March 31, 2023 • 26 mins
Sebastian Lyon says he’d been expecting inflation to rise for a long time. So when prices began to tick up, his firm was ready. Now the founder and chief investment officer of Troy Asset Management says be prepared for inflation to stick around awhile.
Lyon says rates can still fall, and not every part of the economy that thrived in a low-interest environment will run into trouble. So what’s at risk? He says housing, growth stocks, bonds and banks for starters. In terms of protecting investor wealth, Lyon echoes others by suggesting gold.
Sign up to John Stepek's daily newsletter Money Distilled. https://www.bloomberg.com/account/newsletters/uk-wealth
See omnystudio.com/listener for privacy information.
Mark as Played
Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:00):
So John, we've both spente some of today at the
Bloomberg invest conference. Coming up as the live podcast that
I did with Sebastian from that, although I'm not entirely
sure it wakes it more live than other podcasts because
most of my guests are definitely alive. I think the
key difference was that it was in front of an audience,
so that makes it a different kind of life. But
you hosted a panel, didn't new early on which I
(00:23):
didn't make it too, So lucky me, I can here
at the same time as the listeners what you talked about. Well,
there we go. What a treat, No, I said, I
think that makes the live podcast. You should have encouraged
more heckling. There was heckling. I think there was heckling.
Actually there was certainly low level giggling, and Sebastian had
(00:45):
a couple of little goes at me. I noted, I
think I gave back as good as I got, but
we'll leave the listeners to judge that. Oh yes, yes,
thanks on host places, I know beat Let's Table one day.
On one day no So, I had seen a show
from Principal Asset Management and Chann Belle from Goldman Sachs
(01:08):
and Alex Chapter's old friend of the podcast from Rougher
She's so good and everyone, by the way, letting go
back and little for the podcast I did with Alex
a few weeks ago. It was so right. Yeah, no,
and he is, he's very he's very smart. But interestingly,
I mean, because he could be really wrong. But most
(01:30):
of the they basically agreed, which is interesting. Um, the
I suppose it's this thing, well A the banking crisis.
The banking crisis is not going to tune into two
thousand and eight, and it's probably not going to spread
much beyond what we've already had, so they cannot credit
sweet So the US regional stuff, um, which personally speaking
(01:52):
I agree with. I don't. I think that that doesn't
mean that's okay, but it's going to be a different
kind of thing. And their main point was that if
the central banks are forced to choose between financial stability
and letting inflation rip, then we've seen time and time
again that the thing that they will do is favor
(02:14):
financial stability, and clearly they'll try and do it in
a way that doesn't let inflation explode. But the only
tool they really got is pumping more money and he
certain areas the economy, um, you know, arguably kind of
encouraging misallocation that resources. I mean, at this rate, you know,
(02:34):
we'll all just have one giant bank that we bank
with that is backed by you know, the FED. Basically
sounds great, one cost my services person. Well, I mean yeah,
the Department, I hope, not passion. That's how they will
sell Central Bank digital counties to his convenience. And the
more entrenched we get in our mobile phones, the harder
(02:56):
it will be to not do it. I mean, these days,
so much as I try to avoid it, there's a
big party that doesn't care who owns my data anymore,
track of it? You welcome. Google knows everything about such
too many cookies, John your dun for Well, I know,
but it's you know, my best hope is that I'm
(03:17):
just I'm just one of a billion kind of fairly
irrelevant people all sold to China. Well no, well I'm
not on TikTok to be fair, I've avoided that anyway.
I think I got a bit sidetrack there. I was
just thinking of the listeners are rushing to TikTok to
(03:37):
dancing Jay No I don't want to kids get crashing it,
celebrity on TikTok, myself financial financial anyway, you know, moving on,
moving on swiftly on what were their investment recommendations. Well,
I did ask them about bitcoin um and there was
(03:58):
the usual kind of skepticism on that one. I asked
Imasgine about bitcoin and when when you listen to those listeners,
you'll find he could barely be puble to talk about it. See,
I'd rushed that one off almost straight away. I think,
I said, I think it's sort of a good scene
if you're someone who's a bitcoin booll. It was still
(04:20):
in this uneasy kind of no man's land. I mean,
it's up about thirty percent this year. It's not it's
not going to get killed like the rest of the
crypt You think it's an inflation hedge, don't you? No,
Nor do it twice an inflation edge. I don't know
what it is, but it is for something, is for something.
(04:41):
I imagine that a lot of the people we panicked
about the US regional banks may have stuck some of
them money in bitcoin. I mean, then again, I guess
SVB was full of people who would probably be inclined
to see bitcoin. It's some sort of disaster edge. But
but yeah, not other than that, equities the rates to
what's their equities value in all its forms? Um and
(05:08):
the strangely enough, Alex recommended a multi asset fund. I
can't think why. I can't think why. I don't I
wonder where one would buy something such a thing, such
a thing, let's see, that's the terrible conflict of interest.
You need to give me a better answer. But I
don't think that fund managers worry about conflict of interesting
(05:29):
and lucky we do try and get the fund managers
on the show and fun managers we talked to who
are fund managers, not salespeople for funds. And remember most
fund managers are in Victor, Yeah, salespeople because they make
their money out of bumping up the assets under management
a lot more than they make their money out of performance.
But we drank out the ones who care about their
their investorsn't care about returned and so they believe in
(05:52):
their stuff, which they believe in their staging. And they
all have, or we hope they have quite a lot
of skin in the game. Anyway, And on to somewhere
I'm pretty sure does have exactly that. Welcome to Marin
Talks Money, the podcast in which people who know the
markets explain the markets. I'm Marian Sumset Web. This week
we bring you our very first live taping. Again I question,
(06:13):
I question the use of the word live. Here very
first live taping of the podcast, which took place at
the Bloomberg invest Summit at Bloomberg's London headquarters, I spoke
with Sebastian Lyon, founder and chief investment Officer of Troy
Asset Management. Sebastian, thank you for being on my live
recording of my podcast Pleasure Marin. We're going to start
(06:35):
with it something that I read in one of your newsletters. Okay,
markets are never constant. They change and evolve like the weather.
