WEBVTT - Why You Should Stop Selling UK Equities 0:00:00.160 --> 0:00:03.880 John. Things are beginning to break, aren't they. We've talked 0:00:03.920 --> 0:00:08.520 about how interest rates rise after interest rates who've been 0:00:08.520 --> 0:00:11.639 falling the main for kind of footy years or so. 0:00:12.200 --> 0:00:16.440 Everything is geared around interest rates being lower, going lower. Still. 0:00:17.960 --> 0:00:21.440 Entire industry is sectors, and particularly the entire financial industry. 0:00:21.920 --> 0:00:24.840 This is what they're used to. And it's turned around 0:00:25.320 --> 0:00:29.440 interest rates beginning to go up. Stuff beginning to break it. 0:00:29.480 --> 0:00:31.840 Maybe the first clue was, you know, the LDI thing 0:00:31.920 --> 0:00:35.440 under the short lived trust government. Stuff beginning to break. 0:00:36.000 --> 0:00:43.800 And then credit sees definitely broken. Yeah, yeah, fairly comprehensively broken. 0:00:44.880 --> 0:00:49.319 And then there is just tiny little things, more kind 0:00:49.360 --> 0:00:52.400 of cracks at the moment, but things that you look 0:00:52.400 --> 0:00:54.800 at and you think, well that might turn into a fracture, 0:00:55.520 --> 0:00:58.720 you know, and then it might actually break looking at 0:01:00.440 --> 0:01:05.000 So Scottish Mortgage, let's talk about Scottish mortgage. Let's talk 0:01:05.000 --> 0:01:08.760 about Scottish mortgage. Now this is barely give it as 0:01:08.760 --> 0:01:12.600 a fantastic company. Scottish Mortgage has always been an absolutely 0:01:12.760 --> 0:01:15.400 brilliant trust. And we've talked about it for years and 0:01:15.440 --> 0:01:18.039 we've written about it for years, and I hold it 0:01:18.120 --> 0:01:19.800 my portfolio. I don't know if you do it. Pretty 0:01:19.880 --> 0:01:24.440 much every retail investor in the UK does hold it, 0:01:24.480 --> 0:01:26.959 and it's made this extraordinary name for itself on the 0:01:26.959 --> 0:01:30.760 back of investing in growth companies mainly tech but you know, 0:01:30.840 --> 0:01:34.240 let's just call it growth super high growth, both listed 0:01:34.400 --> 0:01:38.759 and unlisted, with this idea that you know, you should 0:01:38.800 --> 0:01:41.280 hold unlisted companies as well as listed if you're going 0:01:41.280 --> 0:01:45.000 to be an exciting growth growth spaces. Because companies don't 0:01:45.040 --> 0:01:47.720 list like they used to, they stay private for much longer. 0:01:47.880 --> 0:01:50.040 There's lots of exciting stuff going on down there, and 0:01:50.080 --> 0:01:53.920 so why should you differentiate between the listed and the unlisted? 0:01:54.760 --> 0:01:58.800 And maybe this week we kind of found out. I mean, 0:01:58.880 --> 0:02:02.080 there's a there's all been a logic to that, but 0:02:02.320 --> 0:02:08.360 I think the well, there's there's a couple things. The 0:02:08.480 --> 0:02:14.480 philosophy that went or goes with Scottish Mortgage and similar companies, 0:02:14.520 --> 0:02:19.959 but Scottish Mortgage in particular, is that one about all 0:02:20.000 --> 0:02:21.920 of the tons in the stock market come from like 0:02:21.960 --> 0:02:26.959 a handful accompanies. Four percent, yes, and so you should 0:02:26.960 --> 0:02:30.840 just buy the four percent. One reason I've always slightly 0:02:30.840 --> 0:02:35.519 struggled with that theory is how do you choose the 0:02:35.560 --> 0:02:38.960 four percent? But Scottish mortgage did a very good job 0:02:38.960 --> 0:02:44.800 of it, for right to interest rates started to rise. Yeah. Well, 0:02:44.800 --> 0:02:47.040 one of the things they always said, and let's not forget, 0:02:47.120 --> 0:02:48.679 by the way, on this podcast that we did it 0:02:48.760 --> 0:02:52.679 interview TOMPs later become manager of that fund eight weeks ago, 0:02:52.800 --> 0:02:55.160 nine weeks ago and maybe longer than that, but relatively 0:02:55.160 --> 0:02:58.200 weakning within the last three months. We interviewed him and 0:02:58.360 --> 0:03:02.160 one of the things he said was that because of 0:03:02.200 --> 0:03:06.080 this idea that all the returns come from four percent 0:03:06.280 --> 0:03:11.120 of the companies, everything in his portfolio was the wrong price, 0:03:11.680 --> 0:03:14.240 the wrong price. So the majority of the stuff in 0:03:14.240 --> 0:03:18.880 the portfolio was grotesquely overpriced because it would never end 0:03:18.960 --> 0:03:21.600 up being part of that four percent. But the companies 0:03:21.639 --> 0:03:26.680 in the portfolio that are the four percent were hideously underpriced. 