Speaker 1: Bloomberg Audio Studios, Podcasts, Radio News. Welcome to the Merrin
Speaker 1: Drugs Money Market Wrap, where we talk about the biggest
Speaker 1: moves in the markets this weekend what's driving them. I'm
Speaker 1: Marrin Zumsat, Web editor at Large for Bloomberg UK Wealth.
Speaker 2: I'm joined Stepic, senior reporter at Bloomberg and author of
Speaker 2: the Money Distilled newsletter.
Speaker 1: Okay, John, We're going to start with the I Told
Speaker 1: you So section, And on Friday you wrote in your
Speaker 1: Money to Tell the newsletter about a number that you
Speaker 1: told everyone at the end of last year that you're watching,
Speaker 1: Fray Kefley, and the reason to watch it Fray Kefley
Speaker 1: has become very clear of the last few months. Right.
Speaker 2: Yes, it was in the video share price. And the
Speaker 2: reason I was looking at the video share praise is
Speaker 2: because back then, before Tarloffs were even a twinkle in
Speaker 2: Donald Trump's I Will, I guess deploy Will, the most
Speaker 2: obvious thing that was driving us exceptionalism was the EA Bobble,
Speaker 2: And obviously the big pixe and shovel story of the
Speaker 2: EA Bobble was Nevidia. And I thought, well, if Nevidia
Speaker 2: goes down the Wii, that means the whole market's going down,
Speaker 2: and if it goes keeps going up the weed then
Speaker 2: US exceptionalism is intact. And of course is down about
Speaker 2: thirty percent, maybe a bit less today, but thoughtyd percent.
Speaker 1: Okay, exceptionalism not intact. And I just want to interrupt
Speaker 1: here briefly, and we're not going to talk about this
Speaker 1: because we are absolutely only talk about markets today, So
Speaker 1: obviously we cannot talk about a blackout in Spain and
Speaker 1: in Portugal and in a little bit of France and
Speaker 1: what caused it. But I do want to draw your
Speaker 1: attention to the fact that in that same publication, when
Speaker 1: we were asked at the end of twenty twenty four
Speaker 1: what we thought might happen in twenty twenty five, my
Speaker 1: answer was that there'd be a lot more focused on
Speaker 1: national grids because they were designed for a few big,
Speaker 1: centrally located powerstations, not for thousands of dispritin distance renewable producers.
Speaker 1: They require upgrades or there is trouble ahead. So all
Speaker 1: I will say is, well, here we are.
Speaker 2: I mean that is our proper told you, So I
Speaker 2: think that's that is a good one. And actually know
Speaker 2: what irony is Helen who asked us to answer those questions,
Speaker 2: was actually in Spain in Madrid yesterday in the depths
Speaker 2: of the blackout.
Speaker 1: Well, she should have known. She should have known that
Speaker 1: that's what was going to happen. Anyway, almost there was
Speaker 1: when the bit on one number of index that you
Speaker 1: think is important for understanding the world in twenty twenty five,
Speaker 1: when you answered video share price, I answered, actually GDP
Speaker 1: per capita in Argentina. So we're still watching that very closely,
Speaker 1: saying if what is happening there is working, Obviously the
Speaker 1: currency is tanking, so maybe it's not going perfectly, but
Speaker 1: well worth watching onwards, John, what is happening in markets?
Speaker 2: One of the interesting things is the S and P
Speaker 2: five hundred is bouncing back. And one point that people
Speaker 2: have been making is that if you look back to
Speaker 2: before all the tide of stuff happened at the start
Speaker 2: of April, it's like the US stock market is down
Speaker 2: something like one or two percent in US dollar terms.
Speaker 1: John, I think I just want to interrupt and say
Speaker 1: we've been making that point.
Speaker 2: Yeah, we actually have made that point almost every week
Speaker 2: for a while.