Trends can sustain for months and years, perhaps even a decade,
but not forever. Now we're in the middle. I think
you would agree of a massive regime change for markets
from a world of low interest rates, low inflation, globalization, peace,
(06:59):
lowly be costs, cheap energy, all these wonderful things to
a period when all that has changed. Is that fair?
Is that? And how you're looking at It's very fair
and it means that it's going to make investing a
lot tougher over the next three or four years, maybe
the next decade than it has been for the last decade.
The last decade you almost needed to just actually just
(07:20):
do very little buttonholed, bitonhole growth stocks. They were rerated
over a period of a long, long period of time.
They are very good companies in the UK and the
US where you've seen steady growth, not spectacular growth, not
like the tech companies that we were hearing about earlier,
but just good solid engineers businesses that are growing five, ten,
fifteen percent perannum and they've been rerated. They were rerated
(07:42):
usually over the last decade. They went from fifteen times
earnings to thirty times zarnings before COVID. Even before COVID
we had the COVID blowout, they went to fifty times earnings.
They're back now at about thirty times earnings. You know,
we're on a long journey back to that fifteen times
zonninges where we were when interest rates were still zero
back in twenty and twelve. Interest rates are you know,
(08:03):
now between four and five percent. If you look back
at valuations when interest rates were four or five percent
prior to the financial crisis valuations were on those those
mid teams multiples for good, good quality stocks. So I
just think we have a long journey ahead. There's going
to be more volatility and that's what you need to
be patient about in terms of from perspective investing for
(08:27):
private wealth, which affects you what I'm doing. But you've
been positioned from inflation of quite a long time. Yes,
possibly too long, yeah, long, thank you, thank you for that.
So you came into this latest bad for inflation ready
for it? Yes, pretty ready. I mean I think that
we were aware that there were there were huge concerns
(08:47):
that interest rates were were far too low and that
inflation was unlikely to remain stable. And the remarkable thing
is that come two years ago to an of years ago,
ten year yields got was learned nor point five percent.
That sort of started a journey whereby the dominoes sort
(09:09):
of effectively fell, and then we saw inflation remains stickier
due to that those post COVID issues, and that sort
of continued. And then when obviously a year ago we
had the war with Ukraine, which I think was a
massive wake up anybody who thought that inflation was going
to be transfreme any thought that the body thought that
inflation was going to return to two percent, which markets
for forecasting at that particular point in time. I think
(09:31):
that that was when everyone realized that interest rates needs
to go up and needs to go out quickly, and
inflation was likely to be around. And here we are
a year later, UK inflation at ten point four percent.
It's just it's not it's not that there are still
people who think it is going away. There are still
two people who believe that once the impulse of higher
energy prices and the supply problems of COVID disappear, we
(09:52):
will go back to two three percent inflation, interest rates
will four and the old normal And what we perceive
is the old normal will return, and then the panel
before us will be happy because technology stocks will sow again,
the everything bubble will return. It's possible, but I think
it's I think it's unlikely for all of the reasons
that you gave in the original question. You've got you've
got deglobalization happening. You've got the power of labor which
(10:19):
is higher than it's been for many years, if not decades.
And I think one of the things I've always said
about the expectation for higher inflation is wages, and it's
always wages that you've got to look at. Ultimately, there's
noise of of of commodity prices, there's the noise of
the old price, there's noise of food prices. But ultimately
the thing that sustains inflation over longer periods of time
(10:43):
is wages. And we have actually been seeing wages rising materially.
We've seen obviously strikes in the UK, but but do
only wage pressure. As services have come back post the pandemic,
particularly last year, we've seen a material amount of wage pressure.
Maybe that won't be sustained. We can track it can't
be by watching union membership. And one of the most
(11:05):
interesting dynamics of the whole thing. I remember being told
a couple of years ago that wage inflation could not
be sustained because the unions weren't powerful enough, and thinking
you've got that the wrong way around. Union power follows inflation.
Inflation doesn't follow union power. And we can see union
membership rising and rising and rising, which may not be
a bad thing. No, no, no, not at all. But
I think wages are key. Capital's had it, you know,
(11:28):
had a fantastic time for the last two decades, three decades.
You could say, you know, it's labor's turn, and labor
is having its turn, certainly at the moment. We'll have
to see how that lasts. But if that continues, then
I would be more cautious about the view that you
gave earlier about you know, rates coming back down, inflation
from back down to normal. I think. I think we're
just in a world where things will be more volatile.
Inflation will be more volatile, fishing will come down. There's
(11:50):
something called the base effect where she soon act knows
about the base effect. He's not stupid. So that's why
his forecast inflation is like to half this year. Maybe
it will, maybe it won't. Be forecasting. He was saying,
you would bring it down. Yes, yes, And so unless
something dramatic happens from a geopolitical perspective and deal price
hasn't got to one hundred fifty dollars or something, then
(12:11):
inflation is likely to be falling this year. The question
isn't whether it falls, The question is whether where it stops,
and ultimately whether there's a sort of second wave out
next year, in the year yeah beyond, and that will
be the surprise to the to the investors who are
saying things are going to come back down to where
they were pre COVID. Yeah. So it feels like an
(12:31):
environment where you would expect volatility at best. Yeah, yeah, okay,
so rates rising, yea, rates are not going to come
back down to zero. This isn't going to happen. And
in an environment where rates have basically been falling for
a couple of decades plus and then four decades, and
they start to write things start to break, and we're
(12:52):
beginning to see things break. What's going to break next?
Where do you see the breaks coming? The usual suspects
are you're in banks, they're usually obviously we've had we've
had credit swees. But I suspect, you know, it will
continue to be within the banking sector, all within sort
of shadow banking type companies perhaps that we've never heard of,
like Green Sial, But those sorts of issues will will.
