WEBVTT - Has the British Equities Market Been 'Hollowed Out'? 0:00:03.120 --> 0:00:11.799 Bloomberg Audio Studios, Podcasts, radio News. Welcome to Marrindrogs Money, 0:00:11.840 --> 0:00:14.240 the podcast in which people who know the markets explain 0:00:14.320 --> 0:00:17.360 the markets. I'm Marior in Sunset Web this week. Marks later, 0:00:17.400 --> 0:00:20.319 the chairman and chief investment Officer of Slater Investment joins me. 0:00:20.480 --> 0:00:22.960 We discussed the UK market, how to invest in it 0:00:23.000 --> 0:00:25.239 and what the government should do to make it a 0:00:25.320 --> 0:00:36.760 better market. Mark, thank you so much for joining us today. 0:00:36.880 --> 0:00:39.680 Very kind of you to come in pleasure. Now you 0:00:39.920 --> 0:00:43.159 have got three different funds at Slater, right, You've got 0:00:43.120 --> 0:00:46.560 an income fund, a growth fund and a recovery fund. Now, 0:00:46.600 --> 0:00:49.360 when we look at these three things, what does it 0:00:49.400 --> 0:00:52.199 all mean? I want to start by talking about the 0:00:52.240 --> 0:00:54.600 difference between these funds. What it is that you mean 0:00:54.640 --> 0:00:57.760 by growth, particularly when if you're investing in the UK, 0:00:58.040 --> 0:01:00.639 almost everything is what we used to call value, right, 0:01:01.120 --> 0:01:04.240 So what's growth, what's income? And what do we mean 0:01:04.240 --> 0:01:04.920 by recovery. 0:01:05.319 --> 0:01:07.720 The income part is very simple because it literally is 0:01:08.040 --> 0:01:11.080 that is a strategy which represents the relatively small part 0:01:11.080 --> 0:01:14.160 of what we do. That is seeking what we call 0:01:14.200 --> 0:01:17.560 good and growing income and some level of capital growth 0:01:17.600 --> 0:01:20.520 at the same time. So that fund pays a pretty 0:01:20.560 --> 0:01:23.560 significant yield premium to the UK market around five and 0:01:23.600 --> 0:01:27.840 a half percent versus the high threes for the UK market, 0:01:28.400 --> 0:01:29.600 and some capital growth. 0:01:29.800 --> 0:01:32.280 And that's what we're going to interrupt you immediately to say, 0:01:32.280 --> 0:01:34.320 so those will be mainly large companies. 0:01:34.520 --> 0:01:37.839 No, that's across the market cap spectrum. Something like ninety 0:01:37.840 --> 0:01:42.119 percent of interesting yield opportunities are outside the foot Sea hundred. 0:01:42.200 --> 0:01:45.600 So we're looking right across the piece for that strategy. Well, 0:01:45.640 --> 0:01:48.120 we have about a third back that thereabouts in foot 0:01:48.120 --> 0:01:51.080 See hundred, but we have a good chunk outside on 0:01:51.280 --> 0:01:54.960 the growth and recovery side. Both of those funds are 0:01:55.000 --> 0:02:00.320 basically our growth strategy. The recovery fund is small and 0:02:00.360 --> 0:02:04.720 therefore focuses on slightly smaller companies, but they're basically the 0:02:04.760 --> 0:02:07.920 same strategy and what we refer to as growth and 0:02:08.000 --> 0:02:10.160 always have done, by the way, so it's our thirtieth 0:02:10.240 --> 0:02:16.120 year is buying growth cheaply. So we're very much at 0:02:16.160 --> 0:02:19.880 the intersection of growth and value, whatever those terms mean, 0:02:19.919 --> 0:02:21.400 because obviously they mean a lot of different things a 0:02:21.440 --> 0:02:22.120 lot of different people. 0:02:22.160 --> 0:02:23.440 Well I always look at that and I think, well, 0:02:23.520 --> 0:02:26.640 surely everything is value. Is there anything except for value? 0:02:26.639 --> 0:02:28.160 It might be in the air of beholder. But who 0:02:28.160 --> 0:02:29.600 on earth would buy a stock if they didn't think 0:02:29.639 --> 0:02:33.000 it represented good value, So the terms are basically meaningless. 