Speaker 1: We have been making the point that all this stuff
Speaker 1: has happened, all this craziness, all this talking, all this angst,
Speaker 1: all those is the end of America is also and
Speaker 1: in decease have literally barely budged volatile volatile. But if
Speaker 1: you didn't look at them for six months, a year, whatever,
Speaker 1: you would think nothing had happened, or even yeah, even
Speaker 1: a month. And that is the big question, because all
Speaker 1: this stuff is real, it's real. American exceptionalism has been
Speaker 1: severely challenged. American valuations are still absurdly high. Gross stock
Speaker 1: valuations are still absurdly high. The American market is still
Speaker 1: absurdly concentrated. This makes no sense. And I interrupted you,
Speaker 1: and that's probably what you were going to say, right.
Speaker 2: Oh yeah, And I think that's again. Well, I think
Speaker 2: the other thing is the yes, exceptions trade isn't just
Speaker 2: about equities low. It's also about the dollar. And whenever
Speaker 2: you look at what would have happened to somebody in
Speaker 2: the UK, if they've kept all their money in US equities,
Speaker 2: then the story is a bit different. They're down something
Speaker 2: like fifteen percent since the actually not the start of
Speaker 2: the year, since they peaked in February, and so that
Speaker 2: is quite a lot chunkier than just the five percent
Speaker 2: off that you would be now if you were a
Speaker 2: US dollar investor. And the other point is that it
Speaker 2: contrasts where the foots one hundred, which is for example,
Speaker 2: only down about two percent over the same period, the
Speaker 2: docks is actually up a little bit for pound investors
Speaker 2: because the pound a lot it's gone up against the
Speaker 2: dollar is going down against the Euro a bit. So
Speaker 2: the point is basically, if you owned anything but US equities,
Speaker 2: then so far this year has been at worst mediocre
Speaker 2: and some whereas if you had had all your money
Speaker 2: in U S equities, it's been pretty catastrophic actually, because
Speaker 2: you know, fifteen percent down over the best part of
Speaker 2: three months is a bad return.
Speaker 1: I suppose it's worth mentioning that that week dollar is
Speaker 1: a bit of a double whammy for anyone who is
Speaker 1: exporting to the US, because they've already got this tariff
Speaker 1: burden and now they've got this week dollar burden too,
Speaker 1: So early doesn't help.
Speaker 2: Yeah, And I do think that it's gonna be interesting
Speaker 2: to see what happens over the next few months, because
Speaker 2: on the one hand, that is the whole point about
Speaker 2: the great rotation being more about other markets catching up
Speaker 2: with the US in that gap closing, but on the
Speaker 2: other hand, I mean is expensive, and it's kind of
Speaker 2: like if the tariff stuff, even if this stuff doesn't
Speaker 2: stay intact, I mean, you've already got ship mints between
Speaker 2: China and the US have dropped off, and inventories which
Speaker 2: they stock up on stuff before the tariff's kicked in,
Speaker 2: but they're only going to last for so long. So
Speaker 2: at some point along the line, some kind of COVID style,
Speaker 2: oh my god, the shelves are empty in point is
Speaker 2: likely to happen, and it just so it depends on
Speaker 2: how everyone fudges around that and whether Trump backs down.
Speaker 2: But then you're kind of like, what was the point
Speaker 2: They're trying to rebalance everything in the first place. So
Speaker 2: I don't know. I think there's a certain bit of
Speaker 2: everyone kidding themselves that this is going to be okay,
Speaker 2: because I think there's got to be more turbulence to
Speaker 2: come further down the road.
Speaker 1: Yeah, and there's been an awful lot of buying on
Speaker 1: the dip because buying on the dip has always always
Speaker 1: worked historically, and even right now it looks like it's worked, right,
Speaker 1: looks like it's worked, but the market can trick you
Speaker 1: quite a lot with that sort of thing. And if
Speaker 1: we look at the straightforward fundamentals, if there's recession coming
Speaker 1: in the US and the whole Tarraf Balaba makes them
Speaker 1: increasingly likely, and inflation coming in the US. By the way,
Speaker 1: it seems ridiculous to think that that valuation gap between
Speaker 1: the US and Europe should continue.
