WEBVTT - What it Takes to Build a Stagflation-proof Portfolio 0:00:02.720 --> 0:00:11.280 Bloomberg Audio Studios, Podcasts, Radio News. 0:00:17.720 --> 0:00:20.119 Welcome to Maren Talks Money, the podcast in which people 0:00:20.120 --> 0:00:22.800 who know the markets explain the markets. I am Maren 0:00:22.840 --> 0:00:25.160 Sumset Web and this week I am speaking with Duncan 0:00:25.280 --> 0:00:28.280 LaMonte had a strategic research at Schroeders. I invited Duncan 0:00:28.360 --> 0:00:30.120 on well, partly because he's been on before and he's 0:00:30.200 --> 0:00:32.080 very good, but also because he's got a new bit 0:00:32.120 --> 0:00:36.920 of research out on how one should invest in stagflationary periods. 0:00:36.960 --> 0:00:39.920 And as geopolitics is remarkably volatile at the moment and 0:00:39.960 --> 0:00:43.680 there's nothing like volatile geopoliticis give you cagflation, I thought 0:00:43.760 --> 0:00:46.120 we would have him on to talk about it. I 0:00:46.200 --> 0:00:48.879 was talking about a variety of other things. We talk 0:00:48.920 --> 0:00:52.440 about the AI bubble, or maybe not bubble. We talk 0:00:52.479 --> 0:00:56.000 about UK equities, and we talk about some new research 0:00:56.080 --> 0:00:59.000 that he is doing that may have a fairly massive 0:00:59.120 --> 0:01:01.880 effect on the US market. Well it's not that his 0:01:01.960 --> 0:01:04.040 research will have a massive effect on the UK. Marketers 0:01:04.040 --> 0:01:06.560 that think he is researching might have a massive effect 0:01:06.640 --> 0:01:10.080 on the UK market. You all know what I mean. Anyway, Duncan, 0:01:10.200 --> 0:01:12.160 Welcome to Marin Talks Money. 0:01:12.640 --> 0:01:14.160 Thank you so much. For having me on. It's great 0:01:14.160 --> 0:01:15.400 to be here right. 0:01:15.520 --> 0:01:17.680 There is a lot going on. I've been on a 0:01:17.680 --> 0:01:19.520 lot Inay for a few weeks, and I come back 0:01:19.520 --> 0:01:21.960 and I find that everything's gone slightly now, says. There's 0:01:22.000 --> 0:01:24.880 massive momentum moves in the market all over the place. 0:01:24.920 --> 0:01:27.920 I've been looking at the costb and worrying about all 0:01:27.959 --> 0:01:31.600 the retail investors in Korea who are getting margin called. 0:01:32.080 --> 0:01:34.920 I've been looking at the Nicket, which is now done 0:01:34.959 --> 0:01:37.120 quite a lot as well from its hires, although it 0:01:37.120 --> 0:01:38.400 was had a marvelous time, so we don't need to 0:01:38.440 --> 0:01:41.840 worry about that. I've been looking at the general shifts 0:01:41.880 --> 0:01:45.679 across the market. Was beginning to see small cups outperforming 0:01:45.840 --> 0:01:49.680 some places. We're beginning to see the big technology companies 0:01:49.880 --> 0:01:53.840 in the US underperform a little, the chip manufacturers in 0:01:53.920 --> 0:01:56.880 career having a very torrid time. There's just there's a 0:01:57.000 --> 0:02:00.600 lot going on. And that's before we even start on geopolitics. War, 0:02:01.040 --> 0:02:04.440 the yen moving all over the place, Bondyell's moving all 0:02:04.440 --> 0:02:06.800 over the place, missile's drones moving all over the place. 0:02:06.800 --> 0:02:09.560 There's an awful lot going on. When we look at 0:02:09.600 --> 0:02:13.480 our portfolios these days, what should we be concentrating on 0:02:13.520 --> 0:02:15.959 and what should we be thinking about about from so 0:02:16.320 --> 0:02:17.640 fair basically. 0:02:17.800 --> 0:02:21.240 So, I'm perhaps a little bit boring in the sense 0:02:21.280 --> 0:02:23.800 that I think that we can spend an awful lot 0:02:23.800 --> 0:02:27.000 of time trying to predict our forecast what's going to happen, 0:02:27.120 --> 0:02:28.880 and the chances of getting any of that right are 0:02:28.919 --> 0:02:31.760 actually quite low a lot of the time. So rather 0:02:31.800 --> 0:02:35.200 than trying to guess what might happen next, my general 0:02:35.240 --> 0:02:38.680 approach is to think about like prepared, don't predict, so 0:02:38.840 --> 0:02:42.560 to think how is your money invested and how might 0:02:42.600 --> 0:02:44.960 it perform if you were to go into different scenarios. 