0:03:26.960 --> 0:03:31.800 So nothing in the portfolio is the correct price. But 0:03:31.880 --> 0:03:34.440 the risk, of course is that the four percent aren't 0:03:34.520 --> 0:03:37.280 in there. Yeah, I mean, that's that is kind of 0:03:37.280 --> 0:03:40.920 what I've always felt the fundamental problem with that app 0:03:41.080 --> 0:03:45.640 which but I think I suppose the weird thing is 0:03:45.640 --> 0:03:53.080 it's also it's the diametric corpus of passive investing and 0:03:53.240 --> 0:03:56.760 buy an an index. It's sort of the ultimate technically 0:03:56.840 --> 0:04:00.760 speaking an active investment in some ways to say there's 0:04:00.840 --> 0:04:03.840 only like, you know, kind of lessons to a fifth 0:04:04.280 --> 0:04:07.480 licensed five percent of companies actually make all of the tons, 0:04:07.600 --> 0:04:10.080 and I am the person who can choose those points 0:04:10.840 --> 0:04:13.880 um and then but then you're also kind of delving 0:04:14.840 --> 0:04:17.480 amid the area that you think they're most likely to 0:04:17.560 --> 0:04:20.240 come from, but the promise that that area kind of 0:04:20.880 --> 0:04:25.480 largely thrives under certain conditions, and then those conditions are changing, 0:04:25.800 --> 0:04:28.080 I don't know what. And then growth appears in other areas, 0:04:28.720 --> 0:04:31.799 all that surprise growth and the energy industry price growth 0:04:31.800 --> 0:04:35.960 in oil. But it's growth, right. But the problem is 0:04:36.000 --> 0:04:39.960 Gottish mortgage, and it's not unique gottig mortgage. Of course, 0:04:40.760 --> 0:04:45.000 is that with listed equities, you know the price. You 0:04:45.040 --> 0:04:47.000 don't have to worry about what they're worth because the 0:04:47.040 --> 0:04:49.159 market tells you. You You might not agree with the market. Yeah, 0:04:49.279 --> 0:04:51.120 but the market gave you the price, and it gives 0:04:51.160 --> 0:04:53.960 it to you every day, multiple times every day. No 0:04:54.040 --> 0:04:56.960 one can ever be in any doubt what the price is. 0:04:57.680 --> 0:05:01.720 Now with the unlisted investments, nobody knows the price. Nobody knows. 0:05:01.760 --> 0:05:04.080 The press who can possibly know what these things are worth? 0:05:04.200 --> 0:05:06.880 Nobody knows. So there's always the suspicion in the market 0:05:07.400 --> 0:05:10.400 right now, when thing's going down that maybe they they're 0:05:10.400 --> 0:05:12.560 on the books at the wrong price. No one cares, 0:05:12.800 --> 0:05:15.120 No one cares what you value a private equity investment out. 0:05:15.120 --> 0:05:17.160 When everything's going up up a lot is great. We 0:05:17.279 --> 0:05:19.600 like up a lot, right, we don't need any precision 0:05:19.839 --> 0:05:23.480 up a lot, hooray, right, yes, But when things are 0:05:23.480 --> 0:05:27.480 going down and the valuation is down a little bit, 0:05:27.720 --> 0:05:29.960 down a little bit, like, well, that's not enough any 0:05:29.960 --> 0:05:31.920 more precision than that? Is it down a little bit down? 0:05:31.920 --> 0:05:33.880 The medium matters it down a lot, and it was 0:05:33.920 --> 0:05:35.120 not downe a lot? Why is it not down the 0:05:35.160 --> 0:05:37.440 same as your listed investments? What's the difference? You invest 0:05:37.520 --> 0:05:39.719 in the same stuff, right, yeah, So why why would 0:05:39.760 --> 0:05:41.560 your unless the portfolio and not have gone down as 0:05:41.600 --> 0:05:44.360 much as your listed portfolio? And now I'm worried. Yeah, 0:05:44.520 --> 0:05:47.200 And I mean it's entirely understandable because the other problem 0:05:47.279 --> 0:05:50.279 is that because they're not unless these companies don't