Speaker 2: Yeah, and I mean I think it's also you can
Speaker 2: see there's an element that complacency in other areas as
Speaker 2: well help because another sort of thing that was rumbling
Speaker 2: in the background the last week or so I noticed
Speaker 2: was this sort of dispute between Pakistan and India. And
Speaker 2: on the one hand, that's this kind of thing that's
Speaker 2: happened between Indian and Pakistan a lot over time. It's
Speaker 2: not unusual, and so you can be forgiven for saying
Speaker 2: it will just be the same as it's always been,
Speaker 2: and you effectively it's a buying opportunity. On the other hand, again,
Speaker 2: the sort of there like the willingness to go straight
Speaker 2: to that conclusion. So it gives you a sense that well,
Speaker 2: like no one is really taking on board the global
Speaker 2: geo politics has become rather more fractious and rather more splintered,
Speaker 2: and it's probably risky to think that it's just gonna
Speaker 2: be business as usual, and I don't. It's tricky because
Speaker 2: we all these geopolitical things are a little bit binary.
Speaker 2: But it doesn't feel as if it almost feels as
Speaker 2: if there's an elementary i know, limbo in the markets
Speaker 2: at the moment where people are just well, let's just
Speaker 2: do what has always walked and for the time being
Speaker 2: that has been the sort of by the debt Truthe.
Speaker 1: Yeah, well, I suppose the thing that we should probably
Speaker 1: say about this, and everyone's bored of us saying it
Speaker 1: so far? Is it when you go into an environment
Speaker 1: like this, when you go into a difficult environment, you
Speaker 1: might as well go into it holding inexpensive equities, equities
Speaker 1: that are not already priced for perfection. And that is
Speaker 1: going to be value stocks or value orientated investments, probably
Speaker 1: more in Europe than in the US. And value investing
Speaker 1: has had so long out of favor it's beginning to
Speaker 1: get ridiculous. And we had value investing was all the
Speaker 1: thing right up for the g GFC, right, and then
Speaker 1: we turned into we all turned into growth investors with
Speaker 1: a little bit of value pop here and that, and
Speaker 1: that's been so long now everyone's forgotten that over the
Speaker 1: very long time. But at term it is value investing
Speaker 1: that tends to work best. And if you do accept that,
Speaker 1: then there are quite a lot of things out there
Speaker 1: that you can buy to sit out this difficult environment.
Speaker 2: Yeah, I mean, I don't know if you've got this one,
Speaker 2: but we've got a note from Verdad Advisors the other day.
Speaker 1: Oh, nice Dan, who we had on the podcast.
Speaker 2: Yeah, his colleague Brian, Brian Tinoro. He was writing about
Speaker 2: European including the UK, European small caps and value small
Speaker 2: caps in particular, and his point was, I mean, because
Speaker 2: he's been watching the ETFs as well, and he noted
Speaker 2: it in the first quarter of this year, one of
Speaker 2: the big vanguard dtfs that covers Europe has so its
Speaker 2: biggest quarterly in flows in at least five years. So
Speaker 2: that's the sort of idea that money is definitely moving
Speaker 2: out of the US and in Europe. But then he
Speaker 2: was also in the point that whenever the money first rotates,
Speaker 2: especially if it's quite a large amount of once, the
Speaker 2: fund managers tend to stick it all in the large
Speaker 2: caps first, and he's pointing that there's still massive kind
Speaker 2: of value in the small cap area and particularly again
Speaker 2: then inentially microcap area as well. So his point is
Speaker 2: that if you are i'll sort of you know, value oriented,
Speaker 2: and you've got the time way to then that's the
Speaker 2: police to go all because that's been the money's going
Speaker 2: to tackle two. Next.
Speaker 1: Yeah, well that does make complete sense. You know, an
Speaker 1: American investor pultubot of money out of America, hands it
Speaker 1: to a European fund manager. The first thing they're going
Speaker 1: to do is put it in a big liquid stuff
Speaker 1: and then gradually you'll get trickled down into the smaller companies.
Speaker 1: There's the allocation to large cab equities, which is a
Speaker 1: perfectly reasonable level, and then you start to trickle down.
Speaker 1: And of course where are the cheapest small caps pretty
Speaker 1: much in the world.