0:02:33.120 --> 0:02:36.080 They are, but I would say, if one were to caricature, 0:02:36.160 --> 0:02:38.519 you would say, you know, some people regard growth as 0:02:39.040 --> 0:02:43.680 momentum driven, very high multiples, that kind of thing, and 0:02:43.720 --> 0:02:46.520 they regard value as sort of cheap but utterly hopeless, 0:02:47.000 --> 0:02:50.519 and in decline that those are the extremes. What we're 0:02:50.560 --> 0:02:54.720 looking for is decent levels of earnings growth but at 0:02:54.720 --> 0:02:58.240 a reasonable price. So we're looking to pay a relatively 0:02:58.240 --> 0:03:00.360 low multiple in relation to the growth threa for the 0:03:00.400 --> 0:03:03.960 companies we buy. I would say in the last few 0:03:04.000 --> 0:03:10.040 years we've had a very different market complexion where suddenly 0:03:10.440 --> 0:03:14.240 even quite dynamic businesses are priced as if they have 0:03:14.360 --> 0:03:17.560 no prospects whatsoever, so they're priced on very low multiples. 0:03:18.200 --> 0:03:22.120 For us, our ballpark has always been somewhere between a 0:03:22.200 --> 0:03:25.640 ten and fifteen multiple of earnings a pe multiple. In 0:03:25.680 --> 0:03:27.520 twenty twenty one we were at the upper end of that. 0:03:28.080 --> 0:03:31.160 We can go up to twenty times on a prospective basis, 0:03:31.160 --> 0:03:33.960 but that's not something that happens very often. So in 0:03:33.960 --> 0:03:35.600 twenty twenty one we were at the upper end of 0:03:35.640 --> 0:03:38.080 that ten to fifteen range. Typically for a new holding 0:03:38.320 --> 0:03:40.840 these days were at the bottom of that range or 0:03:40.880 --> 0:03:44.280 below it. There's a plethora now of single digit multiples 0:03:44.880 --> 0:03:48.120 where you've got a very good business. So these days 0:03:48.160 --> 0:03:50.560 I think if growth and value didn't have much meaning 0:03:50.560 --> 0:03:52.880 in the past, I think now they really have converged 0:03:53.000 --> 0:03:53.560 in the UK. 0:03:53.680 --> 0:03:56.680 In the UK, Lisa, you must have the most spectacular 0:03:56.800 --> 0:03:59.160 hunting ground in the UK at the moment, you know, 0:04:00.280 --> 0:04:02.960 is absolutely downed, particularly the foot two two fifty, with 0:04:03.480 --> 0:04:07.400 very high quality companies with reasonably fast growing earning trading 0:04:07.440 --> 0:04:10.280 on very low valuations, not quite as low as they were. Admittedly, 0:04:10.360 --> 0:04:12.840 you know eighteen months ago valuations are even cheaper than 0:04:12.880 --> 0:04:16.640 they are now. But nonetheless, given what you've just said, 0:04:16.720 --> 0:04:19.640 this should be the most perfect time for your style. 0:04:19.960 --> 0:04:23.520 I agree with you. Yes, there have been little moments 0:04:23.560 --> 0:04:25.640 here or there where things have been cheaper, you know, 0:04:25.680 --> 0:04:29.520 the day after the Trust budget markets were obviously cheaper. 0:04:29.560 --> 0:04:31.960 But if I look at the thirty years I've been 0:04:32.000 --> 0:04:36.400 doing this professionally, I would say, right now, give or 0:04:36.400 --> 0:04:41.720 take a few percentage points, yes, it's spectacularly cheap. And 0:04:41.760 --> 0:04:44.280 the other aspect of it, which is really interesting. And 0:04:44.360 --> 0:04:46.359 this is again something that's fairly unique for me. I 0:04:46.360 --> 0:04:50.080 haven't seen this before to this degree, is the disconnect 0:04:50.080 --> 0:04:55.159 between public and private market valuations. The private equity players 0:04:55.279 --> 0:04:58.520 are rubbing their hands with glee, and that's actually been 0:04:58.560 --> 0:05:01.040 a real problem in the last eighteen months or so. 0:05:01.640 --> 0:05:04.080 A little bit less so now because there's a slight 0:05:04.320 --> 0:05:06.760 change in the mood for the better. But you go 0:05:06.880 --> 0:05:11.000 back a year and boards didn't feel they could resist 0:05:11.480 --> 0:05:14.400 a premium. Now, a premium to a really low number 0:05:14.760 --> 0:05:17.800 isn't very clever, but that's what we were seeing, and 0:05:17.880 --> 0:05:20.080 a lot of fund managers needed the cash, so they 0:05:20.080 --> 0:05:23.520 were accepting deals they should never have accepted. You know, 0:05:23.760 --> 0:05:26.039 go back into last year. I think that