Speaker 1: Hello, John, Hi will now John, inflation right, A lot
Speaker 1: of people have been expecting CPI in the UK to
Speaker 1: fall and fall quite significantly. The whole transient argument is back.
Speaker 1: Oh look, energy prices are falling. Fuel prices are falling.
Speaker 1: Oil prices are falling, and so what we're going to
Speaker 1: see is lower inflation numbers coming through and we kind
Speaker 1: of have it. It's we need tiny bit. But today's
Speaker 1: numbers came in significantly higher than people expected.
Speaker 2: Right, we now have had CPI above ten percent for
Speaker 2: months and months and months. It will take and it
Speaker 2: doesn't seem to be falling back. You've written about this, right,
Speaker 2: what's your explanation? You know what mine is anyway.
Speaker 3: Well, I mean it's just that inflation keeps coming in
Speaker 3: higher than the Bank of England can those wishful thinking
Speaker 3: and makes it makes it harm. I mean in April
Speaker 3: we will see a sharp fall and that will go
Speaker 3: below double digital. It's because effective atithmetically it simply cannot
Speaker 3: The rate it sign now, but it'll probably fall is
Speaker 3: something like seven and a half or eight percent, and
Speaker 3: you know that will sound like a law, but it's
Speaker 3: still higher than the Bank I'd hoped it would be,
Speaker 3: you know, as recently as fair Beauty and it's saying but.
Speaker 1: It's worth reminding everybody that the Bank of England target
Speaker 1: is two percent and an inflation is currently five times
Speaker 1: the Bank of England target. I mean this represents a
Speaker 1: policy fail failure of such stunning scale. I'm amazed for
Speaker 1: not talking about it every single day. We talk a
Speaker 1: lot about the inflation numbers, but how often do you
Speaker 1: hear someone on the radio in the morning saying, wow,
Speaker 1: five times the Bank of England target. Can we get
Speaker 1: someone from the Bank of England on to explain it?
Speaker 1: That's like getting someone from one of the top managers
Speaker 1: of the NHS on to explain the mess up at
Speaker 1: the NHS, right, We never hear from them.
Speaker 3: Well, it's true, and utiliarly talks about it during the
Speaker 3: press conferences after the interest rate meetings either. I mean,
Speaker 3: I think that's interesting in itself because there is that
Speaker 3: sense or that understanding that an awful lot of this
Speaker 3: stuff is beyond the control of central banks. So the
Speaker 3: fact that you set a two percent target doesn't mean
Speaker 3: that you're going to get two percent. And it's almost
Speaker 3: everyone takes that. Yeah, I mean everyone seems to take
Speaker 3: that for granted, to the point where you're not actually
Speaker 3: holding the central bank governor accountable for something that in
Speaker 3: theory he's accountable for. And I mean even has to
Speaker 3: write those stupid little letters to the Chancellor, you know,
Speaker 3: every couple of months saying, oh, you know, I'm sorry
Speaker 3: that inflation is you know, below one percent or above
Speaker 3: three percent. Here's why, it's basically not my fault.
Speaker 1: So what's the point What is the point of the
Speaker 1: Bank of England, What is the point of any central banks?
Speaker 1: You've literally just talked from out of a job? Well,
Speaker 1: I mean, I mean they have one job.
Speaker 3: I don't really think that central banks are necessarily a
Speaker 3: good thing in the first place. I don't know what
Speaker 3: the mechanism is that you would replace them with. But
Speaker 3: you know they're already basically chasing the market the whole
Speaker 3: time anyway.
Speaker 1: Yeah, but it just tells us that we're not quite
Speaker 1: as close to peak rates as we would have expected. Now, listen,
Speaker 1: there's one number that really really stands out in these
Speaker 1: inflation numbers that we've had this week, and that is
Speaker 1: food inflation over nineteen percent, an absolutely extraordinary level of inflation.
Speaker 1: And also, I think we can be pretty certain that
Speaker 1: farmers are not seeing in nineteen percent rise in the
Speaker 1: prices that they're getting. So this is part of this
Speaker 1: new dynamic that we're beginning here a lot about greed inflation,
Speaker 1: where companies are taking the opportunity of crisis and disaster
Speaker 1: to effectively profit here. You know, they did it during
Speaker 1: the pandemic the beginning, at the beginning of the war,
Speaker 1: and they are still doing it. They're shoveling up their
Speaker 1: profit margins to increasing their supernomal levels to take advantage
Speaker 1: of this slightly chaotic period in time. And that seems
Speaker 1: like something that surely can't continue. And if it does continue,
Speaker 1: there would surely be political pressure on the corporate world
Speaker 1: to just stop.
Speaker 3: I mean, you would think particularly food inflation, because food
Speaker 3: inflation is extremely visible. You know, I don't know why
Speaker 3: anyone regardless of you know, can I wealthy or not wealthy,
Speaker 3: who doesn't look at the shopping bell at the moment
Speaker 3: and say, hold dn a minute. You know last week
Speaker 3: that was you know, about ten percent less than it
Speaker 3: is today. So yeah, not that's especially given that you
Speaker 3: know the government has this they dam having the inflationary
Speaker 3: by end of the year. There's quite be some political
Speaker 3: pressure to be out as long as they can find
Speaker 3: a smoking gun for this stuff.
Speaker 1: Well, I mean, this is the sort of time when
Speaker 1: you would expect margins to be falling. You'd be looking
Speaker 1: at the cost pressures, you'd be looking at the pressure
Speaker 1: on consumers at the same time, and you'd be saying,
Speaker 1: this is exactly when you expect the profit cycle to
Speaker 1: turn and margins to be lower, instead of which they're
Speaker 1: going up and up again.
Speaker 3: Well, I mean that's interesting. I mean I know that.
Speaker 3: I mean one reason I think that might be the
Speaker 3: case is simply because I think the consumers are probably
Speaker 3: in better shape than we are given the impression that
Speaker 3: they are. And so that's one reason why this perhaps
Speaker 3: let's push back against these higher prices. Are you a
Speaker 3: cost respect.
Speaker 1: Hang on, are you a cost of living crisis denial? John?
Speaker 3: You know, I know as much denying that there's a
Speaker 3: course of living crisis, But yes, I'm denying the people
Speaker 3: are in the sort of unable to spend. I mean,
Speaker 3: everyone's get jobs, and there are some people are getting
Speaker 3: a certain amount of extra wages, and so far, to
Speaker 3: be fair, they still seem to be able to pay
Speaker 3: their mortgages and things like that as well. I mean,
Speaker 3: it's still a lot of fixtrates to come off this year.
Speaker 3: Something's got to explain how these companies I mean, I mean,
Speaker 3: the supermarket sector in the UK, like the banking sector,
Speaker 3: is pretty competitive, and so if if they're managing to
Speaker 3: push through super super normal profit margin prices, then that
Speaker 3: means that somebody must be sucking it up somewhere, and
Speaker 3: if the consumer is sucking up, it implies that they
Speaker 3: have enough money to do so. Now I'm not I mean,
Speaker 3: I I don't like the idea that people are getting,
Speaker 3: you know, profiteered from due to this kind of confusion,
Speaker 3: and I think that if that's happening, then you know,
Speaker 3: we need to look at it. You know, it's not
Speaker 3: a it's something the politicians should take a week look
Speaker 3: at the fact that it's.
Speaker 1: Even about some price control place controls.
Speaker 3: That's a great idea. Always words, let me.
Speaker 1: Tell you, Let me tell you about rent controls, which
Speaker 1: we now have in Scotland is an Atholte classic of
Speaker 1: the price control genre. And when they first introduced rent
Speaker 1: controls for Scotland last year, I think all of those
Speaker 1: were some vague knowledge of economic history, etc. Again, you know,
Speaker 1: there's been tried a lot of times before in it
Speaker 1: never ever ever works. Because if if the market is
Speaker 1: telling you via high prices that you have maybe too
Speaker 1: much demand or not enough supply or both, you want
Speaker 1: to policy that either reduces demand or increases supply, right,
Speaker 1: and rent controls do exactly the opposite. Make stuff cheaper,
Speaker 1: you increase demand, reduce the return to suppliers, and you
Speaker 1: reduce supply. So you know, that seems obvious and it's
Speaker 1: borne out by many, many case studies. So the Scottish
Speaker 1: did it anyway, I guess.
Speaker 3: What what's harming?