0:02:45.200 --> 0:02:47.280 And one of the ones that I think that we're 0:02:47.360 --> 0:02:50.280 hearing an awful lot from our clients this year is 0:02:50.320 --> 0:02:54.480 around the risk of stagflation, so growth being weak, inflation 0:02:54.600 --> 0:02:56.680 being high, partly based on what's been happening in the 0:02:56.680 --> 0:03:00.000 Middle East, and what might that mean for the portfolio. 0:03:00.320 --> 0:03:01.959 So I think it's a very good place to start 0:03:02.000 --> 0:03:04.760 when you're thinking about robust outcomes for your portfolio. 0:03:05.600 --> 0:03:08.600 Okay, so looking at the history of stagflationary events and 0:03:08.639 --> 0:03:11.480 seeing what happens when that happens, while you look at 0:03:11.480 --> 0:03:14.280 our current environment, you say, well, might we have stagflation. 0:03:14.440 --> 0:03:16.240 I mean in suttinly. In the UK we're very prone 0:03:16.280 --> 0:03:19.440 to inflation anyway, and we keep putting in place policy 0:03:19.480 --> 0:03:23.320 after policy after policy that embeds inflation further into our economy. 0:03:23.320 --> 0:03:27.280 But globally we can suspect that it is possible that 0:03:27.320 --> 0:03:30.320 we might see about this stagflation because of rising oil 0:03:30.400 --> 0:03:33.680 prices and energy shortages. 0:03:33.080 --> 0:03:37.040 Et cetera exactly, And I think most people's natural response 0:03:37.080 --> 0:03:39.080 would be to assume that this is a pretty terrible 0:03:39.120 --> 0:03:42.000 time for investing. That's the reaction. I hear people say, 0:03:42.400 --> 0:03:45.480 surely stagflation is awful for the stock market, and we 0:03:45.600 --> 0:03:47.240 look to the data going back all the way to 0:03:47.680 --> 0:03:50.240 the nineteen twenties, so one hundred years worth of data. 0:03:50.800 --> 0:03:54.480 And it is true that stagflation is a challenging time 0:03:54.520 --> 0:03:57.440 for the stock market. It is more challenging than pretty 0:03:57.520 --> 0:03:59.960 much any other outcome you can have. But it also 0:04:00.080 --> 0:04:03.080 so isn't actually as bad as people might expect. It 0:04:03.080 --> 0:04:04.920 doesn't mean a kind of run for the hills ditch 0:04:04.920 --> 0:04:08.600 stocks scenario. On average. Actually the stock market managed to 0:04:08.680 --> 0:04:12.400 roughly match inflation. Isn't terrible if it's a high inflation environment, 0:04:12.720 --> 0:04:14.800 And actually, more often than not. It still beats cash, 0:04:15.080 --> 0:04:19.400 so harder going, less conviction of high returns, but actually 0:04:19.400 --> 0:04:22.480 still not a terrible outcome for stock market investors. So 0:04:22.520 --> 0:04:24.599 a bit of reassurance. I think there, okay. 0:04:24.640 --> 0:04:26.640 And was that the case in the seventies. If you 0:04:27.240 --> 0:04:29.880 had equitied at the beginning of the nineteen seventies in 0:04:29.960 --> 0:04:32.600 the UK and you still have the same ones at 0:04:32.600 --> 0:04:34.880 the end of the nineteen seventies, would you have been 0:04:34.880 --> 0:04:35.400 an inflection? 0:04:35.839 --> 0:04:37.400 So I was looking at this more for the US 0:04:37.400 --> 0:04:38.800 because I had the data going all the way back 0:04:38.800 --> 0:04:42.159 to the nineteen twenties. The unfortunate reality of these things 0:04:42.200 --> 0:04:44.120 is that you get a better, longer data set for 0:04:44.200 --> 0:04:46.640 the US. I love a good data set, but there's 0:04:46.640 --> 0:04:48.800 always a risk that the future is not going to 0:04:48.800 --> 0:04:51.400 be like the past, so we have to have caveat caveat, caveat. 0:04:51.680 --> 0:04:53.760 But what I did was I looked at any calendar 0:04:53.839 --> 0:04:56.760 years when inflation was above its ten year average and 0:04:56.800 --> 0:04:59.120 growth was below its ten year average, and then looked 0:04:59.120 --> 0:05:03.000 at the performance of of stocks bonds the sixty forty portfolio. 