(13:16):
I suspect these dominoes will continue to fall. One of
the things that I think there are there are parallels
with what we're seeing at the moment from a stock
market point of view, with two thousand to two thousand
and three and two thousand and seven to two thousand nine,
So the financial crisis and the dot com bubble busting.
Both both of those times the S and P fell
about fifty percent um and that people say, well, is
(13:38):
this a great financial crisis, No, it's not. You know,
the banking system is is a lot better capitalized, particularly
the larger banks are much better capitalized than they were
when Lehman went bust. So there are differences, but there
are similarities. And we've seen, you know, a tech bust effectively,
and we've seen issues in the banking sector, and this
time they're related. Whereas in two thousand the banking sector
(13:59):
is fine, in two thousand and two thousand and nine
the tech sector was actually not not too bad. Now
we've actually effectively got them, got them converging. So I
think we need to think about the merging of those
two bear markets and think that's probably what we're facing
this time around, something significantly worse than well, not necessarily worse,
(14:19):
but probably you know, I think you need to be
open minded about how it's going to play out. But
I think be open minded means we don't know how
it's complete. Yes, no, we don't know how. We don't
play out. But but I suspect that there will be
more accidents ahead. Okay, well, let's talk about than where
we can hide, because in August, every other crisis in
(14:40):
my career anywhere, there has been somewhere obvious, necessarily immediately obvious,
but somewhere you can hid, some area that's cheap, something
that doesn't mean caught up in the previous malia. And
this time around is how hard you see that thing?
It is incredibly hard to see that. And this is
we have been talking about this in our investment ports
for a number of years. Your rights, There aren't very
(15:01):
obvious place to hide. The dollar was good last year,
that really helped us last year. This year, I think
the dollars are a harder one to call, generally speaking
when they're risk off markets. And if we're write about
other accidents happening, then the dollars should do well within that.
But I suppose I'd be surprised if we saw quite
the sort of melt up in the dollar, meltdown in
(15:22):
sort of Stirling that we saw back in September of
last year. So so there aren't very obvious placed. I
suppose the one that you'll probably want me to mention
is gold. I do want you to mention that I
was naming till the end, but which has not been
has not been in a bubble. Yum did its job
in twenty twenty during the pandemic for us when everything
(15:44):
was was melting down. Did its job for us last
February during the invasion of Ukraine. And it was flat
last year. And everybody, everybody looks at the dollar price meriton,
don't look at prices in other currencies. We don't hedge
our golds. So in sterling gold was up temper tent
last year. Yeah, did it did its job for us
(16:04):
within the portfolio. So I think that that still may
yet do its job. It's certainly feeling it's certainly feeling
that way. It's feeling as if it's not a bad
place to be in an environment where inflation is high,
where negative real rates are likely to stay in place.
You're not going to see a situation where central banks
(16:27):
are going to be able to put interest rates up
well above the rate of inflation, which is what positive
real rates because more things will break, because a lot
more things will break, and so rates are probably going
to stay higher for longer as a result, and there'll
be there'll be some drift in terms of policy on
inflation targeting. We've seen that with Haldane's article in the Ft,
(16:49):
We've seen it with Howard Davis West talking about thinks
we should allow the inflation target from the Bank of
England just to drift out maybe maybe three years or
four years, allow them to have a bit more time.
That's slippage. Effectively move to all moved to arrange from
two to four yeah, whatever, and that is effectively debasement,
(17:13):
and that is that's a good environment for gold. So
so I think gold will have a role to play
and personal personal assets for example, holds watch in gold
ten percent percent of portfolio and God hasn't actually gone
up interially. No, it's been been about ten percent for
for a while. We wouldn't have it go up to
(17:34):
about fifteen or twenty percent. I think what's really important
with holding gold and having a role within the portfolio
is you want to have You want to have enough
to make a difference. There's no point in having one
or two percent. It's just not going to move the needle.
But you also don't want to have too much where
the tailwat's the dog effects for you it's affecting. It's affecting,
then then have too much you want to place your
full bet there. But I think you know it has
(17:56):
a role to play in terms of its defensibility, and
you've seen it time and time again. There were now
three three episodes in the last three years where it's
kicked in, and it's actually kicked in very nicely at
a time when things have been pretty febrile. Um, And
there were a lot of losses out there for elsewhere,
within within portfolios and other portfolios. And quite like to
(18:17):
ask you about bitcoin, you can ask me about Okay,
I'm going to age against inflation. I mean, I think
we know what I think. No, I think crypto just
for me goes into the too hard bucket. Um, I
think it's been found out a little bit. I was
very interested to nar Ferguson's comment about his view on
crypto and the fact that crypto had been sort of
(18:38):
effectively corrupted. Um, we've never held it. I've never held it.
I think gold has actually proven itself over the last
year or two or three during a period where bitcoin
has been very highly volatile. And I think that volatilis
is the definition of you know, people don't know how
to value something, and it's about the most vola tile
(19:00):
thing that you can own, so clearly people don't really
know how to value it. Okay, let's move on from that.
I'm interested in you saying that when I was talking
about there being somewhere to hide, somewhere that wasn't caught
up and everything bubble, and you said no, previous times
there have been good value stocks in the UK. A
lot of my podcast gus say exactly that. Now there
(19:20):
is a place to hide, and it is the UK,
which is cheap on any measure you could look at.
And the value ratio between the UK and the US,
for example, is that it's one of the widest has
ever been. And not only that, but these are good,
high quality companies operating internationally with good, high dividend yields.
And I think you know you and I both agree
that a good dividend yield is one of the greatest
(19:42):
hedges you can get against inflation. So why on earth
wouldn't invest it? Like you not be pouring into the
UK market. We're definitely looking at UKA. I went to
visit the headquarters of a UK company in Slow this morning,
so We're definitely looking at UK companies. I would say, Marion,
I'd say you're half right. I think you're comparing chalk
and cheese a little bit. In terms of comparing the
(20:03):
US with UK. The if you scrape, scrape below the
surface a little bit, the businesses within the UK. If
you look at the foot Sea, there are a large
number of very large cap companies that are highly cyclical.