Speaker 1: Well, do you know what, sten This is the one
Speaker 1: time it worked because Scotland is special. Now no, it's
Speaker 1: not working for started suppliers, suppliers falling land laws are
Speaker 1: pulling out, the build to rent suppliers who were just
Speaker 1: beginning to get reasonably big in Scotland are pulling out
Speaker 1: or delaying things. Talking about there was a reporter from
Speaker 1: the British Building Federation in which many of the big
Speaker 1: providers noted that they found Scotland an unattractive place to
Speaker 1: think about investing because of the political risk. And then
Speaker 1: here's a really interesting little dynamic. You can actually see
Speaker 1: what's happening to rents, and despite the fact that they
Speaker 1: have been frozen, they're still going up because every time
Speaker 1: a property comes to the market again, there's a new
Speaker 1: roopdris between tenants. The landlords put up the rent as
Speaker 1: much as they possibly can because they know that their
Speaker 1: future potential to put at rents is limited. So you'll
Speaker 1: see in cities Glasgow, Edinburgh, et cetera, rent's going out
Speaker 1: fourteen to fifteen percent. And of course when we get
Speaker 1: to the beginning available when you can put your rent
Speaker 1: up by three percent, everybody will put their rents up
Speaker 1: by three percent, So the cab becomes a target. Anyway,
Speaker 1: I only tell you about it because absolutely standard stuff
Speaker 1: and mostly mostly the results of policies aren't one hundred
Speaker 1: percent predictable because there are various sort of external forces
Speaker 1: and things can things can turn out differently, but not
Speaker 1: rent controls. Not rent controls. We have so much evidence.
Speaker 3: No, I mean, that's I think that's really interesting because
Speaker 3: for two reasons, like one, actually in areas that aren't
Speaker 3: rent controlled, like you know the rest of the UK,
Speaker 3: it's basically the same dynamic. The landlords aren't generally putting
Speaker 3: rents up for certain tenants because they're just glad they've
Speaker 3: got a certain tenant and one particularly who's low hassle,
Speaker 3: and that's a big deal. You don't really want to
Speaker 3: kick people over a few percent. But as soon as
Speaker 3: people leave, you know, yeah, rents are getting jacked up
Speaker 3: by double digit rates. So the same thing is happening,
Speaker 3: only you don't need to have imposed any event controls.
Speaker 3: And then the thing about the three percent, it's like,
Speaker 3: as you say, it turns from being a cap and
Speaker 3: a target and everyone can raise it at the same
Speaker 3: time because they all know what the target is. And
Speaker 3: so effectively you've kind of created a massive monopoly market
Speaker 3: because now everyone knows that there's not going to be
Speaker 3: anyone undercutting them because everyone's going to raise their rates
Speaker 3: by three percent exactly at the same time. So the
Speaker 3: tenants are a captive market. So I just I just
Speaker 3: wish people would think about the consequences of the policies
Speaker 3: beyond doing something that sounds good.
Speaker 1: It's so.
Speaker 3: Frustrating.
Speaker 1: It's frustrating, But you know what, here's a prediction for you.
Speaker 1: We have decades of history showing as that rent controls
Speaker 1: don't work and effect have negative effects. We have a
Speaker 1: live example, a live case that you can watch in
Speaker 1: real time in Scotland. You can see it failing. You
Speaker 1: can read the failure and the numbers. But I bet
Speaker 1: that the calls for rent controls in the rest of
Speaker 1: the UK and around the world will continue. I know
Speaker 1: that the Sidik can in London has been calling for them.
Speaker 1: You will see more calls for them and you will
Speaker 1: probably get rent controls in more major cities in the
Speaker 1: UK because we are so back to the seventies.
Speaker 3: Oh yeah, I mean Sidik's been calling for them since
Speaker 3: before Scotland even introduced their stuff. So yeah, I mean
Speaker 3: he's not going to change, you mean, I mean, yeah,
Speaker 3: you're good.
Speaker 1: Yeah, but do you know what that tells you landlords?
Speaker 1: And there's messages here, messages I'm going to write about this.
Speaker 1: In fact, I in the middle of writing about this,
Speaker 1: there are messages from Scotland for the rest of the UK.
Speaker 1: All these property bubbles are high price of housing. It
Speaker 1: makes you want to do something, don't do this. And
Speaker 1: then there's a message for landlords the government shouldn't do this,
Speaker 1: but it probably will take action.
Speaker 3: Yeah, I mean, do you do sort of sitting in
Speaker 3: and think, well, look, if I'm a landlord just now
Speaker 3: and I own a properly then on the one hand, yeah,
Speaker 3: maybe I'm going to face a bit of political hassle.
Speaker 3: On the other hand, I'm going to have a semi
Speaker 3: kind of protected market, and much the same way that
Speaker 3: you know, Facebook and all the rest of them call
Speaker 3: for regulations whenever they if they're in the dominant position.
Speaker 3: So I know, I mean, you know, rent controls are
Speaker 3: in a funny kind of way. They do give you
Speaker 3: that if you know you're going to get a nice
Speaker 3: predictable three percent uplift every single year, and then an
Speaker 3: extra you know, twenty twenty percent every time somebody moves out.
Speaker 3: Do you know, maybe it's not such a bad Do
Speaker 3: you know what this has to be?
Speaker 1: In I can introduce you quite a few people in
Speaker 1: Edinburgh who may want to sell you a too big
Speaker 1: or that well told.
Speaker 3: Thanks good, thank you.
Speaker 1: Welcome to Marin Talks Money, the podcasting which people who
Speaker 1: now the market's explain the markets. I'm meren Sunset Web.
Speaker 1: This week's special treat a conversation with Simon Edelson, manager
Speaker 1: of the Artemist Global Select Fund and co manager of
Speaker 1: the Midwind Investment Trust. Actually, before we get any further Samon,
Speaker 1: do you know I call it the Midwind Investment Trust,
Speaker 1: but sometimes I'm tended to call it the Midwind Investment Trust.
Speaker 1: What's the actual real answer, because I hear both all
Speaker 1: the time.
Speaker 4: Well, the last time I was in Dundee, which is
Speaker 4: where Midwind Street is, the locals call it Midwind, So
Speaker 4: I'm sticking with that.
Speaker 1: You're sticking with that, Okay, brilliant. And one of the
Speaker 1: things that I want to mention before we get started
Speaker 1: is that you have a fabulous where record of spending
Speaker 1: long periods in the top quartile, etc. So that you've
Speaker 1: had a very successful career and now you're leaving it.
Speaker 1: You're retiring at the end of the year and handing
Speaker 1: all this over, and we'll talk about the person you're
Speaker 1: handing it over to briefly at the end, so everyone
Speaker 1: knows whether they should sell immediately or hang onto the
Speaker 1: long term. But we'll come to that towards the end
Speaker 1: because Fus, obviously we want to talk about you, so
Speaker 1: thank you for joining us.
Speaker 5: You're welcome to light to be here.
Speaker 1: Good now, I have just been looking, which I didn't
Speaker 1: mean to, actually, I was just googling the performance of
Speaker 1: the Midwind Investment Trust so I can see whether it
Speaker 1: be polite or route to you at the beginning of this,
Speaker 1: and I found an interview that we did a couple
Speaker 1: of years ago, twenty nineteen, and it was very prescient,
Speaker 1: very prescient, all about you had recently been on stage
Speaker 1: with the managers of Scottish Mortgage, and you had been
Speaker 1: We talked a little bit about that because I had
Speaker 1: also recently interviewed the managers of Scottish Mortgage, and we
Speaker 1: talked about the importance of growth and how amazing it
Speaker 1: is to be invested in exciting companies which are disruptive
Speaker 1: and growing at speed and doing brilliant things that will
Speaker 1: lead the world forward, but also about how important it
Speaker 1: is to make sure that you buy those stocks at
Speaker 1: the right price. And you had, I think at the time,
Speaker 1: just sold out of Amazon and a few of those
Speaker 1: sort of similar names, and obviously Scottish Mortgage was hanging
Speaker 1: onto those and you were right.
Speaker 4: Well, yes, we did think that valuations would come under
Speaker 4: pressure a couple of years ago, and so we sold
Speaker 4: a few of our technology shares, which we've made a
Speaker 4: huge amount of money in over the years but we
Speaker 4: just felt that there come points in markets where everyone's
Speaker 4: in the same place, everyone's in the same stocks, everyone's
Speaker 4: pointed in the same direction. Now this doesn't mean these
Speaker 4: companies aren't good. I mean most of them have actually
Speaker 4: performed very well over the last few years, but the
Speaker 4: share prices have gone down because they were priced to perfection,
Speaker 4: and they were priced to perfection also against very very
Speaker 4: artificially low interest rates.