0:05:03.440 --> 0:05:07.240 I said, stocks normally managed to match inflation beat cash. YEA, 0:05:07.600 --> 0:05:11.599 bonds tough, It's a tough environment. If your interest payments 0:05:11.600 --> 0:05:13.800 are fixed and inflation goes through the roof, that is 0:05:13.839 --> 0:05:18.080 clearly not a great outcome. But they kind of traditional 0:05:18.160 --> 0:05:22.080 sixty forty portfolios are really interesting ones. So it feels 0:05:22.080 --> 0:05:24.360 like pretty much every single years you read a ton 0:05:24.400 --> 0:05:26.400 of articles which say the death of the sixty forty. 0:05:26.480 --> 0:05:28.960 This portfolio, which lots of people rely on, is just 0:05:29.000 --> 0:05:32.600 a kind of base case balanced portfolio. People saying it's 0:05:32.760 --> 0:05:34.719 time for it to die. It's not going to work anymore. 0:05:35.240 --> 0:05:39.680 And again sixty forty finds it challenging stagflation when I 0:05:39.720 --> 0:05:43.119 looked at the data. But actually it has a better 0:05:43.200 --> 0:05:45.520 media and outcome than either stocks and bonds and isolation, 0:05:46.279 --> 0:05:49.640 and it actually outperforms cash more often than not too 0:05:49.839 --> 0:05:53.200 so I think that again bonds, it's not great for bonds, 0:05:53.480 --> 0:05:55.159 but I don't think we should just rip up the 0:05:55.160 --> 0:05:58.440 whole investment playbook and actually the portfolios which have served 0:05:58.480 --> 0:06:01.479 investors pretty well. The sixty to forty still has a 0:06:01.480 --> 0:06:05.000 place you're not going to get as good diversification benefits. 0:06:05.240 --> 0:06:06.960 But it also doesn't mean that you should consign it 0:06:06.960 --> 0:06:07.800 to the dustbin either. 0:06:08.480 --> 0:06:10.320 But it's a matter of when we say the sixty 0:06:10.320 --> 0:06:12.280 to forty, and we're talking about a portfolio that is 0:06:12.320 --> 0:06:15.880 forty percent bonds and sixty percent equities. Both those things, 0:06:15.920 --> 0:06:22.000 bonds and equities, cover a vast universe of potential choices. Yes, 0:06:22.240 --> 0:06:24.520 so when we say in a stag pleasure and re environment, 0:06:24.920 --> 0:06:27.839 you can still have a sixty to forty portfolio, that 0:06:28.000 --> 0:06:29.920 forty percent that you might have in the bond market, 0:06:30.000 --> 0:06:31.359 what are we talking about? 0:06:32.080 --> 0:06:34.559 So in the forty there was initially just talking about 0:06:34.600 --> 0:06:37.520 long dated government bonds. You're absolutely right that there is 0:06:37.560 --> 0:06:40.360 a whole universe of things under each of these umbrellas. 0:06:40.360 --> 0:06:42.240 And that's where I think you can say, yes, your 0:06:42.279 --> 0:06:45.320 standard just I don't know, equities plus sixty percent equities 0:06:45.320 --> 0:06:48.680 plus forty percent long dated bonds, it's okay, But you 0:06:48.720 --> 0:06:51.440 can do better in both of those. So in bonds, 0:06:51.480 --> 0:06:53.880 a pretty simple hack actually has been just to invest 0:06:53.880 --> 0:06:57.039 in shorter dated bonds. Shorter daty bonds. Their prices are 0:06:57.120 --> 0:06:59.960 less sensitive to what happens to interest rates, so you've 0:07:00.080 --> 0:07:03.880 got a more steady source of return. And historically just 0:07:03.920 --> 0:07:06.080 doing that one simple trick would actually have led to 0:07:06.440 --> 0:07:08.000 better risk adjusted returns. 0:07:08.120 --> 0:07:10.400 But when you say show to sorry, how's show to you? Toking. 0:07:11.200 --> 0:07:13.360 I think so five year bonds as opposed to twenty 0:07:13.440 --> 0:07:14.400 year bonds. 0:07:14.120 --> 0:07:16.200 Five year bonds as opposed to twenty. 0:07:16.120 --> 0:07:18.800 Yes, exactly. So people might be normally have invested in 0:07:18.920 --> 0:07:21.560 very long dated ones as a kind of risk hedging asset. 