benefit 0:05:50.360 --> 0:05:52.640 from the one thing that well, there's a reason we 0:05:52.720 --> 0:05:54.960 like public markets and they're very good. Yeah, they're good. 0:05:55.000 --> 0:05:58.360 Are putting prices on things relative to everything else, So 0:05:58.400 --> 0:06:01.160 you're not getting the ways to make modes along with 0:06:01.640 --> 0:06:05.599 these unlisted companies. And then of course there's all kinds 0:06:05.640 --> 0:06:12.279 of things you can do. UM, but you can do 0:06:12.279 --> 0:06:14.919 all kinds of things to fight your fighters. But the 0:06:14.960 --> 0:06:17.120 other thing is that there's also not accusing anyone of 0:06:17.120 --> 0:06:22.120 that by the way, no, absolutely no basic stuffy leaning 0:06:22.160 --> 0:06:25.039 for years. They know what they're doing. But but but 0:06:25.080 --> 0:06:28.159 but it's a difficult environment. There's no actual answer. Yeah, 0:06:28.200 --> 0:06:30.400 and it's the other problem is that the kinds of 0:06:30.520 --> 0:06:36.080 companies that aren't listed are also smaller, and they're far 0:06:36.240 --> 0:06:40.000 more vulnerable. And so I I, you know, I would 0:06:40.320 --> 0:06:43.160 I don't have the data to hand. I am assuming 0:06:43.279 --> 0:06:48.120 that politician sounds like politician you can't recall it hasn't 0:06:48.160 --> 0:06:50.600 seen that full story earlier. They only told him the 0:06:50.600 --> 0:06:55.039 story today. It wasn't the time to investigate properly. We 0:06:55.120 --> 0:06:59.160 always go drinking a Friday. But they know the the 0:06:59.320 --> 0:07:03.279 unlisted start it's probably has a higher propensity to go 0:07:03.360 --> 0:07:06.880 to zero and unlested stuff. And the problem is that 0:07:06.920 --> 0:07:09.920 this is the kind of environment where stuff goes to zero. 0:07:10.440 --> 0:07:13.040 I think that's I actually think that's the main problem 0:07:13.280 --> 0:07:16.280 with this UM And as you said, doesn't just apply 0:07:16.320 --> 0:07:18.920 Scottish mortgage. It's all of the unlisted moment and our 0:07:18.960 --> 0:07:21.320 ideas in a little trouble at the moment too. You're 0:07:21.320 --> 0:07:26.280 about forty percent unlisted, you know. Anyway, Um, watching weight, 0:07:26.360 --> 0:07:28.720 watching weight. Things are breaking, but you know one has 0:07:28.720 --> 0:07:32.360 to failed. Sorry for I don't know, yes, probably sorry 0:07:32.360 --> 0:07:34.200 for that. The chair of Scottish movies you had to 0:07:34.240 --> 0:07:37.280 stand down this week, you know, and then she another 0:07:37.360 --> 0:07:40.800 victim a rising interest rates. Yeah, well this is it. 0:07:40.800 --> 0:07:43.480 It's it's interesting how you can say that the ultra 0:07:43.560 --> 0:07:48.120 low rate environment didn't just create Um, it's all like 0:07:48.240 --> 0:07:51.640 financial bubbles. There's a lot of tan gentle kind of 0:07:51.720 --> 0:07:55.560 bubbles that you know you can think of. I mean, 0:07:55.560 --> 0:08:00.680 I mean, I think there's a sattweeze sort of look 0:08:00.760 --> 0:08:03.040 to where you can say that Nicholas Durgeon's career is 0:08:03.040 --> 0:08:07.840 a kind of ultra low interest rate phenomenon. Um. You know, 0:08:07.880 --> 0:08:10.400 it's it's just interesting shity step down along at the 0:08:10.400 --> 0:08:12.400 same time as you know, credit sweet and all the 0:08:12.400 --> 0:08:16.200 rest of them are going bankrupt. So maybe perhaps I 0:08:16.720 --> 0:08:20.080 am reaching, but I think, well, now there's another one 0:08:20.120 --> 0:08:22.360 to wait and watch. There's a lot of watching and waiting. 