that has 0:05:26.120 --> 0:05:27.960 got a bit better this year. 0:05:28.000 --> 0:05:30.400 But it is an extraordinary idea, isn't it, that a 0:05:30.480 --> 0:05:34.520 privately held company should have evaluation premium to a publicly 0:05:34.560 --> 0:05:37.159 held company, Because it's sort of upending everything that I 0:05:37.240 --> 0:05:40.280 ever believed was taught or was told, which is that 0:05:40.440 --> 0:05:44.320 a publicly listed company, given it to liquidity, should trade 0:05:44.880 --> 0:05:46.920 at a premium to a private company. And someone said 0:05:46.920 --> 0:05:48.560 to me only a few months ago, they talked about 0:05:48.720 --> 0:05:51.200 the liquidity premium and what they meant was the lack 0:05:51.240 --> 0:05:54.720 of liquidity premium, and that was an absolutely extraordinary thing. 0:05:54.839 --> 0:05:58.080 Yeah, I totally agree, it's not meant to happen, but 0:05:58.160 --> 0:05:59.520 it's happening here. 0:06:00.000 --> 0:06:00.800 Why has it happened? 0:06:01.360 --> 0:06:03.559 It's interesting. I mean, if you go back to twenty 0:06:03.600 --> 0:06:07.080 twenty one, prices were relatively high in a lot of 0:06:07.120 --> 0:06:10.839 asset classes, including UK med and small cap in some pockets. 0:06:11.040 --> 0:06:15.240 When rates changed, we fully expected there to be some impact, 0:06:16.120 --> 0:06:19.240 and particularly we expected it to be amongst high multiple companies. 0:06:19.560 --> 0:06:22.080 So the surprise has been that it, yes, it's hit 0:06:22.120 --> 0:06:24.760 high multiple companies, but it's hit low multiple companies too, 0:06:25.120 --> 0:06:29.400 And there hasn't been much distinction between companies that have 0:06:29.480 --> 0:06:32.000 had some kind of problem and some companies which haven't 0:06:32.000 --> 0:06:35.279 had a problem. So that's a huge surprise. I would 0:06:35.279 --> 0:06:40.440 say the reasons are partly fear of recession over the 0:06:40.520 --> 0:06:44.320 last couple of years. What concerns about earnings growth or 0:06:44.360 --> 0:06:47.839 the quality of earnings that's been an issue. I think 0:06:47.880 --> 0:06:51.799 on top of that, you've had the almost doom loop 0:06:52.240 --> 0:06:57.760 around flows, where outflows create selling, which create poor performance, 0:06:57.800 --> 0:07:00.720 which create more outflows. There's been an element of that 0:07:00.720 --> 0:07:03.000 that's a bit better than it was today, but it 0:07:03.040 --> 0:07:05.119 was definitely a factor in twenty twenty two and twenty 0:07:05.120 --> 0:07:08.720 twenty three. On top of that, you've got the kind 0:07:08.760 --> 0:07:12.720 of main year around large cap tech in America that's 0:07:13.000 --> 0:07:15.560 sucked a lot of money out of pretty well everything else. 0:07:15.960 --> 0:07:17.960 On top of that, we had the Trust budget, which 0:07:18.040 --> 0:07:20.360 I think just at a time where the UK was 0:07:20.440 --> 0:07:23.640 beginning that the perception of the UK was just beginning 0:07:23.680 --> 0:07:27.240 to improve. That was obviously a big setback. So lots 0:07:27.280 --> 0:07:29.920 of different things have happened. It's been the same in 0:07:29.960 --> 0:07:32.720 Europe to a degree, but I don't think quite as badly. 0:07:32.880 --> 0:07:34.840 It feels why we've had more of a discount in 0:07:34.880 --> 0:07:38.680 the UK. I think so, yeah, but people are noticing, yeah, 0:07:38.720 --> 0:07:41.080 and it is changing. We're beginning to see We're beginning 0:07:41.040 --> 0:07:42.840 to see balls take control themselves. We begin to see 0:07:42.840 --> 0:07:44.960 short rising buybacks where every seems like a very efficient 0:07:44.960 --> 0:07:46.560 thing to do it at a time like that, and 0:07:46.600 --> 0:07:49.760 we haven't seen significant buybacks in the UK in the past. 0:07:49.840 --> 0:07:50.240 That's right. 0:07:50.280 --> 0:07:52.760 And we're also seeing rising m and a rising bids 0:07:52.760 --> 0:07:57.320 for smaller companies, etc. And possibly maybe the beginning of 0:07:57.360 --> 0:07:59.800 some inflows back into the UK market or at least 0:07:59.800 --> 0:08:01.600 the end of the outflows. 