We've got a very large percentage in oils. We've got mining,
we've got utilities with large Telco's exposure and Vodafone BT,
(20:26):
you've got a very large exposure to banks, You've got
house builders. It is not like the US. And yes,
there is a valuation differential and I think there are
some things to blame for that in terms of a
breakfast and other other issues that you've discussed in the past.
And definitely investors, particularly in the UK, have been selling
down in the UK. We can see that with the
(20:47):
flows in unit trusts over the last five or six years.
Wealth managers have been reducing their exposure to the UK
stock market. One I happen to know is reduced from
thirty percent of their portfolio down to about three percent
of their portfolio, specifically in UK stock. So you might say, well,
there's nobody left to sell. That is exactly what I
was going to say. But all the big domestic Penton
(21:09):
found and all the big balance funds have shifted, which
they have now shifted, they're holding in UK could us
down from thirty forty in some cases fifty percent to
a maximum in most cases of three or four percent.
They're done with the selling. It's over, So that may
mark a boss. My one reservation is that all of
those sectors that I mentioned, probably the exception of pharmaceuticals,
(21:30):
a lot of those sets are very cilical. They did
really well last year because we were in a six
up time. If I'm right, and I suspect we're going
into hard landing, a more traditional hard landing than the
ones we've had in the past as well. So by
that I mean more traditional than the COVID recession, more
traditional than perhaps the financial crisis recession, more like the
(21:52):
recessions we used to have in the sort of early
nineties that are sort of slightly more prolonged. Central banks
from titan to get inflation down slightly old school. Then
those cychnical companies like the miners light, the oils light.
The banks probably going to struggle, so they're going to
really struggle with earnings. I suspect so you may be right,
(22:13):
but not yet. But I think that in terms of
some companies that we mean, my largest holding is Unilever.
Unilever is definitely on a discount to the lights of
prop from gamble Nessley. It's Piers, which we also hold,
but not to the same extent. I think there is
a little bit of a gap. It's not massive, but
I think there is a little bit of a gap
between those better quality blue chips within the UK and
(22:34):
their international piers. I think that is a gap that
has to narrow and where we have been adding, we
have been adding there. So I think you're right. There
is a reason why lots of companies thinking about moving
their headquarters to America, and we know exactly where it is,
because so they can get a higher share price. Right now, Yeah,
I do think that the UK market has got a
problem and they couldn't get arm back. They've lost some
(22:55):
great companies over the years, like Cabris, which we were
a holder of. You know, there was no replacement for Cabris.
It's now gone to Mondealais in the US. So I
think that the sad thing is we have lost some
great companies in the UK and they haven't been replaced.
And that is something which has been discussed at nauseam
for the last five or six ers. And I'm sure
you've written Aboust in your in your articles, but there
doesn't seem to be a resolution to that. And the
(23:16):
concern is that where we've got things like companies look
good companies like Ferguson up called Wolsley and in the
UK a large foot one hundred company moving to the US.
So I think that there is I mean, it's not
an easy decision. I saw that Bat was suggested by
one of the shelders that the Bat shout in sem
it's got a very big US business, it hasn't got
a UK business. So there is some logic to BAT
(23:39):
moving to the US. And tobacco companies have slightly higher
racings in the US than they do in the UK,
so we'll see whether they do. It's not an easy
thing to do. I worked at a company where they
were getting a nastack listing. They had a UK listing,
but they wanted a NaSTA listening for exactly the reason
that you said, and I remember it was bureaucratically really tough.
So you've got to be absolutely sure you're really share
(24:01):
prices is going to double. Yeah, yeah, And let's talk briefly.
We haven't got much time left, sorry, about the rest
of the portfolio. How much of it is inequity at
the moment to at low twenties percent, so it's about
basically the lowest it's been about fifteen years, even lower
than it wasn't the financial crisis. Partly coming back to
the point you said that there aren't places. There aren't
obvious places to hide within the secretary market. If there were,
then we'd have a higher proportioned actors. But for exactly
(24:24):
that reason, we're worried about that continued not only multiple
contraction this year, but also the fact that there's more
earnings risk and interest rate costs keep going up for companies.
Companies have taken on frankly, they've taken on public companies
to two on too much debt. Debt levels are pretty
much doubled over the last year, and a lot of companies.
We've seen your companies that were comfortable with one time
to where it are suddenly comfortable with two. Companies that
(24:46):
were comfortable with two are comfortable with four. And increased
tax and increased interest costs mean that the earnings the
top line might be fine, but actually the bottom line,
the earnings that are not going to be as good.
So that's why, because of those lack of places to hide,
that's why we're very conservatively positioned at the moment, with
the idea that probably within a year's time will be
(25:06):
much more hopefully possibly positioned. We're right because we have
only got a few seconds left. So let me challenge
you before we end, give me one piece of good news.
I think I think that sometime in the next eighteen
months is going to be a very good time to
buy the everything market just got to be patient, will
we know? I think just keeping our evaluations, that's what
(25:26):
I look at. I look at things like the KPE
since like the key ratio. I look at the bottom up.
Stop picking our bottom up, stop picking our stocks, and
look at their evaluations on a day by day basis,
and that's what informs me is to whether I'm going
to make those longer term returns. So it'll be valuations
which are the key. All right, I'm going to call
you every week for the next eighteen months until you
tell me it's time. Okay, all right, so Astian, thank
(25:47):
you very much, look forward to it. Thank you for
listening to this week's Marin Talks Money. We will be
back next week in the meantime. If you like us, Joe, rate,
review and subscribe where ever you listen to your podcast,
and please do so positively. Will you'd appreciate that a
lot more than anything else. This episode was hosted by
(26:07):
me Marion Sumset Web. It was produced by Samer Sadi.