Speaker 5: So we'd had very low interest rates before.
Speaker 4: The pandemic as a result of the financial crisis at
Speaker 4: the end of the two thousands.
Speaker 5: And then those interest rates kept even lower.
Speaker 4: So a lot of what's happened over the last couple
Speaker 4: of years has just been interest rates getting where they
Speaker 4: normally are, inflation getting where it normally is, but quite
Speaker 4: a big all off in the share price of these companies,
Speaker 4: despite those companies still being pretty good businesses.
Speaker 1: What's interesting, isn't it that over this lengthy period of
Speaker 1: falling interest rates and brilliantly performing equity markets, large groups
Speaker 1: of people came to believe that their good performance was
Speaker 1: a result of brilliant stock picking and skill, when in
Speaker 1: fact it was to a large degree a function of that.
Speaker 1: We could come on to central banks in a minute
Speaker 1: actually talking about this kind of thing, whereas in fact
Speaker 1: it was a function of more global global economic dynamics
Speaker 1: and movements.
Speaker 4: I'm afraid that that's always right. My old boss, Neil's Taup,
Speaker 4: who started farm management in nineteen forty six, and I've
Speaker 4: met him when he was about seventy, and one of
Speaker 4: the things he said to me, which always seemed to
Speaker 4: be a joke but now seems to be less of
Speaker 4: a joke, is that as people get wealthier, it turns
Speaker 4: out that they think that they're cleverer than they were.
Speaker 4: I mean, of course, the trouble is that some of
Speaker 4: them were just luck and some of the times we
Speaker 4: live in are easy times to make money. I'm afraid
Speaker 4: the last ten years was an easy time to make
Speaker 4: money until two years ago, and the period we're in
Speaker 4: now is probably going to be a bit more tricky.
Speaker 4: Ask for a bit more certainly, a bit more valuation discipline,
Speaker 4: because suddenly we have the option of leaving money in
Speaker 4: the bank. I mean, you'll lose purchasing power if you
Speaker 4: leave money in the bank, but.
Speaker 5: At least you get more than nothing.
Speaker 1: Well, you saw, I'm sure about the new Apple bank
Speaker 1: account will not quite bank account, but deposit to arrangement
Speaker 1: where you can get four point Indeed, now, why would
Speaker 1: you not do that? And also why would you not?
Speaker 1: Why would you not on your investment account? And of
Speaker 1: course I've done this myself because I had a reasonable
Speaker 1: amount of cash in my investment accounts, which Harger's landsdown,
Speaker 1: except for we're making a large amount of money from
Speaker 1: you by paying me no interest at all. And now
Speaker 1: I've moved a doll landed guilts. So you know, as
Speaker 1: presumably everybody has, and that has consequences, doesn't it.
Speaker 4: Yes, well, well, of course this sort of movement is
Speaker 4: what caused an American bank to fall over, quite a
Speaker 4: small American bank, but all the same, bank failures don't
Speaker 4: come along all that often, and when they do come along,
Speaker 4: one ought to pay attention to them. So this American
Speaker 4: bank called Silicon Valley Bank. He got a couple of
Speaker 4: things wrong, including having a city name, But the main
Speaker 4: thing was the main thing was that the people who
Speaker 4: left the deposits there were all quite switched on and
Speaker 4: all quite plugged in, and so it only took them
Speaker 4: a very short period of time to move their.
Speaker 5: Money out of that bank.
Speaker 4: Into money market funds and the equivalent of US treasuries
Speaker 4: where they have better security and a high yield. I mean,
Speaker 4: what's not to like. A friend of mine was heady
Speaker 4: skiing in Canada and saw some of the largest depositors
Speaker 4: doing it, moving this money on their iPhones that Friday night.
Speaker 4: So I mean, we live in a world where the
Speaker 4: frigidities in the system that rudely exposed from time to time,
Speaker 4: and everyone says, well.
Speaker 5: Similar things won't happen around the rest of the world.
Speaker 4: And certainly, you know, the credit suitel issues are more
Speaker 4: down bad management than deposits moving around. But if you're
Speaker 4: moving your deposits, and I have to say, I've been
Speaker 4: moving my deposits as well, and I move and I
Speaker 4: check my interest s right on the small cash balances
Speaker 4: we have on the funds to make sure that you're
Speaker 4: getting at least at least three and a half percent
Speaker 4: in the UK at the moment, and I'm afraid most
Speaker 4: people aren't. So that's tip number one, but it is
Speaker 4: it check your deposit account.
Speaker 5: I could see that one.
Speaker 1: That is possibly the most important. I mean, I know
Speaker 1: you're going to say, piles more interesting things as we
Speaker 1: go on over the next half an hour. But I
Speaker 1: have to say I believe that this is the most
Speaker 1: important financial advice you can give anyone in the UK
Speaker 1: at the moment. If you look at your deposit account,
Speaker 1: I bet you will find that you're still making one percent,
Speaker 1: one and a half percent, possibly significantly less, and you
Speaker 1: can move that money and make a risk free two
Speaker 1: or three percent points more in a matter of minutes.
Speaker 1: Well I don't know how many minutes it takes to
Speaker 1: open and your bank account these days, but not very
Speaker 1: many minutes. And you could do that even as I
Speaker 1: say in your investment catch, just by buying short, short
Speaker 1: dated guilts. So if you haven't done that, you're literally
Speaker 1: throwing money away. You're giving it to the big financial
Speaker 1: institutions who you will always tell me that you hate
Speaker 1: every time I talk to the little to hate their bank. Well,
Speaker 1: you know what, you can take your revenge now, This
Speaker 1: is the time to take your revenge on the retail
Speaker 1: banks that you just like so much. Go for it,
Speaker 1: do it. They may all go bust as a result,
Speaker 1: but you know whatever, do it anyway, Do it anyway, right, Simon,
Speaker 1: Let's stick with interest rates and inflation, because this is
Speaker 1: the key dynamic in markets.
Speaker 5: Right.
Speaker 1: You said a few minutes ago that we're getting to
Speaker 1: the point where interest rates are normalizing and inflation rates
Speaker 1: are normalizing. They're coming back to where they should be.
Speaker 1: Now that I agree with you. But if you move
Speaker 1: interest rates from the lowest they've been ever back to
Speaker 1: normal levels, if we think of four to five percent
Speaker 1: as being normal levels, and you do that faster than
Speaker 1: in restrates have ever risen for forty years, you've got
Speaker 1: to break stuff. And everyone is now talking about what breaks,
Speaker 1: how it breaks, and how long this can go on for.
Speaker 4: Yes, and I would be very nervous about that. You
Speaker 4: don't tend to find the unexploded bombs all that quickly.
Speaker 4: People like to hide them for a long time. So long,
Speaker 4: long periods of low interest rates tend to lead to
Speaker 4: a number of companies which would normally have gone bus
Speaker 4: not going bust. In fact, the furlough loans from our government,
Speaker 4: who might remember, were specifically designed to stop people going
Speaker 4: bus during lockdown and did a very good job.
Speaker 5: But it means.
Speaker 4: That the normal failure on average of businesses around the
Speaker 4: world hasn't happened. Where do you want to be careful
Speaker 4: at a time like this, The classic places to be
Speaker 4: careful are real estate investment. Now the real estate shairs
Speaker 4: in the market have actually fallen so far that I
Speaker 4: don't think stock markets being silly about this. I mean,
Speaker 4: shares in stocks like land securities are half what they
Speaker 4: were before the pandemic, and actually they haven't borrowed as
Speaker 4: much money as they used to. So that's probably an
Speaker 4: area where people know to worry, and it's right to worry.
Speaker 4: Private individuals, i'm sure will know some young families who've
Speaker 4: recently taken out of mortgage for their first home who
Speaker 4: didn't expect mortgage rates to go up this far, So
Speaker 4: it'll also have an effect, i'm afraid on a few
Speaker 4: unlucky people who weren't expecting mortgage rates to go up,
Speaker 4: and it will squeeze consumer spending later this year, so
Speaker 4: one needs to keep an eye on that. But the
Speaker 4: part of the market which I think is debt funded
Speaker 4: and isn't understood is being debt funded is what I
Speaker 4: call immature technology and immature biotech. So we know that
Speaker 4: the last cycle was built up out of people getting
Speaker 4: very excited about technology stocks and a lot of them
Speaker 4: doing very very well, but they themselves got used.