0:08:22.720 --> 0:08:25.040 There was a lot of watching the day for those two. 0:08:25.160 --> 0:08:27.000 I mean, I think that we've we've had like a 0:08:27.160 --> 0:08:31.720 kind of like a fired blanket thrown over volatility, like 0:08:31.880 --> 0:08:37.400 in all areas of our life since the Great Financial Crisis, UM, 0:08:37.440 --> 0:08:39.280 in the form of kind of like ultra low interest 0:08:39.320 --> 0:08:45.480 rates and complete safety rails on the government bond market, 0:08:46.440 --> 0:08:51.400 the can equity markets, and that kind of suffocation of 0:08:51.520 --> 0:08:55.720 volatility has got to come out somewhere UM. And I 0:08:55.720 --> 0:08:57.560 think a lot of explains the whole sense because I 0:08:57.600 --> 0:08:59.959 was writing to the readers the other day, so it's 0:09:00.040 --> 0:09:02.480 talking to them about what decade is it most like? 0:09:02.840 --> 0:09:06.440 And you know, whiteb the twenty tents so flat and 0:09:06.960 --> 0:09:10.439 kind of miserable, really compared to even some of the 0:09:10.520 --> 0:09:13.040 late sixties and seven or so, even some time period 0:09:13.080 --> 0:09:16.360 like the seventies, which was nihilistic but quite energetic. It 0:09:16.480 --> 0:09:18.920 was the twenty tents was nihilistic and totally lacking in 0:09:19.120 --> 0:09:21.640 energy right in By the way, people don't tell me 0:09:21.640 --> 0:09:25.920 if you'd say night nihilistic or nihilistic nihilistic that's a 0:09:26.000 --> 0:09:32.400 good point. Moving on, sorry maybe, um Yeah, so where 0:09:32.400 --> 0:09:34.000 it was it? Yeah, I was just kind of coughing, 0:09:34.280 --> 0:09:36.000 So I was just going off in like a flight 0:09:36.040 --> 0:09:38.439 of fancy there. But but basically, yeah, this idea that 0:09:38.880 --> 0:09:41.960 almost as a like social mood has been kind of 0:09:42.440 --> 0:09:46.120 crushed as well, and that's enabled these kind of long 0:09:46.400 --> 0:09:51.160 periods of just trend following, whether that trend is Scottish 0:09:51.240 --> 0:09:55.319 nationalism or whether that trend is something like Scottish mortgage 0:09:55.520 --> 0:10:00.000 or growth triumphing over value. And so now that that's 0:09:59.760 --> 0:10:02.480 the interests are going up and they're kind of like 0:10:02.520 --> 0:10:07.120 putting bombs under things. A lot of the if you like, 0:10:07.480 --> 0:10:10.920 the philosophical offshoots of a lower interest rate era are 0:10:10.960 --> 0:10:14.680 also blowing up. Yeah, there's a book in that, John, 0:10:14.720 --> 0:10:16.319 I think are right. I think I think that the 0:10:16.440 --> 0:10:18.800 shift in interest rates doesn't change our economic life, it 0:10:18.880 --> 0:10:22.960 changes our political life, and it changes our cultural life. 0:10:22.960 --> 0:10:25.200 Follow on that, Uh, I think it's probably healthy. I 0:10:25.320 --> 0:10:28.360 absolutely agree, But I also think that that we need 0:10:28.400 --> 0:10:29.800 more than a podcast with us. We'll go for a 0:10:29.840 --> 0:10:32.960 drink when we're done here, Okay, the idea right, Moving on, 0:10:34.679 --> 0:10:37.160 Welcome to Marin Talks Money, the podcast in which people 0:10:37.160 --> 0:10:40.560 who know the markets explain the markets. I'm Marin Sumset Web. 0:10:40.679 --> 0:10:43.760 This week our guest is Ian Lance Temple Bar investment 0:10:43.760 --> 0:10:47.480 Trust portfolio manager. Now he is the exact opposite of 0:10:47.760 --> 0:10:49.679 John and I have just been talking about. He is 0:10:49.679 --> 0:10:53.240 a genuine value investor. I started by asking about a 0:10:53.240 --> 0:10:55.640 blog he wrote recently, the tankle of which was just 0:10:55.960 --> 0:10:59.280 stop selling UK equities. The numbers to us that there 0:10:59.360 --> 0:11:02.680 is a huge, a NonStop outflow from the UK equity market. 0:11:02.920 --> 0:11:05.959 So I asked Ian to tell us exactly what is happening. 0:11:10.240 --> 0:11:11.880 I think there are a couple of things. One of 0:11:11.920 --> 0:11:14.560 them is it's a long term phenomena, which is that, 0:11:14.920 --> 0:11:16.680 as I mentioned in the blog, if you went back 0:11:16.720 --> 0:11:20.240 to the nineties, I used to run balanced pension funds 0:11:20.320 --> 0:11:22.920 at a firm called Gartmore, and back back in those days, 0:11:22.960 --> 0:11:25.760 the big balance pension funds used to have about fifty 0:11:25.760 --> 0:11:29.720 five percent of their allocation in UK equities and probably 0:11:29.760 --> 0:11:32.800 another twenty percent or so in overseas equities. And that 0:11:32.840 --> 0:11:35.200 meant two things. Number one is they were massively overexposed 0:11:35.200 --> 0:11:37.720 to