Additional editing by Blake Maples. Special thanks to Sebastian Lyon
and John Steppic. And finally, our weekly reminder, and you know,
if you do all sign up, I'll have to I'll
be able to stop reminding you. Just sign up. Sign
up to John's daily newsletter Money distilled with the links
in the show notes. Do it. You won't regret it.
So John, we've both spente some of today at the
Bloomberg invest conference. Coming up as the live podcast that
I did with Sebastian from that, although I'm not entirely
sure it wakes it more live than other podcasts because
most of my guests are definitely alive. I think the
key difference was that it was in front of an audience,
so that makes it a different kind of life. But
you hosted a panel, didn't new early on which I
(00:23):
didn't make it too, So lucky me, I can here
at the same time as the listeners what you talked about. Well,
there we go. What a treat, No, I said, I
think that makes the live podcast. You should have encouraged
more heckling. There was heckling. I think there was heckling.
Actually there was certainly low level giggling, and Sebastian had
(00:45):
a couple of little goes at me. I noted, I
think I gave back as good as I got, but
we'll leave the listeners to judge that. Oh yes, yes,
thanks on host places, I know beat Let's Table one day.
On one day no So, I had seen a show
from Principal Asset Management and Chann Belle from Goldman Sachs
(01:08):
and Alex Chapter's old friend of the podcast from Rougher
She's so good and everyone, by the way, letting go
back and little for the podcast I did with Alex
a few weeks ago. It was so right. Yeah, no,
and he is, he's very he's very smart. But interestingly,
I mean, because he could be really wrong. But most
(01:30):
of the they basically agreed, which is interesting. Um, the
I suppose it's this thing, well A the banking crisis.
The banking crisis is not going to tune into two
thousand and eight, and it's probably not going to spread
much beyond what we've already had, so they cannot credit
sweet So the US regional stuff, um, which personally speaking
(01:52):
I agree with. I don't. I think that that doesn't
mean that's okay, but it's going to be a different
kind of thing. And their main point was that if
the central banks are forced to choose between financial stability
and letting inflation rip, then we've seen time and time
again that the thing that they will do is favor
(02:14):
financial stability, and clearly they'll try and do it in
a way that doesn't let inflation explode. But the only
tool they really got is pumping more money and he
certain areas the economy, um, you know, arguably kind of
encouraging misallocation that resources. I mean, at this rate, you know,
(02:34):
we'll all just have one giant bank that we bank
with that is backed by you know, the FED. Basically
sounds great, one cost my services person. Well, I mean yeah,
the Department, I hope, not passion. That's how they will
sell Central Bank digital counties to his convenience. And the
more entrenched we get in our mobile phones, the harder
(02:56):
it will be to not do it. I mean, these days,
so much as I try to avoid it, there's a
big party that doesn't care who owns my data anymore,
track of it? You welcome. Google knows everything about such
too many cookies, John your dun for Well, I know,
but it's you know, my best hope is that I'm
(03:17):
just I'm just one of a billion kind of fairly
irrelevant people all sold to China. Well no, well I'm
not on TikTok to be fair, I've avoided that anyway.
I think I got a bit sidetrack there. I was
just thinking of the listeners are rushing to TikTok to
(03:37):
dancing Jay No I don't want to kids get crashing it,
celebrity on TikTok, myself financial financial anyway, you know, moving on,
moving on swiftly on what were their investment recommendations. Well,
I did ask them about bitcoin um and there was
(03:58):
the usual kind of skepticism on that one. I asked
Imasgine about bitcoin and when when you listen to those listeners,
you'll find he could barely be puble to talk about it. See,
I'd rushed that one off almost straight away. I think,
I said, I think it's sort of a good scene
if you're someone who's a bitcoin booll. It was still
(04:20):
in this uneasy kind of no man's land. I mean,
it's up about thirty percent this year. It's not it's
not going to get killed like the rest of the
crypt You think it's an inflation hedge, don't you? No,
Nor do it twice an inflation edge. I don't know
what it is, but it is for something, is for something.
(04:41):
I imagine that a lot of the people we panicked
about the US regional banks may have stuck some of
them money in bitcoin. I mean, then again, I guess
SVB was full of people who would probably be inclined
to see bitcoin. It's some sort of disaster edge. But
but yeah, not other than that, equities the rates to
what's their equities value in all its forms? Um and
(05:08):
the strangely enough, Alex recommended a multi asset fund. I
can't think why. I can't think why. I don't I
wonder where one would buy something such a thing, such
a thing, let's see, that's the terrible conflict of interest.
You need to give me a better answer. But I
don't think that fund managers worry about conflict of interesting
(05:29):
and lucky we do try and get the fund managers
on the show and fun managers we talked to who
are fund managers, not salespeople for funds. And remember most
fund managers are in Victor, Yeah, salespeople because they make
their money out of bumping up the assets under management
a lot more than they make their money out of performance.
But we drank out the ones who care about their
their investorsn't care about returned and so they believe in
(05:52):
their stuff, which they believe in their staging. And they
all have, or we hope they have quite a lot
of skin in the game. Anyway, And on to somewhere
I'm pretty sure does have exactly that. Welcome to Marin
Talks Money, the podcast in which people who know the
markets explain the markets. I'm Marian Sumset Web. This week
we bring you our very first live taping. Again I question,
(06:13):
I question the use of the word live. Here very
first live taping of the podcast, which took place at
the Bloomberg invest Summit at Bloomberg's London headquarters, I spoke
with Sebastian Lyon, founder and chief investment Officer of Troy
Asset Management. Sebastian, thank you for being on my live
recording of my podcast Pleasure Marin. We're going to start
(06:35):
with it something that I read in one of your newsletters. Okay,
markets are never constant. They change and evolve like the weather.
Trends can sustain for months and years, perhaps even a decade,
but not forever. Now we're in the middle. I think
you would agree of a massive regime change for markets
from a world of low interest rates, low inflation, globalization, peace,
(06:59):
lowly be costs, cheap energy, all these wonderful things to
a period when all that has changed. Is that fair?