Speaker 2: Well, I selected in the UK.
Speaker 1: I think we've talked about this before. Some of the
Speaker 1: cheapest small caps in the world are yes, absolutely here
Speaker 1: and we've talked as well before, having we about the
Speaker 1: investment trust where you get a kind of you know,
Speaker 1: an endless double discount. You get a UK discount, trible discount,
Speaker 1: you got a UK discount, you get an investment trust discount,
Speaker 1: you get a small cap discount, and there is extraordinary
Speaker 1: value knocking around in that sector. Yeah.
Speaker 2: And the other thing is, again, despite the fact that
Speaker 2: you know, the UK government need leaves a lot to
Speaker 2: be desired, and you know, the Chancellor's probably kind of
Speaker 2: screw lots of things up, hunting for taxes to plug
Speaker 2: various imaginary and or rather looking for taxes to plug
Speaker 2: lots of black holes and all that.
Speaker 1: But I don't think they're imaginary. They're real.
Speaker 2: Well they're real, yeah, but they.
Speaker 1: Argue about who created them, but they're definitely very real.
Speaker 2: The black holes are there, but they're not it's more that,
Speaker 2: I mean, they are unfillable. The way that they talk
Speaker 2: about them, and it's more about the fractions of a
Speaker 2: decimal point either way that they're sort of finagling over
Speaker 2: that is infury. And but the point is it's like
Speaker 2: I noticed this morn than UK mortgage rates are down
Speaker 2: the lowest they've been in quite some time. And also
Speaker 2: the UK build well yeah, I don't even don't even.
Speaker 3: Listen to our podcast from earlier this week on how
Speaker 3: to buy the best house if you're going to buy
Speaker 3: a house. It's really really excellent set myself, very important
Speaker 3: if you're looking at those low Morges rates and going
Speaker 3: do you know what I'm going to.
Speaker 1: Buy a house? Listen to our housing series before you
Speaker 1: go anywhere near the housing market. Definitely, Sorry, John, I
Speaker 1: interrupted you again. What were you going to say?
Speaker 2: No, so Martket rates falled out FA, then consumers are
Speaker 2: going to have more money despite all the other stuff
Speaker 2: they've got to put up with this year. And also
Speaker 2: the UK is probable is well it is it's one
Speaker 2: of the countries that least is least exposed to whatever
Speaker 2: ends up happening with tariffs. So from a big picture,
Speaker 2: global investors don't pay that much attention to the politics
Speaker 2: a country. They just want a good excuse to tell
Speaker 2: their clients why they're investing there. And actually the UK
Speaker 2: has the excuses lining up, you know, lower interest rates
Speaker 2: converting to you know, consumer kind of coming back, and
Speaker 2: then the big picture being immune to the tariffs basically,
Speaker 2: so you can see why inflous make head are we
Speaker 2: because the guy that's telling these clients that has got
Speaker 2: a story, know to evangelizer boot which they didn't have
Speaker 2: for the past you know it years.
Speaker 1: Yeah, reminder that all market action is about stories. And
Speaker 1: I did actually on that very note, John get a
Speaker 1: note this morning from someone suggesting that we've been waiting
Speaker 1: for a catalyst forever for UK smaller mid caps to
Speaker 1: start moving, and it may be that the progress between
Speaker 1: the UK and the US on the making of a
Speaker 1: trade deal could be that catalyst. Whose You know, UK
Speaker 1: smaller companies are straight but much more often than big companies, straightforward,
Speaker 1: simple businesses, and if they know where they are tariff wise,
Speaker 1: that maybe something that makes everyone go Okay, now we
Speaker 1: know where we are, we can buy these, excepting the
Speaker 1: cheap small caps. We live in a world of hope,
Speaker 1: don't we, John, I mean, we really do.
Speaker 2: We do. Maybe this is the catalyst.
Speaker 1: We are optimists.
Speaker 2: We are such optimists.
Speaker 1: People sometimes say that, you know when perma bears were pessimists,
Speaker 1: not so not so optimistic, fullish fansiastic about the future.
Speaker 1: Thanks for listening to this week's Marin Talks to Your
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