equities per se. But number two, they were probably 0:11:37.760 --> 0:11:41.040 massively overexposed to the UK. And then of course along 0:11:41.080 --> 0:11:43.720 comes two thousands. We have two things. We have the 0:11:43.760 --> 0:11:47.920 eputy markets go down quite aggressively. Interest rates also come down. 0:11:47.960 --> 0:11:50.240 That means the liabilities on the pension funds go up, 0:11:50.960 --> 0:11:54.319 so complete tastrophe for lots of pension funds and they 0:11:54.320 --> 0:11:57.720 were basically forced to adjust their positions quite aggressively. And 0:11:57.760 --> 0:12:00.920 what they did was they cut their exposure to equities, 0:12:01.200 --> 0:12:04.600 in particularly they cut their exposure to UK equities. And 0:12:04.679 --> 0:12:06.920 we have a chart in the in the blog which 0:12:07.000 --> 0:12:09.920 sort of tracks the decline of ukits from about fifty 0:12:09.960 --> 0:12:12.240 five percent down to it I think about five percent now. 0:12:12.679 --> 0:12:14.959 That's been the sort of long term trend. And then 0:12:15.040 --> 0:12:20.160 I think the secondary issue is just colossal barishes about 0:12:20.160 --> 0:12:23.600 the UK economy and that that probably started around the 0:12:23.640 --> 0:12:26.640 time of Brexit. And then you know, we've had we've 0:12:26.720 --> 0:12:29.320 just given investors, haven't we loads of excuses to be 0:12:29.360 --> 0:12:32.280 negative on the UK over the last few years that 0:12:32.320 --> 0:12:33.800 you know, the number of prime ministers we've had, the 0:12:33.880 --> 0:12:36.920 number of chancellors, we've had, the strikes in et cetera, 0:12:36.960 --> 0:12:40.480 et cetera. It is just sort of twenty four seven 0:12:40.920 --> 0:12:43.760 negative sentiment towards the UK. So I think I think 0:12:43.800 --> 0:12:48.000 that's been a factor as well, probably thrown in with 0:12:48.080 --> 0:12:51.000 the fact that the UK has high exposure to sectors 0:12:51.000 --> 0:12:53.920 that people don't really like or haven't really liked until recently, 0:12:54.000 --> 0:12:57.680 so banks, energy miners, and it's got low exposure to 0:12:57.640 --> 0:13:00.600 sext as people do like so technology. So I think 0:13:00.640 --> 0:13:02.760 that's probably the sort of the background to it all. 0:13:03.200 --> 0:13:04.920 There's a lot of fun back here. Let's go let's 0:13:04.920 --> 0:13:06.719 go back a bit when the bench of the fun 0:13:06.840 --> 0:13:08.960 started selling all their equities. If we accept that they 0:13:09.000 --> 0:13:11.959 were overexposed to equities in the first place, but one 0:13:12.000 --> 0:13:14.600 of the reasons they started selling equities as a whole 0:13:14.800 --> 0:13:16.520 was because they felt they needed to do a little 0:13:16.559 --> 0:13:20.120 bit more liability matching, so they moved into bonds in volume. Right, 0:13:20.360 --> 0:13:23.240 So Land involved selling a lot of equities, which in 0:13:23.280 --> 0:13:25.120 itself we can argue about whether that turned out to 0:13:25.160 --> 0:13:27.079 be a good idea or not, but maybe that that's 0:13:27.080 --> 0:13:29.319 the subject for another day. That's what they did. But 0:13:29.600 --> 0:13:33.439 why was the majority of these equity sales in the 0:13:33.559 --> 0:13:36.000 UK market? What made them think for themselves, if we're 0:13:36.000 --> 0:13:38.960 getting get out of equities, we need in particular to 0:13:39.000 --> 0:13:42.360 get out of the UK. It's almost a change in benchmark. 0:13:42.520 --> 0:13:45.040 So back in the nineties, bench funds used to follow 0:13:45.080 --> 0:13:47.640 something called the caps medium, which which is a bizarre 0:13:47.640 --> 0:13:50.280 benchmark because it basically it just looked at all other 0:13:50.320 --> 0:13:52.959 farm managers. So you were just benchmark in yourself against 0:13:52.960 --> 0:13:55.720 other farm managers. Other farm managers have fifty five cent 0:13:55.800 --> 0:13:58.480 in the UK, then you did. And I think over 0:13:58.520 --> 0:14:01.079 time we drifted away from that, we more towards these 0:14:01.120 --> 0:14:04.320 market cat weighted industries. So people began to look at 0:14:04.360 --> 0:14:07.040 you know, MSCI World for instance, and if you look, 0:14:07.120 --> 0:14:09.080 if you do look at MSCI World, you know, the 0:14:09.080 --> 0:14:11.960 figures today are that the US market is seventy percent 0:14:11.960 --> 0:14:14.400 and the UK market is about five percent. And so 0:14:15.160 --> 0:14:18.400 I think there was that people basically moving towards that benchmark. 