Speaker 5: To free cash.
Speaker 4: They got used to being able to hire very large workforces,
Speaker 4: pay them in shares, and expect to build their business
Speaker 4: and come to the market fairly early to pay everyone off.
Speaker 4: And all of those gates of clothes. The banks aren't
Speaker 4: able to lend them any money, even if they've got
Speaker 4: a good app or a good new drug in development,
Speaker 4: and the stock market won't allow them to ipo that early.
Speaker 4: So I'm afraid that there's probably going to be quite
Speaker 4: a lot of quite good businesses out there which just
Speaker 4: going to find their timing very unfortunate. And this is
Speaker 4: in a part of the market most people at the
Speaker 4: moment think is really safe. They think technology is not
Speaker 4: debt funded. Well, we saw from Silicon Value pank it
Speaker 4: is debt funded. You know, everything has to be paid for.
Speaker 4: It's just it's not in loans against real estate, which
Speaker 4: was the classic problem from previous cycles.
Speaker 1: What about the wall of money we keep hearing about
Speaker 1: in the private equity world that is just sitting there
Speaker 1: to pick up all these companies and help them out.
Speaker 5: Yeah, well it might be a bit stretched, because.
Speaker 4: I know that you see an interview every now and
Speaker 4: the chairman of the Midwine Board Professor Russell Napier, who
Speaker 4: now tis no tis from telling anyone who listened, including me,
Speaker 4: that the total amount of debt in the system is
Speaker 4: so much higher than it ever has been. And what
Speaker 4: I find interesting about his point here is that the
Speaker 4: large public companies that I invest in, the Googles of
Speaker 4: this world, the Thermo Fishers of this world, the Seamens,
Speaker 4: even these companies actually have got much less debt than
Speaker 4: they've had for most of my career, which is quite
Speaker 4: a long one. So it's not public companies who borrowed
Speaker 4: a lot of the debts seems to be in private equity.
Speaker 4: And so although the private equity people you know, are
Speaker 4: still around and looking to pick up anything from a
Speaker 4: full seller, and you see the odd bid out there,
Speaker 4: one suspects that the total amount that the adjustment that
Speaker 4: they're going to have to face from a zero interest
Speaker 4: rate world to a three and a half percent interest
Speaker 4: rate world could be quite tricky and.
Speaker 5: It's very opaque.
Speaker 4: So I suspect that when the unexploded bombs go off,
Speaker 4: some of them will be in the private equity world.
Speaker 4: But trying to find out where is almost impossible because
Speaker 4: they don't unlike public equity people, they don't have to
Speaker 4: give out that much information.
Speaker 1: Mmm. And that is why, of course, too many of
Speaker 1: the private equity trusted RAINI on such what been great discounts,
Speaker 1: isn't it because no one quite trusts what's going on
Speaker 1: under the bonnet.
Speaker 5: Yeah.
Speaker 4: And also they will have a lot of these early
Speaker 4: stage growth companies.
Speaker 5: I mean, there's lots of different sorts of private equity.
Speaker 4: Some take private very old companies like Cabre's, and some
Speaker 4: of them just start up small bar tech and small tech.
Speaker 4: But again, I remember in two thousand and two thousand
Speaker 4: and three, right at the end of the TMT bubble,
Speaker 4: the big quota stops went down first. But even in
Speaker 4: two thousand and three, it was the unquoted s which
Speaker 4: were still being written down, and they had to be
Speaker 4: written down to zero most of the time.
Speaker 1: Yeah. No one wants to write the stuff in their
Speaker 1: actually portfolio down do this, so the longer they can
Speaker 1: hold it off, the better.
Speaker 5: Yeah.
Speaker 4: And the rules this is where it all gets quite difficult.
Speaker 4: But the rules on how you write it down are
Speaker 4: quite hard to apply. Whereas in public markets you just
Speaker 4: look at the share price, the market makes forces you
Speaker 4: to face reality early.
Speaker 1: Okay, Well, let's talk about the listed market then, and
Speaker 1: when we did that into you. I was talking about
Speaker 1: earlier in twenty nineteen, one of our big topics of
Speaker 1: conversation with valuations and how it was very, very hard
Speaker 1: to find any particular sector or geographical market where you
Speaker 1: could invest and do so at at a price that
Speaker 1: made long term sense. I think at the time you
Speaker 1: were still relatively interested in the Japanese market, which was
Speaker 1: looking relatively cheap. Still is And how has that changed
Speaker 1: over the last three years. When you look around, do
Speaker 1: you see more or possibly less that looks reasonable value.
Speaker 4: I'd say that valuations are not particularly cheap. I would
Speaker 4: say they're okay. I mean the global equity universe that
Speaker 4: I look is dominated by America and the standard and
Speaker 4: pauses on seventeen times earnings in a yield of one point.
Speaker 5: Seven percent for next year.
Speaker 4: So with that hurdle that you can get three and
Speaker 4: a half percent in the bank, going off and buying
Speaker 4: a load of BAC is not the easiest thing to do.
Speaker 4: You've got to have a reason to do it. On
Speaker 4: the other hand, three and a half percent in the
Speaker 4: bank is probably going to lose you a bit of
Speaker 4: purchasing power if inflation stays where it is now. The
Speaker 4: good news on inflation, there are two bits to inflation.
Speaker 4: One bit is the cost of living, you know, prices,
Speaker 4: and the good news on that is that the oil
Speaker 4: price is a lot lower now than it was a
Speaker 4: year ago. So we live in a world of eighty
Speaker 4: five dollars brent one hundred and twenty three dollars a
Speaker 4: year ago when Putin went into Ukraine, So we probably
Speaker 4: won't see so much inflation in goods prices this over
Speaker 4: the middle part of this year, over the summer, which
Speaker 4: is good news. On the other hand, wage inflation is
Speaker 4: still holding pretty high and that will feed inflation in
Speaker 4: other areas. So the inflatory pressures are less than they were,
Speaker 4: but they're still high and they still make a difference
Speaker 4: to which stock you want to be in.
Speaker 1: Yeah.
Speaker 4: So do we think valuations are cheap? We think that
Speaker 4: they're okay. Do we think the world is a safer
Speaker 4: place to go into, Yes, because inflation might have shot
Speaker 4: out even further last year, and it seems now to
Speaker 4: be sort of leveling out a bit but very persistent.
Speaker 4: So we're not going to expect interest rates to go
Speaker 4: down anytime soon. So what does that mean in terms
Speaker 4: of stocks and shares? Where you've got you've got to
Speaker 4: buy stocks that are growing, and you've got to buy
Speaker 4: stocks that aren't going to where you're not going to
Speaker 4: give up most of your gains to wage inflation. And
Speaker 4: you've got to buy stocks which don't spend too much
Speaker 4: time talking to their bankers. Now, fortunately there are quite
Speaker 4: a lot of stocks like that, and those stocks are
Speaker 4: generally a little bit more expensive the index, but you
Speaker 4: get a lot more back for the fact that they're
Speaker 4: growing very fast.
Speaker 1: Let's just go back one step, because we keep talking
Speaker 1: about value evaluations. Let just want to ask briefly, what
Speaker 1: when you talk about value, what do you mean? What
Speaker 1: represents value to you?
Speaker 4: So the two things that I keep an eye on
Speaker 4: are how much free cash flow you get per share
Speaker 4: after all costs, including stop based compensation, which is a big,
Speaker 4: big factor.
Speaker 5: In American companies.
Speaker 4: Ignoring stock based comp is one of the biggest errors,
Speaker 4: I think in the last couple of years, because a
Speaker 4: lot of technology companies have just been paying their staff
Speaker 4: in shares, and when your share price goes down, all
Speaker 4: these people look at their share options and they say,
Speaker 4: I haven't got any money, and they're highly paid computer programmers,
Speaker 4: and they're very mobile. So suddenly that stop based compensation,
Speaker 4: which hasn't been a cash deduction from earnings, hasn't been
Speaker 4: a scene as a cost of the business for shareholders. Suddenly,
Speaker 4: if you want to keep your programmers, you've got to
Speaker 4: start paying them some cash. So this happened again in
Speaker 4: two thousand and three. So you can suddenly find if
Speaker 4: you don't adjust these earnings figures properly, you can find
Speaker 4: a sudden, very sharp increase in the costs, very sharp
Speaker 4: decrease in what's left over for shareholders. And in the
Speaker 4: case of big companies like Facebook or or Amazon, Amazon
Speaker 4: has I think one point five million employees, many of
Speaker 4: whom are not on high wages, most of whom work
Speaker 4: at work in the warehouses.