0:08:02.080 --> 0:08:05.960 I think the flow situation has significantly improved in the industry. 0:08:06.320 --> 0:08:07.920 There have been one or two months where there's been 0:08:07.960 --> 0:08:10.040 signs of life, and then you find the next month 0:08:10.080 --> 0:08:12.720 it's sort of not so good, but the bad months 0:08:12.760 --> 0:08:16.120 are no longer very bad, so there's a slight improvement there. 0:08:16.560 --> 0:08:21.720 What's interesting, actually outside the fund data that are bigger 0:08:21.760 --> 0:08:25.680 flows into passive UK products like mid to fifty indices 0:08:25.720 --> 0:08:28.280 and things like that. So there's definitely some interest in 0:08:28.320 --> 0:08:31.160 the UK now that there wasn't before. We do quite 0:08:31.240 --> 0:08:35.280 regular investor meetings and lunches and webinars and things like that, 0:08:36.040 --> 0:08:39.520 and we have found in the last year that attendance 0:08:39.559 --> 0:08:44.599 has rocketed and pretty well everybody there is very interested 0:08:44.600 --> 0:08:47.280 in doing something about the UK. They recognize it's cheap, 0:08:47.559 --> 0:08:51.840 they recognize their underweight, but they're all waiting for a catalyst. 0:08:51.960 --> 0:08:54.000 Everyone's sort of waiting for someone else to jump. It's 0:08:54.000 --> 0:08:56.559 a bit like the sort of penguins in Antarctica, you know, 0:08:56.600 --> 0:08:59.200 when they're all waiting to do get in the water. 0:09:01.000 --> 0:09:03.520 So there's a nervousness, but there's a lot of money 0:09:03.520 --> 0:09:06.360 on the sidelines that could move very quickly, so I 0:09:06.400 --> 0:09:10.760 think there's a lot more interest the valuation piece. I 0:09:10.760 --> 0:09:13.720 think when it's interesting when people talk about catalysts, because 0:09:13.720 --> 0:09:16.839 I think when something is very cheap, you shouldn't be 0:09:16.880 --> 0:09:20.000 too worried about a catalyst. It's going to come. Valuation 0:09:20.120 --> 0:09:22.439 in and of itself is a pretty interesting catalyst. Is 0:09:22.440 --> 0:09:23.600 the most people are often. 0:09:23.440 --> 0:09:25.600 Not prepared to wait, are they. I mean, this is 0:09:25.600 --> 0:09:27.440 one of the problems with the fund management industry, and 0:09:27.480 --> 0:09:31.040 we always say that retail investors have this great advantage 0:09:31.120 --> 0:09:33.640 over institutional investors because they can afford to wait. No 0:09:33.679 --> 0:09:36.400 one's judging, no one cares. They can buy things that 0:09:36.400 --> 0:09:38.640 are cheap and consider around and wait with that endlessly 0:09:38.920 --> 0:09:41.240 wobbling way about catalyst because it doesn't matter. 0:09:41.440 --> 0:09:44.040 Yeah, that's true to me. The interesting thing is, I 0:09:44.080 --> 0:09:46.960 think the smart question would be what is the catalyst, 0:09:47.120 --> 0:09:51.400 for example, for Nvidia to double again whatever. But for 0:09:51.800 --> 0:09:55.640 very very cheap companies on low multiples, the risk is low. 0:09:56.400 --> 0:09:58.319 I mean you might say in the UK as well, 0:09:58.360 --> 0:10:02.360 that the big sellers of finished selling, so where we're 0:10:02.400 --> 0:10:05.360 just waiting, we're sort of plattered. So the pension funds 0:10:05.400 --> 0:10:08.600 of probably finished selling, the insurance funds of finished selling, 0:10:08.600 --> 0:10:11.240 they've been selling down their UK takes for years, years 0:10:11.280 --> 0:10:13.640 and years of practically no home bus at all, in fact, 0:10:13.800 --> 0:10:17.120 no home busts at all, negative and negative home bust 0:10:17.160 --> 0:10:19.480 most of them, so they can't really sell anymore. The 0:10:19.559 --> 0:10:22.959 defined benefit pension funds have nothing left to sell, so 0:10:23.200 --> 0:10:29.520 that that negative has effectively gone, and defined contribution pension funds, 0:10:29.559 --> 0:10:32.240 the assets inside those are rising and they tend to 0:10:32.280 --> 0:10:35.920 have a little higher allocation to the UK, so that 0:10:36.160 --> 0:10:38.240 makes a difference, a gradual one, but a difference in 0:10:38.280 --> 0:10:40.400 terms of weight of money coming to the market. So 0:10:40.520 --> 0:10:44.679 it's it's as much the negatives have been removed as anything. 