0:14:18.440 --> 0:14:20.240 And one of the things that I say in the 0:14:20.280 --> 0:14:23.560 blog is I think that is just crazy because what 0:14:23.960 --> 0:14:28.160 that means is that people are forced towards having a 0:14:28.240 --> 0:14:31.560 large percentage of their assets in large markets and a 0:14:31.600 --> 0:14:34.760 small percentage in small markets, rather than a large percentage 0:14:34.760 --> 0:14:38.000 in cheap markets and a small percentage in expensive markets. 0:14:38.200 --> 0:14:41.880 And to me that just seems completely and utterly counterintuitive. Yeah, 0:14:41.920 --> 0:14:44.560 so what it does if you're hugging global benchmark flate, 0:14:44.600 --> 0:14:46.720 there's what you're doing is buying a whole pile of 0:14:46.720 --> 0:14:49.880 stuff that has already gone up and selling stuff that 0:14:50.800 --> 0:14:52.520 hasn't gone up yet. I mean, it seems that of 0:14:52.640 --> 0:14:56.520 slightly mad everybody who is following exactly the same momentum 0:14:56.640 --> 0:15:03.600 strategy exactly right. It's yeah, completely and utterly counterintuitive in 0:15:03.600 --> 0:15:07.520 my opinion. Again, there's a nice chart in this blog, 0:15:07.560 --> 0:15:11.720 and it basically just tracks returns of eperty markets against 0:15:11.720 --> 0:15:14.520 the valuation of the valuation measure is effectively a sort 0:15:14.520 --> 0:15:17.720 of market capture GDP. And then it's the subsequent returns 0:15:17.720 --> 0:15:20.400 over the next twelve years. And the our square of 0:15:20.440 --> 0:15:22.560 the chart is about point nine or you know, I'm 0:15:22.560 --> 0:15:25.520 supposed to put that in simple terms, that there is 0:15:25.520 --> 0:15:29.400 a very very close correlation between valuation inverse correlation between 0:15:29.480 --> 0:15:34.040 valuation and subsequent returns subsequent twelve years returns from eptew markets. 0:15:34.120 --> 0:15:37.800 And why people therefore would literally do the opposite of 0:15:37.800 --> 0:15:41.480 what that chart implies and actually overallocate to expensive markets 0:15:41.480 --> 0:15:44.400 and under allocates to cheat markets is just beyond me. 0:15:44.920 --> 0:15:47.320 It's one of the maddest things in markets that you 0:15:47.400 --> 0:15:50.240 actually just had to say that, So you actually had 0:15:50.280 --> 0:15:54.040 to say aloud that there is a relationship between the 0:15:54.080 --> 0:15:57.520 price you pay and the future returns that you make. 0:15:57.880 --> 0:16:00.920 That is something that has been so completely gotten in 0:16:01.080 --> 0:16:04.520 markets for the last decade, they were actually having to 0:16:04.560 --> 0:16:09.480 remind people that the entire history of markets proves their 0:16:09.640 --> 0:16:12.480 valuations matter absolutely, right. Do you ever do you ever 0:16:13.760 --> 0:16:16.280 read the Credit Squeeze Investment Returns hand but when that 0:16:16.320 --> 0:16:18.280 comes out, you know that that that comes out. I 0:16:18.360 --> 0:16:21.920 have it right here, right here on my desk, the 0:16:22.000 --> 0:16:25.600 Credit Squeee Global Investment Returns Yearbook twenty twenty three exactly. 