Speaker 5: But they're still facing at a lot of cost inflation.
Speaker 4: And people people in the technology sector are not used
Speaker 4: to modeling for cost inflation. It's not what they're interested in.
Speaker 4: So you've got to keep an eye up for that
Speaker 4: sort of thing. I should just add something you mentioned
Speaker 4: by Keyness on Japan. I should mention Japan was dreadful
Speaker 4: last year. I know, so I took my profits, we
Speaker 4: took our profits in the fund in some of these
Speaker 4: technology shares, and we wanted to get better value for money.
Speaker 4: And the other side of the valuation inequities that we
Speaker 4: love is how much book value you get per share,
Speaker 4: because if the earnings of a company disappoint, you've still
Speaker 4: got the sort of intrinsic value of the business. So
Speaker 4: we think it's worth trying to work out what would
Speaker 4: this business be worth even in really bad economic conditions.
Speaker 4: And Japanese companies you get a lot of company for
Speaker 4: your money, You get a lot of plant, you get
Speaker 4: a lot of market share. They don't always make a
Speaker 4: lot of money, but they do dominate certain industries around
Speaker 4: the world, so you have that resilience.
Speaker 5: Unfortunately, the end went.
Speaker 4: Down a lot last year, and that meant that our
Speaker 4: Japanese investments didn't perform very well. But I am much
Speaker 4: more positive about Asia in general this year, and I
Speaker 4: think one of the things which could be really really
Speaker 4: positive for investors, on top of inflation being under control,
Speaker 4: is just that Asia was still locked down until the
Speaker 4: end of last year, particularly China obviously with the extended
Speaker 4: COVID measures and China coming out of lockdown. Japan coming
Speaker 4: out of lockdown late could be one of the more
Speaker 4: exciting global trends on consumption and industrial demand over the
Speaker 4: next twelve months.
Speaker 1: Okay, so Asia is a big theme for you. Yeah,
Speaker 1: how are you playing that theme?
Speaker 5: So we have double the index waiting in Japan.
Speaker 4: So we have about eleven or twelve percent of the
Speaker 4: midwide pork value in Japanese equities. There are three groups
Speaker 4: of them. We own Japanese banks. Japanese banks would love
Speaker 4: it if inflation persisted because at the moment, interest rates
Speaker 4: in Japan are zero more or less, and so banks
Speaker 4: prefer to lend it a bit more than zero. So
Speaker 4: if they're ever allowed to lend it a bit more
Speaker 4: than zero, they'll make a lot more money than they
Speaker 4: make at the moment. And then we also own some
Speaker 4: companies in Japan which trade at a discount book value
Speaker 4: and which are under pressure to reorganize themselves, basically to
Speaker 4: sell some of the cross shareholdings that they've had and
Speaker 4: buy back shares, and that would lead to very sharp
Speaker 4: increases in the share prices.
Speaker 1: And I to interrupt you to ask you what would
Speaker 1: make that happen, because we have been telling that story
Speaker 1: for fifteen years, maybe longer, maybe twenty years. We've been
Speaker 1: telling that story and Ryan Cross shareholding blah blah blah
Speaker 1: blah blah. Yeah, and sometimes it happens, but it hasn't
Speaker 1: happened in the volume that maybe you and I might
Speaker 1: have expected. So what's going to make it happen now?
Speaker 4: So the good news here is that for the first
Speaker 4: time in history, yes, the new chairman of the Tokyo
Speaker 4: Stock Exchange has told them all to do this in public, okay,
Speaker 4: And that's what makes a difference. So if you look
Speaker 4: up the nicky newspaper headlines for last week, the new
Speaker 4: chairman of the Tokyo Stock Exchanger sent out a letter
Speaker 4: to over a thousand companies that trade below book value,
Speaker 4: and they've said, all of you should make a public
Speaker 4: announcement of how you're going to reorganize yourself so that
Speaker 4: you don't trade blow book value in future.
Speaker 5: Now you can refuse, you can lose face, which is
Speaker 5: not big into bad.
Speaker 4: But the pressure on them has never been greater, and
Speaker 4: this is quite a big change. The other thing I'd
Speaker 4: say is there were a number of activist investors who
Speaker 4: forced this change last year, and they weren't pushed away
Speaker 4: or frowned on. You know, the establishment in Japan can
Speaker 4: see that they need to make some changes. Whereas there
Speaker 4: was a wave of this around the time Arbey came
Speaker 4: in in twenty twelve, twenty thirteen, twenty fourteen, a few
Speaker 4: raiders turned up from America, particularly in private equity, and
Speaker 4: tried to do this, and they were pretty much told
Speaker 4: to go away. And you know, the establishment just said,
Speaker 4: we don't want to, we don't want Japanese business run
Speaker 4: in these dreadful American ways.
Speaker 5: And they had some points, you know, because they don't
Speaker 5: you know.
Speaker 4: They're not going to approve of takeovers to lay off
Speaker 4: workers or anything like that. But the pressure at the
Speaker 4: moment is just to improve governance, just to improved shareholder value.
Speaker 5: And the number of stocks you.
Speaker 4: Can buy on that is smaller than it was because
Speaker 4: some of them have already worked. So we've got a
Speaker 4: few of those.
Speaker 1: Can you give us an example of definitely stockholder's trading
Speaker 1: below book? Very we like examples?
Speaker 4: Yes, yes, Well, there's a company called top Hand, which
Speaker 4: used to be called top Hand Printing, and it owns
Speaker 4: lots of lots of controlling stakes in.
Speaker 5: Very very good subsidiary companies.
Speaker 4: But if it just sold those stakes and used its cash,
Speaker 4: it could cancel half its shares and you'd end up
Speaker 4: with the same business for half the number of shares,
Speaker 4: so the share price would double. It's quite simple, and
Speaker 4: the board has always known this, but they found life
Speaker 4: very comfortable having a wildly over capitalized, very rich business
Speaker 4: which which you know, chugs along. So it's the interesting
Speaker 4: thing here is that there were there are two printing
Speaker 4: businesses in Japan. The other one is called Di Nipon Printing,
Speaker 4: and the other one's already done this over the last
Speaker 4: six months and it shares are rap I think, so
Speaker 4: all that they've got to do is not be the
Speaker 4: only one left who hasn't done the right thing.
Speaker 5: That's it.
Speaker 1: It's and it's core business is solid. So if it
Speaker 1: sells off all these subsidiary steaks.
Speaker 4: Exactly, and you don't want to buy something where the
Speaker 4: core business isn't solid. Yeah, it's it's a solid, low
Speaker 4: growth business.
Speaker 1: But I thought you only approved of high growth businesses.
Speaker 1: Literally just told us a matter of three minutes ago.
Speaker 4: No, what I said to you was that I approve
Speaker 4: of high growth businesses if you can find cheap ones, right,
Speaker 4: but during a period of higher inflation, you need a
Speaker 4: balance sportfodio which has some more modest grown companies on
Speaker 4: very low, very very low ratings like this, and also
Speaker 4: balanced with some higher growth businesses which are still not
Speaker 4: bite your hand off cheap. I mean, I'm not going
Speaker 4: to tell you that the well known growth businesses in
Speaker 4: the world.
Speaker 5: To bite your hand off cheap. I don't think they are.
Speaker 4: So you need some balance in the portfolio. I think
Speaker 4: that that's key now that interest rates are higher.
Speaker 1: Okay, So if we're looking for cheap and relatively low growth,
Speaker 1: what about the UK?
Speaker 4: Well, interestingly so on my list of average multiples of
Speaker 4: stock markets, which is not a good way of doing valuation,
Speaker 4: as you know, because each stock market the average multiple
Speaker 4: is more about the mix than about the stocks in it.
Speaker 4: But yeah, so the S and P index in America,
Speaker 4: as I said, is seventeen times earnings, Japan fifteen times earnings.
Speaker 4: Japan used to be more expensive even on just earnings multiple,
Speaker 4: so it's no longer as expensive as it was. And
Speaker 4: then yes, bottom of the class come the UK ten
Speaker 4: times earnings and Hong Kong, which has got problems on.
Speaker 5: Nine times earnings.