0:10:44.400 --> 0:10:46.720 Else, very much, and I think a few others have 0:10:46.760 --> 0:10:50.560 been removed as well. So if you go back two years, 0:10:51.200 --> 0:10:54.160 the narrative was very much that the UK there was 0:10:54.200 --> 0:10:57.800 a kind of UK exceptionalism where the UK was extremely 0:10:57.840 --> 0:11:01.680 bad and a complete outlawer. Even in Europe. That narrative 0:11:01.920 --> 0:11:03.360 was actually just wrong. 0:11:03.200 --> 0:11:04.960 But it was never true in the first Leich just 0:11:04.960 --> 0:11:06.280 somehow developed well. 0:11:06.280 --> 0:11:08.559 I think it was all tied into Brexit, and a 0:11:08.600 --> 0:11:11.520 lot of the people who were anti Brexit sort of 0:11:11.640 --> 0:11:14.160 pushed that narrative because it sort of made them feel 0:11:14.200 --> 0:11:17.840 better but the reality is it wasn't true, and for 0:11:17.880 --> 0:11:20.559 a couple of years that's gone. That narrative was completely 0:11:20.559 --> 0:11:23.959 gone because the data for the UK is kind of 0:11:24.000 --> 0:11:26.240 in the middle of the pack for a European country, 0:11:26.600 --> 0:11:28.560 So it's not brilliant by the way at all, but 0:11:28.600 --> 0:11:30.559 it's just not exceptionally bad. 0:11:30.679 --> 0:11:33.400 You can't suggest that it's specifically worse than anybody else 0:11:33.520 --> 0:11:36.120 because of Brexit, all because of any one factor, and 0:11:36.160 --> 0:11:38.199 you can't. You also can't do the thing of looking 0:11:38.240 --> 0:11:40.559 around saying, oh, look, the UK is in political koes 0:11:40.559 --> 0:11:43.000 and everywhere else's stable, because that, of course isn't true 0:11:43.000 --> 0:11:43.760 either exactly. 0:11:43.800 --> 0:11:46.360 So I think we've had a shift in the narrative 0:11:46.400 --> 0:11:49.480 and the mood around the UK about the general economy, 0:11:49.520 --> 0:11:53.120 which is significantly positive. It was seen as uninvestable in 0:11:53.200 --> 0:11:56.600 twenty twenty two and now it's a very big shift 0:11:56.760 --> 0:11:58.679 to be seen to be investable. Whether people do it 0:11:58.760 --> 0:12:00.480 or not, it's not the matter, but that's a very 0:12:00.480 --> 0:12:03.760 big psychological shift. I think. On top of that, as 0:12:03.800 --> 0:12:08.480 you say, the election, whatever one's preference is, it was boring, 0:12:08.559 --> 0:12:11.520 and boring is good, so I think that was a positive. 0:12:11.760 --> 0:12:13.520 So I think a lot of the pieces of the 0:12:13.600 --> 0:12:17.319 jigsaw are in place. And the other thing is there's 0:12:17.360 --> 0:12:20.880 a lot of resilience amongst UK companies. The UK has 0:12:20.880 --> 0:12:23.400 been in a sort of not a technical recession, but 0:12:23.440 --> 0:12:25.400 it's kind of felt like a recession for quite a 0:12:25.400 --> 0:12:28.840 long time, and businesses are used to operating in that environment. 0:12:28.920 --> 0:12:32.080 Combine that with low valuation, they've taken an awful lot 0:12:32.120 --> 0:12:35.720 of pain. So of course there are circumstances which could 0:12:35.720 --> 0:12:39.040 be negative, but I think an awful lot of that 0:12:39.440 --> 0:12:40.120 is in the price. 0:12:40.440 --> 0:12:42.840 Yeah. Someone suggested to me earlier today that one of 0:12:42.840 --> 0:12:45.959 the reasons that UK companies is so resilient is because 0:12:46.240 --> 0:12:50.280 management became so much better during COVID. Managers really learned 0:12:50.320 --> 0:12:52.840 to understand their companies and the dynamics of their companies 0:12:52.880 --> 0:12:55.040 and every little detail of their companies in a way 0:12:55.080 --> 0:12:58.040 they wouldn't necessarily have had to at any point pre COVID. 