0:07:22.000 --> 0:07:23.840 But if you're going to something that's nearer to kind 0:07:23.880 --> 0:07:26.800 of five year point then actually or even shorter than that, 0:07:27.120 --> 0:07:28.920 then prices are not going to move around as much, 0:07:28.960 --> 0:07:31.239 They're going to be less volatile. You'll have a greater 0:07:31.280 --> 0:07:33.360 certainty of what your return is going to be, and 0:07:33.520 --> 0:07:36.680 historically your risk adjusted returns have been better. I'm talking 0:07:36.760 --> 0:07:39.760 government bonding. The same applies in corporate bonds. If you're 0:07:39.760 --> 0:07:42.520 investing in a corporate bond portfolio, if you decide to 0:07:42.520 --> 0:07:45.240 invest in shorter dated ones, so again, something around the 0:07:45.240 --> 0:07:47.880 five year point or even shorter, you can have greater 0:07:47.960 --> 0:07:50.000 confidence in what your returns are going to be than 0:07:50.040 --> 0:07:51.680 if you're investing in longer dated ones. 0:07:52.000 --> 0:07:56.240 That makes complete sense. But most ordinary investors, they won't 0:07:56.280 --> 0:07:58.400 be investing in individual bonds. I'll be investing in a 0:07:58.400 --> 0:08:03.720 bond fund, right so it's hard for an individual investor 0:08:03.760 --> 0:08:07.360 to have any control of the duration of the bonds 0:08:07.360 --> 0:08:07.880 they hold. 0:08:08.000 --> 0:08:11.280 Right, you say that, but actually are there are plenty 0:08:11.320 --> 0:08:14.560 of funds out there which we'll invest in different maturity buckets, 0:08:14.640 --> 0:08:16.640 so you can have ones that focus more on shorter 0:08:16.760 --> 0:08:19.720 dated corporate bonds for example. Yeah, we manage portfolios like 0:08:19.720 --> 0:08:21.760 that at Schroders, so we have ones that are for 0:08:22.000 --> 0:08:26.560 different clients who are seeking different exposures, different outcomes they 0:08:26.520 --> 0:08:29.640 are looking for. Schroders manage short dated corporate bond funds. 0:08:29.680 --> 0:08:32.120 Lots of other competitors in the market will as well. 0:08:32.520 --> 0:08:35.360 You can probably invest in ETFs which target different parts 0:08:35.400 --> 0:08:37.240 of the market as well. So I think it's I 0:08:37.240 --> 0:08:39.160 think you're right that people might just have invested in 0:08:39.200 --> 0:08:41.400 a let's call it a corporate bond fund, but there 0:08:41.480 --> 0:08:43.959 is a lot more available out there than just those 0:08:44.040 --> 0:08:44.840 kind of vanilla ones. 0:08:45.120 --> 0:08:47.120 Okay, all right, So that takes care of of a 0:08:47.280 --> 0:08:51.000 forty percent of a word about stipulation. Let's look at 0:08:51.040 --> 0:08:54.240 the equity component, which I think most people find easier 0:08:54.280 --> 0:08:57.520 to manage somehow. What can you do inside your equity 0:08:57.600 --> 0:09:01.000 portfolio to only have the bits that will withstand this 0:09:01.160 --> 0:09:01.920 environment better. 0:09:02.520 --> 0:09:04.040 Yeah, So again I had to look at the different 0:09:04.200 --> 0:09:07.280 styles and the different sectors. So styles looking at say 0:09:07.360 --> 0:09:10.840 value versus growth, small cap versus large cap, high quality 0:09:10.960 --> 0:09:14.720 versus low quality, and different sectors too, and some of 0:09:14.720 --> 0:09:18.480 these are intuitive, like more defensive sectors typically do well, 0:09:18.600 --> 0:09:22.640 So things like healthcare, utilities, consumer staples, the kind of 0:09:22.679 --> 0:09:25.679 things that you buy anyway no matter what is happening, 0:09:25.840 --> 0:09:27.559 So it doesn't really matter what happens to growth, you're 0:09:27.559 --> 0:09:29.160 still going to be needing to buy some of these things. 