Speaker 4: And the reason for that in the UK, as you know,
Speaker 4: is the biggest stocks in our index are banks and
Speaker 4: oil companies, mining companies, and they all tend to trade
Speaker 4: on very low earnings multiples because the earnings go down
Speaker 4: from time to time.
Speaker 5: So when the oil price goes down, you.
Speaker 4: Know, anyone who buys BP on six times earnings needs
Speaker 4: to check whether that's six times earnings when the oil
Speaker 4: price is very high, because then when the earnings oil
Speaker 4: price goes down, of course it won't be on six
Speaker 4: times earnings.
Speaker 5: It'll be on twelve times earnings.
Speaker 4: So you know, so these pee things move around in
Speaker 4: cycnical sectors. And the trouble with the Hong Kong market
Speaker 4: and the UK market is they've got very large, very good,
Speaker 4: but very cyclical stocks in it, so the comparisons are
Speaker 4: not entirely fair. All the same, I have more UK
Speaker 4: stocks now than I've had for years, I have less
Speaker 4: Americans waiting than I've had for years, and I have
Speaker 4: more European waiting.
Speaker 5: That I have for years.
Speaker 4: So yeah, I don't think America is full of cheap shares,
Speaker 4: and that's quite a big change from the way in
Speaker 4: which on my way of doing valuation is the way
Speaker 4: in which the market looked between twenty ten and i'd
Speaker 4: say twenty twenty, most of the time we could find
Speaker 4: American businesses which were not a.
Speaker 5: Lot more expensive than the rest of the world.
Speaker 1: Now we can't, Okay, so let's go back to talking
Speaker 1: about some of the big themes that you're thinking about
Speaker 1: at the moment. So we've talked a bit about Asia
Speaker 1: as a theme, and that's partly on valuation grounds and
Speaker 1: partly on growth grounds.
Speaker 4: Yeah, China reopening will be the really big economic news
Speaker 4: this year.
Speaker 1: But you're not actively invested in Chinese stocks themselves.
Speaker 5: You don't need to be.
Speaker 4: So the way we we invest in China were actually
Speaker 4: considerably more exposed to the Chinese economy than the index.
Speaker 4: But we do it through investments in other parts of
Speaker 4: the world, most particularly in luxury goods companies which quoted
Speaker 4: in Europe. So the big biggest holdings in the founder
Speaker 4: companies like Louis v Wuito, which managed to sell yet again,
Speaker 4: managed to tell well, I think twenty percent more handbags
Speaker 4: last year than the year before, and they managed double
Speaker 4: digits the year before the year before that.
Speaker 5: I mean, it's an astonishing The.
Speaker 1: Mystery is how many hands how many handbags do you have?
Speaker 4: Simon, Yeah, I'm probably I'm probably not the target audience, Marrin,
Speaker 4: So I think you could probably help me on this one.
Speaker 1: I have quite a lot of airbags, but none very none,
Speaker 1: very expensive. I just don't think I can bring myself
Speaker 1: to pay that kind of money for a handbag. Well,
Speaker 1: and it's it's an endless mystery to me, the whole thing.
Speaker 4: It's a mystery to me. But I'm very happy shareholder.
Speaker 4: We've owned these shares. This has been the biggest holding
Speaker 4: of the fund since we launched the unit Trust twelve
Speaker 4: years ago. It's the biggest profit we've made over that period.
Speaker 4: So luxury goods sales are one of the classic ways
Speaker 4: of getting exposure to China. We've just bought some shares
Speaker 4: an estate Lorder, which again the Chinese by a lot
Speaker 4: of cosmetics from estay Lord in particular, more than from.
Speaker 1: Loreal w Why why why why why Stayloaders. There are
Speaker 1: so many amazing Asian makeup and skincare brands. The Koreans
Speaker 1: are brilliant at their stuff. Why a Staylorder? Are you
Speaker 1: the wrong person to ask? Can't you?
Speaker 5: I'm possibly.
Speaker 1: All you know is that they do not why they.
Speaker 4: I look at the data and I noticed how fast
Speaker 4: the sales stopped, I mean literally stopped overnight when zero
Speaker 4: COVID policy was brought in. And it's particularly these are
Speaker 4: sales inland, so it's it's not actually just Chinese people
Speaker 4: traveling to the rest of the world.
Speaker 5: When they go.
Speaker 4: Down to Hainan Island, they buy a lot down there,
Speaker 4: and they buy very high end stuff, and no doubt
Speaker 4: they find that the estate order cosmetics particularly work for
Speaker 4: them just as much as they particularly like Hermes and
Speaker 4: Louis Wheat are handbags, and they don't you know, they
Speaker 4: won't pay up so much for other brands.
Speaker 5: So I just trust the data.
Speaker 1: And you know how they say you'd only invest in
Speaker 1: things you understand Simon.
Speaker 5: Yeah, well that would leave me with a very narrow portfolio.
Speaker 1: What other ways if have you got to get into
Speaker 1: investing in China without actually investing in China, without taking
Speaker 1: the political risk which comes with being in China itself.
Speaker 4: Well, the other interesting area has been a lot of
Speaker 4: European companies, major German companies are very successful in China.
Speaker 4: They're more successful in their investments in China, i'd say
Speaker 4: in proportion than some of them have been in America.
Speaker 4: And in the autumn last year, when everyone thought the
Speaker 4: world was going to come to an end and we're
Speaker 4: going to run out of gas and we'd have to turn.
Speaker 5: The lights off.
Speaker 4: In Europe, a lot of these European fantastic European market leaders,
Speaker 4: world leaders, we're trading on the lust ratings i've ever
Speaker 4: seen them on. So we bought shares in companies like
Speaker 4: Schneider and Seamens, which will benefit from American growth more
Speaker 4: than Chinese growth, but all the same, they've all got
Speaker 4: good Chinese businesses inside them. And then on top of that,
Speaker 4: American healthcare companies, particularly diagnostic companies, make a decent amount
Speaker 4: of money setting high tech equipment to China. Now, of course,
Speaker 4: in the middle of all this, we've got to be
Speaker 4: very careful that you don't invest in a business which
Speaker 4: could get caught between this increasing trade spat between America
Speaker 4: and China. But at the moment there's no sign that
Speaker 4: the Chinese. The Chinese may want to argue about semiconductors,
Speaker 4: and I understand their point of view here because they're
Speaker 4: sort of being locked out, but that doesn't mean to
Speaker 4: say they're going to stop buying American diagnostic equipment or
Speaker 4: insulin made by Novo Nordisk. I mean they're still open
Speaker 4: to trade with the world, particularly in areas where you
Speaker 4: know your company makes stuff that they want. Making sure
Speaker 4: that you're investing mainly in businesses have got a really
Speaker 4: powerful market position like that is important quite outside the
Speaker 4: Chinese environment. This is about in a difficult world which
Speaker 4: will no doubt face some more problems in future.
Speaker 1: What about India. Indian population overtaking the Chinese population, and
Speaker 1: for years we've been talking about India as about to
Speaker 1: break through, about to be that, you know, the fastest growing,
Speaker 1: greatest economy ever except and quite happened. But it feels
Speaker 1: like with everyone wanting possibly to shift some of their
Speaker 1: investments from China towards other developing countries that now might
Speaker 1: be India's time invested there.
Speaker 5: We're not.
Speaker 4: We do have licenses to invest there, and we've missed out.
Speaker 4: I mean, it was the best performing emerging market last year,
Speaker 4: so I can't claim it's been a good idea.
Speaker 5: There are two troubles I've had with India.
Speaker 4: Firstly, I find all of the best companies I find
Speaker 4: very very expensive. Indeed, there's a very large domestic investing public,
Speaker 4: and so that public can't take their money out of
Speaker 4: India easily and invested around the rest of the world.
Speaker 4: So that's probably one of the reasons why the shares
Speaker 4: tend to look expensive. And then secondly, if India does
Speaker 4: open up to trade more, it could always they'll always
Speaker 4: be losers as well as winners. And so you know,
Speaker 4: everyone in the world keeps knocking on India's door saying,
Speaker 4: would you like to join this trade agreement that trade agreement?
Speaker 5: Trade with us more?
Speaker 4: But they've generally got a domestic industry that they know
Speaker 4: might be quite fragile if it was opened up, and
Speaker 4: you don't want to be invested in them.
Speaker 1: Okay, not India, then other Asian economies that are interesting.
Speaker 5: I think one thing.
Speaker 4: I mean, I'm very underweight emerging markets at the moment,
Speaker 4: and I think it's important I just go back to
Speaker 4: what I said earlier about the total weight of debt
Speaker 4: in the world.