0:12:58.120 --> 0:13:00.839 So coming out of COVID, or not out of COVID itself, 0:13:00.880 --> 0:13:04.240 but out of the pandemic regulations, etc. That changed the 0:13:04.280 --> 0:13:06.679 way they were able to manage companies made them much 0:13:06.720 --> 0:13:09.640 more resilient in the following years. 0:13:09.720 --> 0:13:11.719 Is that fair or I think it's fair, And I 0:13:11.760 --> 0:13:14.280 think there's a very significant contrast there between the private 0:13:14.320 --> 0:13:16.800 and the public sector. You know, I think companies got 0:13:16.880 --> 0:13:19.640 lean and mean in that period, and I think the 0:13:19.640 --> 0:13:22.679 public sector did the opposite, which you know, for a 0:13:22.679 --> 0:13:24.920 whole lot of reasons, but no, I think it's true. 0:13:24.960 --> 0:13:27.560 I think companies and not just COVID. Also, coming out 0:13:27.640 --> 0:13:30.520 of COVID was very complicated for a lot of companies, 0:13:30.559 --> 0:13:34.600 particularly around supply chain, and it's been tough. They've had 0:13:34.640 --> 0:13:38.480 an awful lot thrown at them, and they've managed throughout 0:13:38.559 --> 0:13:41.720 the last few years. Whenever we met companies, with the 0:13:41.760 --> 0:13:44.720 exception of the worst moments in COVID where people really 0:13:44.760 --> 0:13:47.960 didn't know what was going on, but outside that extreme moment, 0:13:48.480 --> 0:13:51.120 when you've met with companies, they weren't complaining about the 0:13:51.160 --> 0:13:54.520 economy or any of these other factors that one tends 0:13:54.559 --> 0:13:56.600 to read about. They were just getting on with it. 0:13:57.080 --> 0:14:00.360 And that's what companies do. That's one of the things 0:14:00.400 --> 0:14:02.720 about meeting companies. They tend to be quite positive and 0:14:02.720 --> 0:14:05.280 they're just getting on with the work they have to do. 0:14:05.520 --> 0:14:10.400 Okay, So you've got pleasantly valued, very resilient companies sitting 0:14:10.440 --> 0:14:13.640 in an environment where what could go wrong mostly has 0:14:14.000 --> 0:14:16.120 Although I would say there's probably a little political risk 0:14:16.160 --> 0:14:18.800 in there. We've no adar about the budget in October. 0:14:18.800 --> 0:14:20.480 They're an awful lot of things there that may look 0:14:20.840 --> 0:14:23.840 unfriendly to business, unfriendly to growth. In this idea that 0:14:23.880 --> 0:14:27.360 the UK is now stable place that could be derailed. 0:14:27.440 --> 0:14:29.320 That could be derailed, So there is political risk. 0:14:29.440 --> 0:14:32.080 If you talk to a London they will definitely share 0:14:32.120 --> 0:14:34.480 that view. They would definitely say that they're very worried 0:14:34.520 --> 0:14:36.440 about things, but there aren't that many. 0:14:36.560 --> 0:14:38.120 There aren't that many of them, but that other people 0:14:38.200 --> 0:14:40.400 may be worried about capital gains. We may see people 0:14:40.600 --> 0:14:43.880 selling their UK equities, for example, ahead of the budget 0:14:43.920 --> 0:14:46.440 to crystallize capital gains in advance of the rate going up. 0:14:46.480 --> 0:14:49.120 So the river is there are niggles about it. That's 0:14:49.160 --> 0:14:52.520 not concerned about the direction of travel, but nonetheless optimistic 0:14:52.520 --> 0:14:55.040 point of view, We've got a politically stable country with 0:14:55.160 --> 0:14:59.600 a perfectly reasonable economy, interest rates very likely to come 0:14:59.640 --> 0:15:02.040 down for that very soon, and most of the world 0:15:02.080 --> 0:15:05.280 in a rate cutting cycle as well, and great valuations, 0:15:05.320 --> 0:15:09.040 so it would be entirely reasonable to think that you 0:15:09.040 --> 0:15:13.320 could see a fairly nice couple of years coming from UK. 0:15:13.400 --> 0:15:14.680 Smallerment caps in particular. 