Is that? And how you're looking at It's very fair
and it means that it's going to make investing a
lot tougher over the next three or four years, maybe
the next decade than it has been for the last decade.
The last decade you almost needed to just actually just
(07:20):
do very little buttonholed, bitonhole growth stocks. They were rerated
over a period of a long, long period of time.
They are very good companies in the UK and the
US where you've seen steady growth, not spectacular growth, not
like the tech companies that we were hearing about earlier,
but just good solid engineers businesses that are growing five, ten,
fifteen percent perannum and they've been rerated. They were rerated
(07:42):
usually over the last decade. They went from fifteen times
earnings to thirty times zarnings before COVID. Even before COVID
we had the COVID blowout, they went to fifty times earnings.
They're back now at about thirty times earnings. You know,
we're on a long journey back to that fifteen times
zonninges where we were when interest rates were still zero
back in twenty and twelve. Interest rates are you know,
(08:03):
now between four and five percent. If you look back
at valuations when interest rates were four or five percent
prior to the financial crisis valuations were on those those
mid teams multiples for good, good quality stocks. So I
just think we have a long journey ahead. There's going
to be more volatility and that's what you need to
be patient about in terms of from perspective investing for
(08:27):
private wealth, which affects you what I'm doing. But you've
been positioned from inflation of quite a long time. Yes,
possibly too long, yeah, long, thank you, thank you for that.
So you came into this latest bad for inflation ready
for it? Yes, pretty ready. I mean I think that
we were aware that there were there were huge concerns
(08:47):
that interest rates were were far too low and that
inflation was unlikely to remain stable. And the remarkable thing
is that come two years ago to an of years ago,
ten year yields got was learned nor point five percent.
That sort of started a journey whereby the dominoes sort
(09:09):
of effectively fell, and then we saw inflation remains stickier
due to that those post COVID issues, and that sort
of continued. And then when obviously a year ago we
had the war with Ukraine, which I think was a
massive wake up anybody who thought that inflation was going
to be transfreme any thought that the body thought that
inflation was going to return to two percent, which markets
for forecasting at that particular point in time. I think
(09:31):
that that was when everyone realized that interest rates needs
to go up and needs to go out quickly, and
inflation was likely to be around. And here we are
a year later, UK inflation at ten point four percent.
It's just it's not it's not that there are still
people who think it is going away. There are still
two people who believe that once the impulse of higher
energy prices and the supply problems of COVID disappear, we
(09:52):
will go back to two three percent inflation, interest rates
will four and the old normal And what we perceive
is the old normal will return, and then the panel
before us will be happy because technology stocks will sow again,
the everything bubble will return. It's possible, but I think
it's I think it's unlikely for all of the reasons
that you gave in the original question. You've got you've
got deglobalization happening. You've got the power of labor which
(10:19):
is higher than it's been for many years, if not decades.
And I think one of the things I've always said
about the expectation for higher inflation is wages, and it's
always wages that you've got to look at. Ultimately, there's
noise of of of commodity prices, there's the noise of
the old price, there's noise of food prices. But ultimately
the thing that sustains inflation over longer periods of time
(10:43):
is wages. And we have actually been seeing wages rising materially.
We've seen obviously strikes in the UK, but but do
only wage pressure. As services have come back post the pandemic,
particularly last year, we've seen a material amount of wage pressure.
Maybe that won't be sustained. We can track it can't
be by watching union membership. And one of the most
(11:05):
interesting dynamics of the whole thing. I remember being told
a couple of years ago that wage inflation could not
be sustained because the unions weren't powerful enough, and thinking
you've got that the wrong way around. Union power follows inflation.
Inflation doesn't follow union power. And we can see union
membership rising and rising and rising, which may not be
a bad thing. No, no, no, not at all. But
I think wages are key. Capital's had it, you know,
(11:28):
had a fantastic time for the last two decades, three decades.
You could say, you know, it's labor's turn, and labor
is having its turn, certainly at the moment. We'll have
to see how that lasts. But if that continues, then
I would be more cautious about the view that you
gave earlier about you know, rates coming back down, inflation
from back down to normal. I think. I think we're
just in a world where things will be more volatile.
Inflation will be more volatile, fishing will come down. There's
(11:50):
something called the base effect where she soon act knows
about the base effect. He's not stupid. So that's why
his forecast inflation is like to half this year. Maybe
it will, maybe it won't. Be forecasting. He was saying,
you would bring it down. Yes, yes, And so unless
something dramatic happens from a geopolitical perspective and deal price
hasn't got to one hundred fifty dollars or something, then
(12:11):
inflation is likely to be falling this year. The question
isn't whether it falls, The question is whether where it stops,
and ultimately whether there's a sort of second wave out
next year, in the year yeah beyond, and that will
be the surprise to the to the investors who are
saying things are going to come back down to where
they were pre COVID. Yeah. So it feels like an
(12:31):
environment where you would expect volatility at best. Yeah, yeah, okay,
so rates rising, yea, rates are not going to come
back down to zero. This isn't going to happen. And
in an environment where rates have basically been falling for
a couple of decades plus and then four decades, and
they start to write things start to break, and we're
(12:52):
beginning to see things break. What's going to break next?
Where do you see the breaks coming? The usual suspects
are you're in banks, they're usually obviously we've had we've
had credit swees. But I suspect, you know, it will
continue to be within the banking sector, all within sort
of shadow banking type companies perhaps that we've never heard of,
like Green Sial, But those sorts of issues will will.
(13:16):
I suspect these dominoes will continue to fall. One of
the things that I think there are there are parallels
with what we're seeing at the moment from a stock
market point of view, with two thousand to two thousand
and three and two thousand and seven to two thousand nine,
So the financial crisis and the dot com bubble busting.