Speaker 5: Being very very high.
Speaker 4: Although I think that this is a perfect good time
Speaker 4: to invest in equities and to invest in very strong equities,
Speaker 4: I don't see any point in taking any risks you
Speaker 4: don't have to take because the trouble is, we've got
Speaker 4: this background of massive amounts of debt, massive amounts of
Speaker 4: government debt. We haven't got markets where central banks are
Speaker 4: supporting the market anymore because they're trying to stop doing
Speaker 4: this bond buying that they've been doing for fifteen years.
Speaker 4: In some cases, like in Japan, they're running out of
Speaker 4: bonds to buy, so they have to stop at some point.
Speaker 5: So the shock.
Speaker 4: Absorbers in the system have gone away. And although at
Speaker 4: the moment I can see quite a rosy scenario for
Speaker 4: this year, the trouble is if anything bad did happen,
Speaker 4: and always something happens that you can't expect. Saint Putin
Speaker 4: got much rougher and in Ukraine and wasn't prepared to
Speaker 4: let this warfizzle out, or say that the next attempt
Speaker 4: by Opek to cut oil production really did take the
Speaker 4: oil price up again. Markets would fall quite sharply and
Speaker 4: companies were find it quite difficult. So my policy at
Speaker 4: the moment is safety first, and I'm afraid that that
Speaker 4: just you know, if you can find a developed market
Speaker 4: company on a sensible rating which will which will grow
Speaker 4: nicely for you over the years, why go any further.
Speaker 1: Okay, I think that's a good way of looking at though.
Speaker 1: I would say that your professor Napier is very keen
Speaker 1: on Asian equities at the moment, so maybe we'll come
Speaker 1: back to that with him another time. Now, there are
Speaker 1: few more things that I want to I want to
Speaker 1: ask you, But the first one is about he wrote.
Speaker 4: He wrote, he wrote the book about the shape gradation
Speaker 4: crisis and made me read it.
Speaker 1: He did it. We all read it, and extremely good.
Speaker 1: It is too highly recommended, by the way listeners have had.
Speaker 1: Anything written by Red Napier is highly recommended. I wanted
Speaker 1: to ask you about ESG. Now, we've talked about ESG
Speaker 1: in the past and ESG overlays on portfolios, et cetera,
Speaker 1: et cetera. But the last couple of years, and the
Speaker 1: last year in particular, have shown us many of the
Speaker 1: weaknesses of the approach that lots of fund managers have
Speaker 1: taken to ESG, and things that were not considered to
Speaker 1: be ESG friendly only eighteen months ago are now considered
Speaker 1: to be very very ESG friendly. I give you defense, etc.
Speaker 1: And you can even now and I do make an
Speaker 1: excellent argument for fossil fuels being ESG friendly. Well, I mean,
Speaker 1: if you would take the S seriously and you'd like
Speaker 1: people's living standards to be maintained, then obviously you should
Speaker 1: consider the fossil fuel industry as part of that. Anyway,
Speaker 1: moving on from that, because I hate mail by the
Speaker 1: way to usual address, Simon. Have you changed your approach
Speaker 1: to ESG over the last couple of years or do
Speaker 1: you think that there are changes that people should be
Speaker 1: taking into account.
Speaker 4: I'm delighted to say we haven't changed our approach at all,
Speaker 4: because it was perfect. Because we've thought about these things
Speaker 4: quite seriously, and we've seen the ESG agenda go from
Speaker 4: not taking it seriously to coming up with a sort
Speaker 4: of prescription based, bizarre, totally impractical tick list and now
Speaker 4: perhaps in ways back to where we started.
Speaker 5: So the ESG score on our funds when all.
Speaker 4: This first started about five years ago, came through and
Speaker 4: it turned out that we were top decile.
Speaker 5: I think, amongst all funds, and we.
Speaker 4: Just said, oh, that's interesting. We've never looked at it
Speaker 4: that way. But of course, we don't invest in bad
Speaker 4: businesses that pollute the planet because they're bad, and why
Speaker 4: would we. And then amazingly as you say, a couple
Speaker 4: of years ago, our ratings started going down because we
Speaker 4: own things like copper mines that you need in order
Speaker 4: to do the energy transition.
Speaker 5: You can't do it without copper. It's quite simple.
Speaker 4: And yes, we own a gas company now in the
Speaker 4: Investment Trust, because the Western world needs secure sources of
Speaker 4: gas so it doesn't rely on Russia. And you know,
Speaker 4: getting hydrocarbon prices up for poor people is not an
Speaker 4: acceptable policy. It doesn't mean to say that and that
Speaker 4: zero is undoable. It's just you've got to be practical
Speaker 4: about how long it's going to take, how much it's
Speaker 4: going to cost, and make sure that voters go with you.
Speaker 5: And so we think we've run a balance approach here.
Speaker 5: We have a large.
Speaker 4: Amount of the fund invested in energy transition companies that
Speaker 4: will help energy transition.
Speaker 5: We have a particular holding that I'm very proud of,
Speaker 5: which is.
Speaker 4: Well plea hopeful for let's put it this way, which
Speaker 4: is Panasonic. Yes, again a Japanese company, but it's one
Speaker 4: of Tesla's biggest battery makers, and it's never managed to
Speaker 4: make much money out of this. But you can imagine
Speaker 4: with this massive bill that Biden's passed in America to
Speaker 4: encourage energy transition in general and more use of electric vehicles.
Speaker 4: Panasonic's got two of the biggest battery plants in America,
Speaker 4: one of them joint venture with Tesla. They're going to
Speaker 4: be paid for making a lot more batteries and they're
Speaker 4: going to be a lot more profitable for it. And
Speaker 4: it trades on twelve times earnings. You know, you get
Speaker 4: a lot of company for your money. And of course
Speaker 4: the America American investors have looked through Wall Street for
Speaker 4: companies that will benefit from the Inflation Reduction Act, but
Speaker 4: most of them don't, you know, they have never looked
Speaker 4: at Panasonic. It's in Japan, you know, So you missed
Speaker 4: this out. And then we balance it with companies like
Speaker 4: First Soda, which is the biggest soda panel industrial soda
Speaker 4: panel maker in America, which is a very expensive stock.
Speaker 4: It's probably the most expensive stock in the portfolio. But again,
Speaker 4: going back to what I was saying, energy transition will happen.
Speaker 4: I think people are getting closer to being realistic about
Speaker 4: the cost and the time scales. The time scales may
Speaker 4: not be what the scientists want, but they have to
Speaker 4: be what the politics. I'm afraid and the business reality
Speaker 4: will allow.
Speaker 1: Well, it also has to be a balance between the
Speaker 1: short term, the medium term, and the long term. You know,
Speaker 1: we can't plunge everybody into poverty in the shortened medium
Speaker 1: term for a constantly shifting long term target. As I say, hey,
Speaker 1: mail to the normal address, can I ask you, simon,
Speaker 1: have you got any investments tall in the upgrading of
Speaker 1: electricity grids of the national grade for example? I mean,
Speaker 1: I'm currently obsessed with the fact that our national grid
Speaker 1: was put up, you know, one hundred of years ago
Speaker 1: with the idea of taking empower from a set number
Speaker 1: of large power stations, and now finds itself taking in
Speaker 1: power from tens of thousands of different smaller energy producers,
Speaker 1: be they off sure wind farms or you know, your
Speaker 1: second cousin's solar panel on their roof, et cetera. And
Speaker 1: it makes it an incredibly fragile thing, which is also
Speaker 1: someone's pointing out to me the other day, the global
Speaker 1: national electricity grid is the largest thing that humankind has
Speaker 1: ever created, the biggest thing ever ever, and yet in
Speaker 1: most developed countries it's also horribly, horribly out of date
Speaker 1: and in no way whatsoever fit for purpose. So this
Speaker 1: seems to me to be one of the greatest investment
Speaker 1: opportunities there is participating in the upgrade of this global
Speaker 1: out of date network. Anything in that I.