0:15:14.960 --> 0:15:17.760 I think so, and the data is also supportive on that. 0:15:17.960 --> 0:15:21.720 One can't invest on this basis, but it's interesting historically, 0:15:21.800 --> 0:15:25.400 when particularly the small cap space has a bad period 0:15:25.440 --> 0:15:28.320 for one, two or three years, the following years are 0:15:28.320 --> 0:15:31.920 normally very strong. It's pretty good at bouncing back. So 0:15:32.440 --> 0:15:36.120 it tends to exaggerate in both directions. So that's what 0:15:36.160 --> 0:15:38.960 I would expect. Having said that, I didn't expect what 0:15:39.000 --> 0:15:41.160 happened in the last two years, so you know. So 0:15:41.520 --> 0:15:44.400 I'm not putting myself forward as a sort of soothsayer, 0:15:44.440 --> 0:15:47.760 but I think the facts are very supportive, very supportive. 0:15:48.040 --> 0:15:51.080 Okay, let's go back to the problems of the UK 0:15:51.200 --> 0:15:55.000 market as a whole and a potential catalyst or not. 0:15:55.240 --> 0:15:58.640 There's been a lot of discussion in the industry and 0:15:59.280 --> 0:16:01.680 among politics over the last couple of years about what 0:16:01.760 --> 0:16:04.640 can be done to make the UK market a better 0:16:04.680 --> 0:16:07.320 place to invest. And if you talk to an international investor, 0:16:07.360 --> 0:16:09.520 they'll very often tell you that, yeah, it looks fine, 0:16:09.640 --> 0:16:12.120 but the liquidity isn't there. They can't quite cope with it, 0:16:12.440 --> 0:16:14.760 or they worry about stamp duty. They worry about the 0:16:14.760 --> 0:16:16.520 fact that the UK is one of the highest stamp 0:16:16.560 --> 0:16:20.360 duties in the world, and they worry about the government 0:16:20.400 --> 0:16:23.600 not necessarily producing some kind of signal that they support 0:16:23.680 --> 0:16:26.480 the market. I mean, I felt that the counseling of 0:16:26.480 --> 0:16:28.040 the brita Ice it was a very bad idea. I 0:16:28.040 --> 0:16:31.720 don't know what you thought about that, but them should 0:16:31.720 --> 0:16:36.680 be something that we can do to create that catalyst 0:16:36.680 --> 0:16:38.640 for the UK market. What do you think there should be? 0:16:38.920 --> 0:16:41.640 Well, I think it's necessary. Now I agree with you 0:16:41.720 --> 0:16:43.960 with the British ISA. I mean, yes, it was messy 0:16:43.960 --> 0:16:46.800 and complicated in all kinds of issues, but it was 0:16:46.840 --> 0:16:50.960 a statement of intent and I think that exactly the sortant. 0:16:51.360 --> 0:16:53.120 There are much bigger ways that could be done. But 0:16:53.480 --> 0:16:55.960 I think the first thing is to try and work 0:16:55.960 --> 0:16:58.280 out what the problem is, because there are a lot 0:16:58.280 --> 0:17:02.520 of false narratives around the UK market, and I imagine 0:17:02.560 --> 0:17:06.320 the average politician assumes that these are the kind of 0:17:06.320 --> 0:17:08.880 basic assumptions are we're bad at taking risk and we're 0:17:08.920 --> 0:17:11.479 bad at tech, and they look at the foot Sea 0:17:11.600 --> 0:17:14.320 hundred as if it's representative of the entire UK market, 0:17:14.800 --> 0:17:18.000 and I think that's wrong. Yes, a few companies have 0:17:18.080 --> 0:17:21.200 listed in the States. They typically are actually companies where 0:17:21.240 --> 0:17:23.120 all of their activities are in the US, so it's 0:17:23.160 --> 0:17:27.239 not a particularly unusual phenomenon in my view. But the 0:17:27.280 --> 0:17:32.560 real issue is that underneath the foot Sea hundred it's sick. 0:17:32.720 --> 0:17:35.560 The patient is sick. It's been hollowed out over the 0:17:35.680 --> 0:17:39.200 last probably twenty years, but in particular over the last five. 0:17:40.400 --> 0:17:44.080 You know, the Fledgling Index has lost seventy five percent 0:17:44.119 --> 0:17:47.119 of its constituents in the last five years. If you 0:17:47.160 --> 0:17:51.440 exclude investment companies, which are aren't businesses, the small cap index, 0:17:51.680 --> 0:17:54.920 it has lost half of its market value, ignoring again 0:17:55.240 --> 0:17:58.040 investment companies, so it's not going to exist in a 0:17:58.080 --> 0:17:58.760 few years on. 0:17:58.800 --> 0:18:01.040 This is again because people can get money elsewhere. It 0:18:01.080 --> 0:18:04.399 takes us back to private equity. Equity help waves of 0:18:04.440 --> 0:18:06.920 private money that can that can if the companies don't 0:18:06.920 --> 0:18:08.240 need a list because they can get hold of the 0:18:08.240 --> 0:18:10.560 money earlier, or private equity can take them off because 0:18:10.560 --> 0:18:12.280 they can buy them out at a premium and management 0:18:12.280 --> 0:18:13.840 hasn't got the energy left put up a fight. 