Both both of those times the S and P fell
about fifty percent um and that people say, well, is
(13:38):
this a great financial crisis, No, it's not. You know,
the banking system is is a lot better capitalized, particularly
the larger banks are much better capitalized than they were
when Lehman went bust. So there are differences, but there
are similarities. And we've seen, you know, a tech bust effectively,
and we've seen issues in the banking sector, and this
time they're related. Whereas in two thousand the banking sector
(13:59):
is fine, in two thousand and two thousand and nine
the tech sector was actually not not too bad. Now
we've actually effectively got them, got them converging. So I
think we need to think about the merging of those
two bear markets and think that's probably what we're facing
this time around, something significantly worse than well, not necessarily worse,
(14:19):
but probably you know, I think you need to be
open minded about how it's going to play out. But
I think be open minded means we don't know how
it's complete. Yes, no, we don't know how. We don't
play out. But but I suspect that there will be
more accidents ahead. Okay, well, let's talk about than where
we can hide, because in August, every other crisis in
(14:40):
my career anywhere, there has been somewhere obvious, necessarily immediately obvious,
but somewhere you can hid, some area that's cheap, something
that doesn't mean caught up in the previous malia. And
this time around is how hard you see that thing?
It is incredibly hard to see that. And this is
we have been talking about this in our investment ports
for a number of years. Your rights, There aren't very
(15:01):
obvious place to hide. The dollar was good last year,
that really helped us last year. This year, I think
the dollars are a harder one to call, generally speaking
when they're risk off markets. And if we're write about
other accidents happening, then the dollars should do well within that.
But I suppose I'd be surprised if we saw quite
the sort of melt up in the dollar, meltdown in
(15:22):
sort of Stirling that we saw back in September of
last year. So so there aren't very obvious placed. I
suppose the one that you'll probably want me to mention
is gold. I do want you to mention that I
was naming till the end, but which has not been
has not been in a bubble. Yum did its job
in twenty twenty during the pandemic for us when everything
(15:44):
was was melting down. Did its job for us last
February during the invasion of Ukraine. And it was flat
last year. And everybody, everybody looks at the dollar price meriton,
don't look at prices in other currencies. We don't hedge
our golds. So in sterling gold was up temper tent
last year. Yeah, did it did its job for us
(16:04):
within the portfolio. So I think that that still may
yet do its job. It's certainly feeling it's certainly feeling
that way. It's feeling as if it's not a bad
place to be in an environment where inflation is high,
where negative real rates are likely to stay in place.
You're not going to see a situation where central banks
(16:27):
are going to be able to put interest rates up
well above the rate of inflation, which is what positive
real rates because more things will break, because a lot
more things will break, and so rates are probably going
to stay higher for longer as a result, and there'll
be there'll be some drift in terms of policy on
inflation targeting. We've seen that with Haldane's article in the Ft,
(16:49):
We've seen it with Howard Davis West talking about thinks
we should allow the inflation target from the Bank of
England just to drift out maybe maybe three years or
four years, allow them to have a bit more time.
That's slippage. Effectively move to all moved to arrange from
two to four yeah, whatever, and that is effectively debasement,
(17:13):
and that is that's a good environment for gold. So
so I think gold will have a role to play
and personal personal assets for example, holds watch in gold
ten percent percent of portfolio and God hasn't actually gone
up interially. No, it's been been about ten percent for
for a while. We wouldn't have it go up to
(17:34):
about fifteen or twenty percent. I think what's really important
with holding gold and having a role within the portfolio
is you want to have You want to have enough
to make a difference. There's no point in having one
or two percent. It's just not going to move the needle.
But you also don't want to have too much where
the tailwat's the dog effects for you it's affecting. It's affecting,
then then have too much you want to place your
full bet there. But I think you know it has
(17:56):
a role to play in terms of its defensibility, and
you've seen it time and time again. There were now
three three episodes in the last three years where it's
kicked in, and it's actually kicked in very nicely at
a time when things have been pretty febrile. Um, And
there were a lot of losses out there for elsewhere,
within within portfolios and other portfolios. And quite like to
(18:17):
ask you about bitcoin, you can ask me about Okay,
I'm going to age against inflation. I mean, I think
we know what I think. No, I think crypto just
for me goes into the too hard bucket. Um, I
think it's been found out a little bit. I was
very interested to nar Ferguson's comment about his view on
crypto and the fact that crypto had been sort of
(18:38):
effectively corrupted. Um, we've never held it. I've never held it.
I think gold has actually proven itself over the last
year or two or three during a period where bitcoin
has been very highly volatile. And I think that volatilis
is the definition of you know, people don't know how
to value something, and it's about the most vola tile
(19:00):
thing that you can own, so clearly people don't really
know how to value it. Okay, let's move on from that.
I'm interested in you saying that when I was talking
about there being somewhere to hide, somewhere that wasn't caught
up and everything bubble, and you said no, previous times
there have been good value stocks in the UK. A
lot of my podcast gus say exactly that. Now there
(19:20):
is a place to hide, and it is the UK,
which is cheap on any measure you could look at.
And the value ratio between the UK and the US,
for example, is that it's one of the widest has
ever been. And not only that, but these are good,
high quality companies operating internationally with good, high dividend yields.
And I think you know you and I both agree
that a good dividend yield is one of the greatest
(19:42):
hedges you can get against inflation. So why on earth
wouldn't invest it? Like you not be pouring into the
UK market. We're definitely looking at UKA. I went to
visit the headquarters of a UK company in Slow this morning,
so We're definitely looking at UK companies. I would say, Marion,
I'd say you're half right. I think you're comparing chalk
and cheese a little bit. In terms of comparing the
(20:03):
US with UK. The if you scrape, scrape below the
surface a little bit, the businesses within the UK. If
you look at the foot Sea, there are a large
number of very large cap companies that are highly cyclical.
We've got a very large percentage in oils. We've got mining,
we've got utilities with large Telco's exposure and Vodafone BT,
(20:26):
you've got a very large exposure to banks, You've got
house builders. It is not like the US. And yes,
there is a valuation differential and I think there are
some things to blame for that in terms of a
breakfast and other other issues that you've discussed in the past.