0:09:29.679 --> 0:09:34.160 Energy equities. Again, it maybe seems obvious, but energy equities 0:09:34.200 --> 0:09:37.240 because if energy prices are causing higher inflation while the 0:09:37.240 --> 0:09:39.600 company's profits are going to go up, blocks it's maybe 0:09:39.600 --> 0:09:42.400 a little bit more interesting on the style point. So 0:09:43.360 --> 0:09:47.200 value tends to outperform growth, So value companies, So many 0:09:47.640 --> 0:09:51.880 companies which trade on cheaper valuation metrics often unloved in 0:09:51.920 --> 0:09:54.440 some way. Whereas your growth companies are maybe your exciting, 0:09:54.480 --> 0:09:56.800 sexy tech companies that people think are going to grow 0:09:56.840 --> 0:09:59.320 their awning super fast in future. The growth ones tend 0:09:59.320 --> 0:10:02.280 to struggle more relative to value. Partly, I guess because 0:10:02.280 --> 0:10:05.520 maybe that growth doesn't come through demand is maybe weaker, 0:10:06.040 --> 0:10:10.000 partly because sentiment turned against them, and also partly is 0:10:10.000 --> 0:10:13.600 because valuations tend to fall in this environment. So even 0:10:13.640 --> 0:10:15.120 if you assume that there's going to be an a 0:10:15.320 --> 0:10:17.360 supercycle and that's going to support the growth of the 0:10:17.360 --> 0:10:20.479 big tech companies, there is still a risk to the valuations, 0:10:20.480 --> 0:10:22.520 and that's what we've seen recently, to be honest, is 0:10:22.559 --> 0:10:25.280 quite incredible. If you look at companies like in Nvidia, 0:10:25.800 --> 0:10:28.720 it's price earnings multiple today is the lowest it's been 0:10:28.720 --> 0:10:31.520 for a decade, which when you consider we're in the 0:10:31.520 --> 0:10:34.960 middle of an AI boom cycle, one of the companies 0:10:34.960 --> 0:10:37.040 that's at the very center of that cycle, for it 0:10:37.080 --> 0:10:39.280 to be at a decade low in terms of price 0:10:39.280 --> 0:10:42.600 earnings multiple is pretty extraordinary. And it's the same if 0:10:42.600 --> 0:10:46.600 you look across Alphabet, Meta, Amazon, they're all trading actually 0:10:46.720 --> 0:10:49.600 pretty low valuations compared with their ten year histories. So 0:10:49.920 --> 0:10:51.760 we're seeing a valuation impact already. 0:10:52.160 --> 0:10:54.720 Is there a suggestion from people that they believe that 0:10:54.720 --> 0:10:57.280 there's an earnings bubble here and that for these earnings 0:10:57.320 --> 0:11:00.079 aren't sustainabletons and the growth in these earnings is that 0:11:00.080 --> 0:11:00.840 it's sustainable. 0:11:01.240 --> 0:11:03.600 I think it suggests that they're skepticism there right now. Yeah, 0:11:03.640 --> 0:11:06.520 so we're seeing a huge amount of capex. Actually, revenues 0:11:06.559 --> 0:11:09.560 are continuing to surprise to the upside, like there are 0:11:09.640 --> 0:11:13.040 a lot of revenues coming through. Ernie's growth forecasts are 0:11:13.720 --> 0:11:16.040 off the scale for some of these companies, but I 0:11:16.040 --> 0:11:18.040 guess the market is saying, we don't think that is 0:11:18.080 --> 0:11:20.240 going to be able to last longer. But you also 0:11:20.280 --> 0:11:23.360 find there's a transmission mechanism when interest rates go up, 0:11:23.440 --> 0:11:26.439 So when bondiodes go up, stock market valuations tend to 0:11:26.480 --> 0:11:28.839 fall as well because of the way the analysts value 0:11:28.880 --> 0:11:31.439 these companies in a kind of discounted cash flow approach. 0:11:31.679 --> 0:11:34.760 So when you've seen interest rates going up partly because 0:11:34.840 --> 0:11:37.440 inflation is higher, then you see that that starts to 0:11:37.440 --> 0:11:39.840 have an impact on the valuation of stocks. And if 0:11:39.880 --> 0:11:42.679 you're starting on a very high valuation, then there's greater 0:11:42.800 --> 0:11:46.280 risk of that coming unstuck. Why this gets really important 0:11:46.360 --> 0:11:48.280 is when you think about how most people are invested. 0:11:48.679 --> 0:11:50.480 So you look at the global stock market today, You've 0:11:50.480 --> 0:11:53.800 got about seventy percent of the developed market in the US. 0:11:54.000 --> 0:11:57.040 You've got the five biggest US stocks have the same 0:11:57.040 --> 0:11:59.920 weight or bigger weight than the next five biggest countries 0:12:00.040 --> 0:12:02.480 in the global stock market. All aaddy together, you've got 0:12:02.520 --> 0:12:04.480 a huge bet on the US, a huge bet on 0:12:04.559 --> 0:12:08.240 technology and actually the bets of the market that might 0:12:08.240 --> 0:12:10.640 be expected to do well well. If we're talking about value, 0:12:10.720 --> 0:12:14.560 we're talking about energy equities, if we're talking about defensive sectors, 0:12:15.360 --> 0:12:17.920 they're not what you're really getting exposure to in the 0:12:17.920 --> 0:12:21.560 global market. I think people like to think and it 0:12:21.720 --> 0:12:23.760 was once the case that you invest in the portfolio 0:12:23.800 --> 0:12:27.120 global stocks and you've got a nice diversified portfolio. It 0:12:27.280 --> 0:12:29.880 is rubbish today it simply isn't happening. So if you 0:12:29.960 --> 0:12:33.040 want to get diversification, you have to work a lot harder. 