0:18:14.080 --> 0:18:16.359 Yeah, that is the sort of the diagnosis in the 0:18:16.400 --> 0:18:20.000 sense that you know, there is sickness down in the 0:18:20.040 --> 0:18:22.679 lower reaches of the market, and it's a problem that 0:18:22.800 --> 0:18:25.280 in the same way if a tree didn't have roots, 0:18:25.320 --> 0:18:26.919 it would be a bit of a problem. I think 0:18:26.960 --> 0:18:29.000 it's also analogous to the housing market. You know, when 0:18:29.000 --> 0:18:31.880 the housing for the housing market market to succeed at 0:18:31.880 --> 0:18:34.879 the very top level, ultimately you need health at the 0:18:34.960 --> 0:18:37.280 very bottom as well. It ripples all the way through. 0:18:37.720 --> 0:18:40.399 So I think there's a real issue down in that 0:18:40.440 --> 0:18:45.560 the lower reaches. I think that the solution is actually 0:18:45.720 --> 0:18:48.280 very simple. It's a lack of capital. You know, the 0:18:48.680 --> 0:18:52.040 UK is the only major stock market on Earth that 0:18:52.119 --> 0:18:57.400 doesn't have around half its ownership in domestic long term 0:18:57.440 --> 0:19:00.359 capital either pension funds or insurance companies. Used to have 0:19:00.400 --> 0:19:02.399 half not that long ago, maybe thirty years ago. Now 0:19:02.400 --> 0:19:07.080 it's down to five percent roughly, and that's unique. Nobody 0:19:07.119 --> 0:19:11.320 else does that, nobody, and that is a problem. And 0:19:12.320 --> 0:19:14.399 basically another way of looking at it is we've had 0:19:14.560 --> 0:19:18.760 roughly a trillion of outflows in the last few decades 0:19:19.400 --> 0:19:21.920 in the context of a market that's worth just over 0:19:21.960 --> 0:19:24.960 two trillion. So it's very significant, and it's for a 0:19:24.960 --> 0:19:27.280 whole lot of reasons, but a lot of it relates 0:19:27.320 --> 0:19:30.920 to errors by government and regulators over many, many years. 0:19:31.440 --> 0:19:35.520 And I'm not a fan of government interference in markets. 0:19:35.560 --> 0:19:37.760 But when they make a mess, I think they have 0:19:37.800 --> 0:19:41.040 to think about whether they put it right. And I 0:19:41.080 --> 0:19:43.200 think the starting point has to be do we want 0:19:43.200 --> 0:19:46.240 to stock market at all, because on the current direction 0:19:46.320 --> 0:19:48.920 of travel, we will not have one in a meaningful 0:19:48.960 --> 0:19:50.440 sense in five or ten years. 0:19:50.520 --> 0:19:53.120 Well, there's an interesting parallel. I was discussing with them 0:19:53.160 --> 0:19:55.639 on the other day about regional stock markets in the 0:19:55.760 --> 0:19:57.320 UK and as you know, we used to have so 0:19:57.480 --> 0:20:03.720 many regional stock markets. We had Aberdeen, done Glasgow, Edinburgh, Leeds, Birmingham, Manchester. 0:20:03.960 --> 0:20:06.400 I'm sure there are more, and the last one's disappeared 0:20:06.400 --> 0:20:08.639 in the mid eighties with the Big Bang, But also 0:20:08.680 --> 0:20:12.560 they gradually withered away because London became the best place 0:20:12.600 --> 0:20:14.679 to less and their place with the other the biggest company's, 0:20:14.720 --> 0:20:17.439 most expensive companies, most interesting companies, et cetera. And the 0:20:17.440 --> 0:20:20.320 ones that were listed elsewhere just still slowly disappeared. Everything 0:20:20.359 --> 0:20:23.679 gravitated to London, and there is suggested that this, you 0:20:23.680 --> 0:20:28.760 know this, this could happen globally as the London comes 0:20:28.800 --> 0:20:32.280 to New York because Dundee was to London and gradually 0:20:32.400 --> 0:20:34.080