39,360 Speaker 3: that's going all the way back to nineteen hundred and 68 00:03:39,400 --> 00:03:41,680 Speaker 3: so that's why I think we'll see more volatility. But 69 00:03:41,800 --> 00:03:45,080 Speaker 3: most importantly, what investors need to realize is that where 70 00:03:45,080 --> 00:03:48,000 Speaker 3: the S and P five hundreds PE is today the 71 00:03:48,000 --> 00:03:51,560 Speaker 3: price to earnings multiple for the big index the biggest 72 00:03:51,560 --> 00:03:54,400 Speaker 3: five hundred companies in the US. Based on where it 73 00:03:54,440 --> 00:04:00,640 Speaker 3: is right now, it's expected that the average annual return 74 00:04:01,000 --> 00:04:03,960 Speaker 3: two investors for investing in the S and P five 75 00:04:04,120 --> 00:04:07,320 Speaker 3: hundred over the next ten years, the average annual return 76 00:04:07,600 --> 00:04:11,200 Speaker 3: will be somewhere between plus four percent and minus four 77 00:04:11,200 --> 00:04:15,880 Speaker 3: percent per annum. So remember the rule in investing, the 78 00:04:16,000 --> 00:04:17,680 Speaker 3: higher the price you pay. 79 00:04:17,839 --> 00:04:19,000 Speaker 2: The lower your return. 80 00:04:19,320 --> 00:04:22,320 Speaker 3: If you've got prices very high pes are very high, 81 00:04:22,680 --> 00:04:24,960 Speaker 3: then you're going to get a lower return. So, based 82 00:04:24,960 --> 00:04:28,920 Speaker 3: on history, the next ten years is likely if you 83 00:04:28,960 --> 00:04:31,440 Speaker 3: buy today, it's likely to give you a single digit 84 00:04:31,480 --> 00:04:36,599 Speaker 3: return at best. Given that, it's probably worth thinking about rebalancing. 85 00:04:36,920 --> 00:04:39,040 Speaker 1: Okay, what abd ees training market though, because it hasn't 86 00:04:39,040 --> 00:04:39,799 Speaker 1: gone as hard. 87 00:04:40,080 --> 00:04:42,480 Speaker 3: No, that's right, but there's a reason for that. There's 88 00:04:42,600 --> 00:04:46,359 Speaker 3: less growth in Australian large caps, and that's because most 89 00:04:46,400 --> 00:04:49,000 Speaker 3: of the profits are paid out as a dividend because 90 00:04:49,000 --> 00:04:52,359 Speaker 3: we have franking, and franking credits have no value to 91 00:04:52,400 --> 00:04:56,480 Speaker 3: a company, enormous value to retirees, and so companies are 92 00:04:56,480 --> 00:04:59,480 Speaker 3: incentivized to pay most of the profits out as a dividend, 93 00:05:00,000 --> 00:05:02,800 Speaker 3: retaining less for growth. So if you look at the 94 00:05:02,920 --> 00:05:06,919 Speaker 3: retention rate or the dividend payout ratio of Australian companies, 95 00:05:07,000 --> 00:05:09,960 Speaker 3: it's about eighty or about eighty percent. You look in 96 00:05:10,000 --> 00:05:13,200 Speaker 3: the United States and it's half that, and so they've 97 00:05:13,240 --> 00:05:15,760 Speaker 3: got they retain a lot more capital for growth, and 98 00:05:15,839 --> 00:05:18,680 Speaker 3: consequently their companies are growing much faster. 99 00:05:18,880 --> 00:05:22,160 Speaker 1: So back to the rebalancing. So going into twenty twenty six, 100 00:05:22,680 --> 00:05:24,880 Speaker 1: rebalancing towards what I think you should. 101 00:05:24,600 --> 00:05:27,919 Speaker 3: Be rebalancing every year anyway. So what you do is 102 00:05:27,960 --> 00:05:31,160 Speaker 3: you're taking your profits out of some of the profits 103 00:05:31,200 --> 00:05:33,360 Speaker 3: out of the stock marke. You're not exiting the stock market. 104 00:05:33,360 --> 00:05:34,799 Speaker 3: That's an immature piece of advice. 105 00:05:35,960 --> 00:05:36,800 Speaker 2: What you do is you. 106 00:05:36,760 --> 00:05:38,520 Speaker 3: Say, you know, what I've done really well in the 107 00:05:38,520 --> 00:05:40,280 Speaker 3: stock market last year and the year before and the 108 00:05:40,360 --> 00:05:42,279 Speaker 3: year before that, I'm going to take some profits and 109 00:05:42,320 --> 00:05:45,600 Speaker 3: I'm going to invest in some uncorrelated asset classes. Now 110 00:05:45,600 --> 00:05:49,760 Speaker 3: at the moment, I'm advocating two things. Private credit sensibly 111 00:05:49,839 --> 00:05:52,960 Speaker 3: chosen private credit, you know, double A rated private credit 112 00:05:53,080 --> 00:05:55,680 Speaker 3: or triple B rate investment grade private credit. And for 113 00:05:55,760 --> 00:06:01,159 Speaker 3: wholesale investors, we like the idea of trash funds that 114 00:06:01,279 --> 00:06:05,080 Speaker 3: are successful, hard to get into, but have produced a 115 00:06:05,120 --> 00:06:08,040 Speaker 3: return profile that is very different to the stock market. 116 00:06:08,200 --> 00:06:10,120 Speaker 1: Fantastic Roger, thank you for talking to Fear and Greed 117 00:06:10,160 --> 00:06:10,880 Speaker 1: summer series. 118 00:06:11,240 --> 00:06:13,720 Speaker 2: Shan great to be with you, and Merry Christmas to everyone. 119 00:06:13,880 --> 00:06:16,680 Speaker 1: Merry Christmas to you, Roger. That was Roger Montgomery from 120 00:06:16,680 --> 00:06:20,360 Speaker 1: Montgomery Investment Management. To learn more, visit montinvest dot com. 121 00:06:20,480 --> 00:06:22,400 Speaker 1: M O N T I N V E s T 122 00:06:22,560 --> 00:06:25,000 Speaker 1: montinvest dot com and you can sign up for Roger's 123 00:06:25,040 --> 00:06:29,280 Speaker 1: insights at Roger Montgomery dot com. That's R O G E. R. 124 00:06:29,440 --> 00:06:31,840 Speaker 1: Montgomery Roger Montgomery dot com. Fear and Greed is not 125 00:06:31,880 --> 00:06:34,520 Speaker 1: a financial advice podcast, and if you want to invest, 126 00:06:34,560 --> 00:06:37,080 Speaker 1: we recommend you visit a financial advisor who can tailor 127 00:06:37,160 --> 00:06:39,760 Speaker 1: investments to your needs. Don't forget to hit following the 128 00:06:39,760 --> 00:06:42,080 Speaker 1: podcast I'm Sean Elmer, and this is fear and greed, 129 00:06:42,200 --> 00:06:47,600 Speaker 1: brought to you by Montgomery Investment Management Team.