0:12:33.240 --> 0:12:35.760 You have to look away from the US. But most 0:12:35.800 --> 0:12:37.680 of your money is sitting in the US on a 0:12:37.679 --> 0:12:39.280 one way bet, so. 0:12:39.240 --> 0:12:41.080 You've got to get out of that. You've got to 0:12:41.080 --> 0:12:45.560 move it into different sectors. If you're thinking about a 0:12:45.640 --> 0:12:49.480 circuflationary environment, you might want to move into more in 0:12:49.520 --> 0:12:51.400 the way of value stocks. You might want to move 0:12:51.400 --> 0:12:56.880 into the energy sector defensive. And then there's also, well 0:12:56.880 --> 0:12:58.480 there has been I don't know if this turned up 0:12:58.520 --> 0:13:03.679 in your research, but a dynamic wherebys small caps outperform 0:13:03.880 --> 0:13:06.400 large caps and stagflation reenvironments. 0:13:06.679 --> 0:13:08.839 I didn't look at the small cap bit particularly when 0:13:08.840 --> 0:13:10.520 I was looking at this, but the other one that 0:13:10.559 --> 0:13:13.600 did do really well was quality. So quality companies are 0:13:13.640 --> 0:13:18.840 ones that have more stable balance sheets, more stable profit margins, 0:13:18.840 --> 0:13:21.760 profit growth consistencies, what you're looking for. I always think 0:13:21.760 --> 0:13:24.120 about the companies that won't break, and I guess in 0:13:24.120 --> 0:13:26.960 an environment worth everything's a little bit more uncertain and volatile, 0:13:27.360 --> 0:13:31.160 that stability that you get from quality actually becomes quite valuable. 0:13:31.480 --> 0:13:33.520 And quality companies have gone through one of the worst 0:13:33.559 --> 0:13:35.800 three year draw downs in terms of performance that they've 0:13:35.800 --> 0:13:38.520 ever had recently. So if you're thinking about things that 0:13:38.640 --> 0:13:41.760 might do well in stagflation, if it's also one that's 0:13:41.800 --> 0:13:44.600 performed pretty badly, so valuations have moved in its favor. 0:13:45.040 --> 0:13:47.320 Kind of qualities are a really interesting place to be looking. 0:13:47.400 --> 0:13:49.560 And there's loads of different funds out there which focus 0:13:49.600 --> 0:13:52.560 on quality or quality growth as a style as well. 0:14:03.640 --> 0:14:05.480 When you look at the list of things that performed 0:14:05.480 --> 0:14:07.880 well in the US and the seventies and in the 0:14:08.000 --> 0:14:11.920 UK in the seventies, the list is of a very 0:14:12.040 --> 0:14:17.559 non equity and land. Its diamonds fine, odd, it's gold. 0:14:17.960 --> 0:14:20.120 It was antique furniture back in the day. You can't 0:14:20.120 --> 0:14:22.640 do that happening again. But who knows, who knows? 0:14:22.680 --> 0:14:23.160 I'm going to be. 0:14:23.200 --> 0:14:26.680 Lovely if it did. Did gold pop up in your studies? 0:14:27.280 --> 0:14:31.960 So gold did. So Gold is an interesting one. It's 0:14:32.040 --> 0:14:36.400 consistency of performance isn't necessarily great, but its average performance 0:14:36.400 --> 0:14:38.560 actually is very good, and you have to almost think 0:14:38.600 --> 0:14:40.880 what does that mean. It means it's less reliable, and 0:14:40.920 --> 0:14:43.080 I guess we're seeing that abit this year. But when 0:14:43.080 --> 0:14:45.800 it does perform well, it performs very well. So again 0:14:45.920 --> 0:14:48.720 it is worth considering as part of your portfolio. But 0:14:48.880 --> 0:14:51.520 don't assume that it's guaranteed to go up in value, 0:14:51.560 --> 0:14:53.600 because it has