Speaker 4: Couldn't agree with you more, I love that couldn't agree
Speaker 4: with you more so. Semensddly Enough, which I've mentioned already,
Speaker 4: is one of the biggest. It's one of the first
Speaker 4: companies you'll ring up if you want your grid mended
Speaker 4: an updated, and it's about a third of the businesses
Speaker 4: GID into that. And secondly, if you have lots of
Speaker 4: little wind farms around a grid and they produce wind
Speaker 4: in the middle of the night when nobody needs it,
Speaker 4: what do you need to store the electricity batteries? Thus
Speaker 4: Panasonic again, so that's the combination you really need. In
Speaker 4: the investment trust, we also have a holding in a
Speaker 4: UK battery company called Gore Street, which is a investment
Speaker 4: trust which just owns battery storage in the UK and
Speaker 4: pays a six and a bit percent yield every year
Speaker 4: for helping manage the British grid to and it's also
Speaker 4: been investing. It's brought some battery storage plants in America,
Speaker 4: in Texas actually, and also in Germany because again going
Speaker 4: back to the engineering reality of this, as you say,
Speaker 4: people have talked about grid grid improvements for at least
Speaker 4: twenty years, but it actually seems to be happening now.
Speaker 1: Well, it has to happen now, I mean, it has
Speaker 1: to happen. It's the core part of the energy transition.
Speaker 1: Without full on grid upgrade, yep, everything else is pointless.
Speaker 5: Yeah, I couldn't agree more so.
Speaker 4: Yeah, I mean we have a nice exposure of that,
Speaker 4: and that covers that, you know, that covers two of
Speaker 4: the really big areas we've talked about. Emerging market consumers.
Speaker 4: We invest in We invest in energy transition. We invest
Speaker 4: in automation that I've talked to you about before, which
Speaker 4: you know, just inflation of course, particularly wage inflation, pushes
Speaker 4: people to invest more in robotics and plant automation, but
Speaker 4: also automations coming into other industries like agriculture, even surgery.
Speaker 4: Robots are getting cleverer, smarter. And then the other big
Speaker 4: area we invest in this healthcare because I'm afraid the
Speaker 4: healthcare costs of the world are going to carry on
Speaker 4: being one of the main drivers of econ mis tax
Speaker 4: spending policy, certainly for the next twenty five years. And
Speaker 4: then a funny sort of way, the pandemic actually was
Speaker 4: a period which wasn't very stressful for the health service.
Speaker 4: This may covers a shop for people, but of course
Speaker 4: most of us didn't go anywhere near a hospital for
Speaker 4: two years.
Speaker 1: No. I did actually go near a couple of hospitals,
Speaker 1: and there's absolutely amazing how little was going on, absolutely nothing, nothing.
Speaker 4: Well, you know, we were told stairway, We did stairway,
Speaker 4: and we saved a few people's lives, you know, the
Speaker 4: people who had to go.
Speaker 5: Unfortunately, of course they did a very good job of saving.
Speaker 4: But yeah, we're back now to the normal dynamic which
Speaker 4: fed spending in this area, or demand in this area
Speaker 4: of an aging population which expects top class treatment, and
Speaker 4: there are lots of very high quality companies one can
Speaker 4: invest in.
Speaker 1: You know, Simon, I don't think there's an old person
Speaker 1: left in the UK who expects top quality treatment, Like
Speaker 1: top quality treatment, what do you think they actually expect? Yeah, exactly.
Speaker 5: I don't know. I feel that people do expect it,
Speaker 5: and then.
Speaker 1: Well then they've got a world of disappointment ahead, haven't they.
Speaker 5: I think that I don't know.
Speaker 4: I mean it's a different subject, but just on the
Speaker 4: investment side, the great thing is that there's a such a.
Speaker 5: Long list of really high quality companies.
Speaker 4: But in healthcare, I tend to avoid the drug companies
Speaker 4: because the drug companies businesses inventing cures for things that
Speaker 4: there aren't good cures for at the moment, which are
Speaker 4: often very rare diseases and where you need to spend
Speaker 4: a very large amount of money on a very small
Speaker 4: number of patients to cure them. And I just think
Speaker 4: that the system won't be spending money on that because
Speaker 4: the money will be needed for old fashioned care, proven technology,
Speaker 4: old fashioned technology, a lot more diagnostics, a lot more
Speaker 4: medical equipment, hits and knees, you know, hearing aids, hips
Speaker 4: and knees.
Speaker 1: I need knees. Someone give them your knees. Now, listen,
Speaker 1: what's your top healthcare holding?
Speaker 4: So I think the best one for me on this
Speaker 4: at the moment, anyway, is the one I've probably mentioned
Speaker 4: today anyway. It's Sonova, which is one of the world's
Speaker 4: biggest hearing aid companies, and the world of people who
Speaker 4: need hearing aids because they're feeling a bit stressed on
Speaker 4: the on their personal account because the cost of living.
Speaker 4: None of them upgraded, they're hearing it. Few of them
Speaker 4: upgraded their hearing aids last year, and they're all coming
Speaker 4: back to do it this year because everyone feels a
Speaker 4: bit more confident and people are going out more and
Speaker 4: the hearing aids keep getting better.
Speaker 5: These are the teeny little digital.
Speaker 4: Ones which need tuning up to your ear, but which
Speaker 4: you know, are a massive improvement on the old hearing aids,
Speaker 4: which were basically just loud speakers stuck in ero and
Speaker 4: these these shares. You know, there are three or four
Speaker 4: company is in the world that make the really good
Speaker 4: hearing aids, the many European companies, many most of them
Speaker 4: are based in the Benilux. And yeah, I mean that
Speaker 4: the trend at the moment seems to be that people.
Speaker 5: Are going back to getting their hearing sorted.
Speaker 4: And that's before you get all the people who've been
Speaker 4: on the tube with their EarPods in for the last
Speaker 4: twenty years.
Speaker 5: Is that music?
Speaker 1: Is that going to product the demand for hearing is?
Speaker 1: Do you think Apple is going to release a hearing
Speaker 1: aid product?
Speaker 5: I don't think.
Speaker 1: Come on, I mean it absolutely standard brilliant corporate policy
Speaker 1: to create a need for a product and then build
Speaker 1: the product something to work. You heard it here.
Speaker 4: First they they are to get a hearing aid that
Speaker 4: can yeah, that can bluetooth.
Speaker 5: I don't know. Perhaps hearing aids can't.
Speaker 4: Bluetooth into your iPhone. I have no idea why not.
Speaker 4: But if they don't, now it probably won't be them.
Speaker 4: It'll be you know, snover who will make a hearing
Speaker 4: aid which has good bluetooth and whilst the other thing
Speaker 4: noise cancelation.
Speaker 5: That'll be the thing. The noise cancelation is actually part
Speaker 5: of how hearing his work. Yes, sorry, go into this.
Speaker 1: Yeah, we're going another tangent, tangent alert, tangent. Look, we've
Speaker 1: got calling into this. I always say post didn't be
Speaker 1: more than twenty five minutes or people get terribly bored.
Speaker 1: But you've been a bit longer than that, and I
Speaker 1: know they won't. We got bored for a second. So
Speaker 1: last question, Oh god, I said we were going to
Speaker 1: talk about the person taking over from you, the trust,
Speaker 1: you know what, We're not going to do that. They're
Speaker 1: going to have to read about that on the internet
Speaker 1: at a later date. But here you are, you heading
Speaker 1: off into retirement. You can dig into that portfolio of
Speaker 1: yours at midwind and you can take one stock with you.
Speaker 1: Which one would it be? Oh?
Speaker 5: I think, I think.
Speaker 4: I think the best company for the future that I've
Speaker 4: got in the fund is Thermo Fisher, world's leading scientific
Speaker 4: equipment makers. One of the cleverest companies I've ever met,
Speaker 4: one of the best managed.
Speaker 5: Not cheap, but who cares?
Speaker 1: Okay, Simon, not cheap? Is that the right way to win?
Speaker 1: It'll do. Thank you so much joining us today, and
Speaker 1: I hope that we will talk again before you slide off.
Speaker 1: Actually maybe a little short interview at the end of
Speaker 1: the year, but thank you for joining us.
Speaker 5: You're welcome.
Speaker 1: Thanks for listening to this week's Marin Talks Money. We
Speaker 1: will be back next week. In the meantime, if you
Speaker 1: like our show, do please rate, review, and subscribe wherever
Speaker 1: you listen to your podcast. And I repeat the bit
Speaker 1: if you like our show. If you don't like our show,
Speaker 1: please do not mention it to anybody. This episode was
Speaker 1: hosted by me Maren Sumset Web. It was produced by
Speaker 1: Saasadi and Mohammad Faruk. Additional editing by Blake Maples. Special
Speaker 1: thanks to Simon Edleston and to John Steppek. And finally,
Speaker 1: do not forget to sign up to John's daily newsletter,
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