0:16:25.640 --> 0:16:27.640 And so so that thing is that thing is that 0:16:27.680 --> 0:16:29.680 it's just a study of exactly what we've just been 0:16:29.680 --> 0:16:32.440 talking about. Isn't it the fact that you know, you 0:16:32.440 --> 0:16:35.240 you buy lowly value markets, or you buy lowly values, 0:16:35.280 --> 0:16:38.240 you know, equities within those markets, and you subsequently make 0:16:38.560 --> 0:16:41.480 higher returns not on not on a six month basis 0:16:41.560 --> 0:16:43.200 or a one year basis, but but on a sort 0:16:43.240 --> 0:16:45.040 of ten year basis. You know, there's a very very 0:16:45.040 --> 0:16:49.760 strong correlation. And perhaps what I just said actually answers 0:16:49.800 --> 0:16:52.800 that conundrum, which is that I don't know, maybe ten 0:16:52.880 --> 0:16:55.040 years is just way too long for people these days. 0:16:55.040 --> 0:16:58.880 Maybe people are that their time horizons are much much shorter, 0:16:59.000 --> 0:17:02.840 and therefore sort of taking a bet that expensive markets 0:17:02.840 --> 0:17:05.600 can get even more expensive. Well, I mean that's been 0:17:05.640 --> 0:17:08.960 reasonably fair for some time. You know, if you look 0:17:08.960 --> 0:17:11.520 at you and I I think would have said two 0:17:11.600 --> 0:17:14.320 years ago, five years ago, eight years ago, goodness me, 0:17:14.400 --> 0:17:16.520 the valuation gap between the US and the UK is 0:17:16.560 --> 0:17:18.640 getting out of control. You want to be shifting back 0:17:18.680 --> 0:17:22.000 into the UK. But if we'd been doing that, obviously 0:17:22.040 --> 0:17:23.600 we would have been the ones who looked stupid, if 0:17:23.640 --> 0:17:25.640 that were the ones who looked stupid. Because the UK 0:17:25.800 --> 0:17:29.880 market one hundred continued to basically flatline and the US 0:17:29.960 --> 0:17:33.040 market continued to go up, So this valuation got wider. 0:17:33.200 --> 0:17:35.920 Gap got wider and wider and wider. And you now 0:17:36.000 --> 0:17:39.840 talk to people, younger people obviously, who believe that it 0:17:39.960 --> 0:17:42.600 is perfectly normal and natural for there to be a 0:17:42.680 --> 0:17:45.479 huge valuation gap between the UK and the US. And 0:17:45.520 --> 0:17:47.639 if you say to them, actually, this only happened a 0:17:47.680 --> 0:17:49.720 couple of decades ago. It used to be valued in 0:17:49.840 --> 0:17:52.920 roughly the same way that that's entirely new news. That's 0:17:53.400 --> 0:17:55.400 right again. We you know, we have a chart which 0:17:55.440 --> 0:17:58.320 looks at the looks at exactly that the difference in 0:17:58.359 --> 0:18:01.160 valuations between the two markets, that is back over fifty years, 0:18:01.760 --> 0:18:04.800 and I think you know, for most of that period 0:18:04.840 --> 0:18:07.560 the average was about fifteen cents something like that, and 0:18:07.600 --> 0:18:09.440 then last couple of years you're right, it blew out 0:18:09.480 --> 0:18:13.760 to about forty five percent, and so you're right, you know, 0:18:13.840 --> 0:18:16.360 it's a relatively new phenomenon, and what's the gap now? 0:18:16.840 --> 0:18:21.000 It is it's a little bit less because you know, surprise, surprise. 0:18:21.040 --> 0:18:23.680 Actually last year the SMP was down twenty percent and 0:18:23.760 --> 0:18:26.960 the UK was up four percent, So so it's probably 0:18:26.960 --> 0:18:29.800 about forty percent, but it's a way way wider. And 0:18:30.280 --> 0:18:31.639 I think the other thing that I would add is 0:18:31.680 --> 0:18:34.200 cause that's the average for the market. If you look 0:18:34.480 --> 0:18:37.119 within the market, there are things within the market that 0:18:37.160 --> 0:18:40.320 are much much cheaper. So there is, as I said, 0:18:40.359 --> 0:18:42.919 quadlock going on here. But one thing I think we 0:18:43.080 --> 0:18:46.680 can say, probably for sure with the fifty one hundred 0:18:47.119 --> 0:18:50.919 is that the selling of UK equities maybe about the 0:18:51.000 --> 0:18:54.000 perception of the UK economy as a result of breakcast, 0:18:54.040 --> 0:18:56.840 but it's certainly not about the performance of the companies 0:18:56.920 --> 0:19:00.359 as a result of breakit because the UK large have 0:19:00.440 --> 0:19:03.920 been performing extremely well, right they have. And I think 0:19:04.160 --> 0:19:06.639 you know, another thing I mentioned in the blog is 0:19:06.640 --> 0:19:09.720 that there are lots of companies within the UK market 0:19:09.960 --> 0:19:13.359 that have virtually no exposure to the UK economy, and 0:19:13.440 --> 0:19:17.320 yet they are valued at massive discounts to their the uspers. 