some years where actually it struggles quite 0:14:53.600 --> 0:14:57.240 a lot. Gold is good real essays. Things like real 0:14:57.320 --> 0:15:00.480 estate are interesting. There's often an inflation linkage real estate 0:15:00.520 --> 0:15:03.480 rental leases, which is great on the income side, but 0:15:03.560 --> 0:15:07.560 if your highly leveraged real estate transaction, well, actually, if 0:15:07.600 --> 0:15:09.160 your cost of borrowing is going up, then that's a 0:15:09.160 --> 0:15:11.840 problem for you. So it's a bit some activity. I 0:15:11.840 --> 0:15:14.240 think there it's at understanding the risks you're taking on. 0:15:14.560 --> 0:15:17.680 If you're understanding the risk of the tenants, then maybe 0:15:17.760 --> 0:15:20.400 twenty years ago people just used to think, I don't know, 0:15:21.280 --> 0:15:24.200 a fund manager would buy something, they would just lease 0:15:24.240 --> 0:15:25.880 it and forget it. Whereas I think you have to 0:15:25.880 --> 0:15:27.840 get much closer to the risk of the underlying tenant 0:15:27.880 --> 0:15:30.320 and the financial risk of the transaction these days to 0:15:30.360 --> 0:15:31.520 be able to know whether you're going to get the 0:15:31.560 --> 0:15:33.840 returns in this kind of environment. 0:15:34.640 --> 0:15:38.320 Okay, when we look at markets as a whole, and 0:15:38.360 --> 0:15:40.960 we've talked about how everyone is horribly ever exposed to 0:15:41.000 --> 0:15:44.080 the US and horribly ever exposed to technology, whether they 0:15:44.280 --> 0:15:47.600 want to be or not, that's just the default which 0:15:48.240 --> 0:15:51.960 markets geographically what people want to move into. And we 0:15:52.120 --> 0:15:56.120 used to say consistently UK equity is the cheapest out 0:15:56.160 --> 0:15:59.840 there by them before somebody else does. And they're still inexpensive, 0:16:00.080 --> 0:16:02.320 the inexpensive across the board, and we know that because 0:16:02.400 --> 0:16:04.480 foreign investors keep trying to take them over. In fact 0:16:04.560 --> 0:16:06.760 do keep taking them over, and so does private equity. 0:16:06.760 --> 0:16:09.720 So there's still reasonably good value. But on the other hand, 0:16:09.760 --> 0:16:12.600 they're not a cheapest they were, and with the possibility 0:16:12.640 --> 0:16:16.240 of associating eleven thousand, suddenly it all seems like quite 0:16:16.240 --> 0:16:20.040 a big move quite quickly. Are you still thinking that 0:16:20.080 --> 0:16:21.640 the UK market is attractive? 0:16:22.120 --> 0:16:24.360 Yeah, I think on a relative valuation basis, the UK 0:16:24.440 --> 0:16:26.760 still is cheap. Here. I guess you've got demand from 0:16:26.800 --> 0:16:29.600 foreign investors. Demand from private equity also buybacks as the 0:16:29.640 --> 0:16:32.960 other one, so share buybacks. The UK is now the 0:16:32.960 --> 0:16:35.560 share buy back capital of the world, so UK more 0:16:35.680 --> 0:16:38.520 UK companies are buying back their shares in bulk than 0:16:38.680 --> 0:16:41.240 the US, which unheard over a few years ago, so 0:16:41.280 --> 0:16:43.360 that there's a lot of demand there. We still haven't 0:16:43.360 --> 0:16:46.560 really got the retail investor demand side. Fun Flows from 0:16:46.560 --> 0:16:49.520 retail investors are still not coming through, so that's something 0:16:49.520 --> 0:16:51.680 that I would love to see happen. I feel like 0:16:52.600 --> 0:16:55.080 we're a bit to downbeat on the UK stock market 0:16:55.120 --> 0:16:56.720 in the UK economy, like you just have to open 0:16:56.720 --> 0:16:58.480 your social media for the amount of doom and gloomy 0:16:58.480 --> 0:17:00.320 you read about it. But I think where the venture 0:17:00.320 --> 0:17:02.960 capital capital of Europe here in the UK, and we're 0:17:03.000 --> 0:17:06.240 great at producing unicorns. We have lots of fantastic research institutions. 0:17:06.359 --> 0:17:09.480 We've got great listed companies that are actually really good 0:17:09.480 --> 0:17:11.000 at what they do. But we spend all our time 0:17:11.000 --> 0:17:12.959 till on itselves how terrible we are, and that can 0:17:13.000 --> 0:17:15.040 be a bit self fulfilling. So I'd just like to 0:17:15.080 --> 0:17:17.120 put the kind of great into Britain back a little bit. 0:17:17.440 --> 0:17:20.159 Well, lots of things are kind of terrible to be fair. 0:17:21.640 --> 0:17:23.560 Actually, there's one thing that I do think, is it. 0:17:23.680 --> 0:17:27.120 So you were talking about technology. One risk is staculation. 0:17:27.200 --> 0:17:30.680 Another risk is, Okay, you have got way more exposure 0:17:30.680 --> 0:17:33.280 to technology than you probably realize. It's not just how 0:17:33.320 --> 0:17:36.480 much you've got the tech sector, because Amazon, Tesla or 0:17:36.520 --> 0:17:41.600 Consumer Discretionary Alphabet are actually in communication services. So there's 0:17:41.640 --> 0:17:43.879 a bunch of stuff which are not called IT but 0:17:43.960 --> 0:17:46.720 which are tech companies really, and that takes a number 0:17:46.760 --> 0:17:49.760 of higher But then you've got things like stuff which 0:17:49.760 --> 0:17:52.520 people would have thought of as being nice defensive sectors 0:17:52.520 --> 0:17:55.160 which are actually, to my mind, starting to become more 0:17:55.160 --> 0:17:59.359 correlated with AI. So utilities, a lot of utilities are 0:17:59.359 --> 0:18:01.320 the picks and shovel of the AI trade because the 0:18:01.720 --> 0:18:03.560 energy needs are so great. And if you look at 0:18:03.560 --> 0:18:06.800 the performance of some of the US utilities, they're like memestocks. 0:18:06.800 --> 0:18:09.280 It's like we're talking hundreds of percent returns. This is 0:18:09.320 --> 0:18:13.040 not boring just dividend plays. Even like real estate. One 0:18:13.080 --> 0:18:15.800 of the biggest sectors of the reached market is data centers. 0:18:16.280 --> 0:18:19.240 So there are more parts of the portfolio which people 0:18:19.680 --> 0:18:22.240 might have traditionally thought of would hedge AI risk or 0:18:22.240 --> 0:18:25.159 tech risk which are actually now going to become more correlated. 0:18:25.359 --> 0:18:29.240 So the question then, if you're worried about an AI selloff, 0:18:29.320 --> 0:18:31.879 where can you hide? I'm not convinced that just simple 0:18:31.920 --> 0:18:34.640 sectors will do it, because it's getting it everywhere. Yeah, 0:18:35.040 --> 0:18:37.960 I can make a good case for international diversification in 0:18:38.040 --> 0:18:41.360 terms of valuations outlook everybody being to downbeat about non 0:18:41.440 --> 0:18:45.720 US companies. But do I think that international diversification will 0:18:45.720 --> 0:18:47.720 bail you out if there's an AI driven sell off? 0:18:48.080 --> 0:18:50.800 I'm skeptical. The biggest stocks in em are all massive 0:18:50.840 --> 0:18:53.320 AI tech plays, so you're going to get hurt there. 0:18:54.000 --> 0:18:55.480 And then I spent a lot of time doing work 0:18:55.520 --> 0:18:57.159 I think, are there any parts of the market that 0:18:57.240 --> 0:19:01.520 actually could hedge that risk? Again prepared, don't predict, not 0:19:01.560 --> 0:19:03.560 saying it will happen, but what might do well if 0:19:03.600 --> 0:19:06.240 it falls over? And one area that I found actually 0:19:06.600 --> 0:19:08.959 was value equities. And I look back at data going 0:19:08.960 --> 0:19:11.040 all the way back to nineteen ninety six, and I 0:19:11.119 --> 0:19:14.320 used semiconductors just as a proxy for AI stocks and 0:19:14.400 --> 0:19:17.520 looked at all the quarters where semiconductors fell in value, and 0:19:18.359 --> 0:19:21.760 when they fell in value, the average fall was twelve percent. 0:19:22.119 --> 0:19:25.480 The average fall for value equities was zero, so flat, 0:19:25.960 --> 0:19:29.200 and maybe you're worried about big falls, not just any fall. 0:19:29.480 --> 0:19:31.280 So I looked at falls that were more than five percent, 0:19:31.760 --> 0:19:33.840 and then actually, on average you'd lose fifteen percent in 0:19:33.880 --> 0:19:38.760 semiconductors and one in value. So value won't always work, 0:19:39.160 --> 0:19:42.040