0:19:17.359 --> 0:19:19.679 So the example within the energy sector, the example I 0:19:19.800 --> 0:19:23.520 uses BP today trays on about five times earnings. X 0:19:23.840 --> 0:19:26.199 X on trays on about ten times earnings. You know 0:19:26.240 --> 0:19:28.800 that those are very very similar companies with very very 0:19:28.840 --> 0:19:31.879 similar drivers to their profitability, and yet one trays at 0:19:31.920 --> 0:19:36.000 half the valuation of the other. And yet and if 0:19:36.000 --> 0:19:39.240 we picked up BP and dumped it in America, rehead 0:19:39.280 --> 0:19:42.760 corded it with the share price double. Well, you know, 0:19:43.200 --> 0:19:45.800 interesting thing you should they should say that BP had 0:19:45.840 --> 0:19:52.159 results about about six weeks ago, and there are a 0:19:52.200 --> 0:19:54.400 couple of things. The number one is they basically said 0:19:54.440 --> 0:19:57.199 they were going to slow down their move into renewables 0:19:57.200 --> 0:20:00.399 and invest more in upstream. But the stop went up 0:20:00.400 --> 0:20:03.240 about thirty percent in the following sort a few weeks, 0:20:03.320 --> 0:20:06.359 and that was attributed to US buying, interestingly, and the 0:20:06.400 --> 0:20:09.760 management team. Interestingly, the CEO did his road show around 0:20:09.800 --> 0:20:12.479 the US. The CFO was in the UK, and the 0:20:12.520 --> 0:20:15.920 CEO went around the US, and there was as I said, 0:20:16.160 --> 0:20:18.679 the share probably went up a lot and and apparently 0:20:18.800 --> 0:20:20.840 that was that was US buying. So that's, you know, 0:20:20.880 --> 0:20:24.800 just an interesting anecdotal point. And do you think they 0:20:24.840 --> 0:20:27.359 were buying Um, I know you have, you have no 0:20:27.400 --> 0:20:29.240 idea what I've interested in your opinion. Do you think 0:20:29.280 --> 0:20:31.400 they were buying because they looked at and thought this 0:20:31.480 --> 0:20:33.520 is extremely cheap, or they looked at it and thought, 0:20:33.520 --> 0:20:36.200 we've known this as cheap for a while. But they're 0:20:36.200 --> 0:20:40.399 backing away from renewables lass transition and focusing on what 0:20:40.440 --> 0:20:44.359 they're actually really good at is a positive. Yeah. I 0:20:44.400 --> 0:20:47.960 suspect they looked at the change in strategy and thought, actually, 0:20:48.000 --> 0:20:50.440 that's a positive because even the company, even the company 0:20:50.520 --> 0:20:54.520 themselves talk about returns in the upstream area being significantly 0:20:54.560 --> 0:20:57.800 higher than returns in the renewable era. So I suspect 0:20:58.000 --> 0:21:00.840 the US investors looked at that change in actually and thought, actually, 0:21:00.880 --> 0:21:02.600 that's a good thing. And then they looked at the valuation. 0:21:02.640 --> 0:21:04.359 I thought, my god, I can buy this for about 0:21:04.400 --> 0:21:08.040 halfway one I'm paying for Excel. Interesting And because when 0:21:08.160 --> 0:21:11.119 when you were talking earlier, you were talking about the 0:21:11.240 --> 0:21:13.560 UK market being stuffed full of companies that people have 0:21:13.680 --> 0:21:15.680 not been keen on for a little while. So we've 0:21:15.680 --> 0:21:18.600 had what you might call it an ESG discount on 0:21:18.680 --> 0:21:23.520 the UK market, but the conversation around ESG is changing 0:21:23.560 --> 0:21:26.320 really fast. You'll have noticed that, I certainly have. You know, 0:21:26.320 --> 0:21:27.879 if we go right back to the beginning of the 0:21:27.920 --> 0:21:30.840 war in Ukraine, when suddenly defense doc turned from somethingl 0:21:31.040 --> 0:21:34.160 something and evil and filthy to a social good. And 0:21:34.400 --> 0:21:37.040 now again people are looking at the energy companies and 0:21:37.080 --> 0:21:39.680 the commodity companies, and particularly commodity is pointing out that 0:21:39.720 --> 0:21:42.560 we can't possibly have an energy transition without being really, 0:21:42.840 --> 0:21:46.440 really very commodity heavy. And of course we can't maintain 0:21:46.560 --> 0:21:49.320 our living standards in the short, medium and possibly long 0:21:49.400 --> 0:21:52.000