And definitely investors, particularly in the UK, have been selling
down in the UK. We can see that with the
(20:47):
flows in unit trusts over the last five or six years.
Wealth managers have been reducing their exposure to the UK
stock market. One I happen to know is reduced from
thirty percent of their portfolio down to about three percent
of their portfolio, specifically in UK stock. So you might say, well,
there's nobody left to sell. That is exactly what I
was going to say. But all the big domestic Penton
(21:09):
found and all the big balance funds have shifted, which
they have now shifted, they're holding in UK could us
down from thirty forty in some cases fifty percent to
a maximum in most cases of three or four percent.
They're done with the selling. It's over, So that may
mark a boss. My one reservation is that all of
those sectors that I mentioned, probably the exception of pharmaceuticals,
(21:30):
a lot of those sets are very cilical. They did
really well last year because we were in a six
up time. If I'm right, and I suspect we're going
into hard landing, a more traditional hard landing than the
ones we've had in the past as well. So by
that I mean more traditional than the COVID recession, more
traditional than perhaps the financial crisis recession, more like the
(21:52):
recessions we used to have in the sort of early
nineties that are sort of slightly more prolonged. Central banks
from titan to get inflation down slightly old school. Then
those cychnical companies like the miners light, the oils light.
The banks probably going to struggle, so they're going to
really struggle with earnings. I suspect so you may be right,
(22:13):
but not yet. But I think that in terms of
some companies that we mean, my largest holding is Unilever.
Unilever is definitely on a discount to the lights of
prop from gamble Nessley. It's Piers, which we also hold,
but not to the same extent. I think there is
a little bit of a gap. It's not massive, but
I think there is a little bit of a gap
between those better quality blue chips within the UK and
(22:34):
their international piers. I think that is a gap that
has to narrow and where we have been adding, we
have been adding there. So I think you're right. There
is a reason why lots of companies thinking about moving
their headquarters to America, and we know exactly where it is,
because so they can get a higher share price. Right now, Yeah,
I do think that the UK market has got a
problem and they couldn't get arm back. They've lost some
(22:55):
great companies over the years, like Cabris, which we were
a holder of. You know, there was no replacement for Cabris.
It's now gone to Mondealais in the US. So I
think that the sad thing is we have lost some
great companies in the UK and they haven't been replaced.
And that is something which has been discussed at nauseam
for the last five or six ers. And I'm sure
you've written Aboust in your in your articles, but there
doesn't seem to be a resolution to that. And the
(23:16):
concern is that where we've got things like companies look
good companies like Ferguson up called Wolsley and in the
UK a large foot one hundred company moving to the US.
So I think that there is I mean, it's not
an easy decision. I saw that Bat was suggested by
one of the shelders that the Bat shout in sem
it's got a very big US business, it hasn't got
a UK business. So there is some logic to BAT
(23:39):
moving to the US. And tobacco companies have slightly higher
racings in the US than they do in the UK,
so we'll see whether they do. It's not an easy
thing to do. I worked at a company where they
were getting a nastack listing. They had a UK listing,
but they wanted a NaSTA listening for exactly the reason
that you said, and I remember it was bureaucratically really tough.
So you've got to be absolutely sure you're really share
(24:01):
prices is going to double. Yeah, yeah, And let's talk briefly.
We haven't got much time left, sorry, about the rest
of the portfolio. How much of it is inequity at
the moment to at low twenties percent, so it's about
basically the lowest it's been about fifteen years, even lower
than it wasn't the financial crisis. Partly coming back to
the point you said that there aren't places. There aren't
obvious places to hide within the secretary market. If there were,
then we'd have a higher proportioned actors. But for exactly
(24:24):
that reason, we're worried about that continued not only multiple
contraction this year, but also the fact that there's more
earnings risk and interest rate costs keep going up for companies.
Companies have taken on frankly, they've taken on public companies
to two on too much debt. Debt levels are pretty
much doubled over the last year, and a lot of companies.
We've seen your companies that were comfortable with one time
to where it are suddenly comfortable with two. Companies that
(24:46):
were comfortable with two are comfortable with four. And increased
tax and increased interest costs mean that the earnings the
top line might be fine, but actually the bottom line,
the earnings that are not going to be as good.
So that's why, because of those lack of places to hide,
that's why we're very conservatively positioned at the moment, with
the idea that probably within a year's time will be
(25:06):
much more hopefully possibly positioned. We're right because we have
only got a few seconds left. So let me challenge
you before we end, give me one piece of good news.
I think I think that sometime in the next eighteen
months is going to be a very good time to
buy the everything market just got to be patient, will
we know? I think just keeping our evaluations, that's what
(25:26):
I look at. I look at things like the KPE
since like the key ratio. I look at the bottom up.
Stop picking our bottom up, stop picking our stocks, and
look at their evaluations on a day by day basis,
and that's what informs me is to whether I'm going
to make those longer term returns. So it'll be valuations
which are the key. All right, I'm going to call
you every week for the next eighteen months until you
tell me it's time. Okay, all right, so Astian, thank
(25:47):
you very much, look forward to it. Thank you for
listening to this week's Marin Talks Money. We will be
back next week in the meantime. If you like us, Joe, rate,
review and subscribe where ever you listen to your podcast,
and please do so positively. Will you'd appreciate that a
lot more than anything else. This episode was hosted by
(26:07):
me Marion Sumset Web. It was produced by Samer Sadi.
Additional editing by Blake Maples. Special thanks to Sebastian Lyon
and John Steppic. And finally, our weekly reminder, and you know,
if you do all sign up, I'll have to I'll
be able to stop reminding you. Just sign up. Sign
up to John's daily newsletter Money distilled with the links
in the show notes. Do it. You won't regret it.
Host
Merryn Somerset Webb
Popular Podcasts
Dateline NBC
Current and classic episodes, featuring compelling true-crime mysteries, powerful documentaries and in-depth investigations. Follow now to get the latest episodes of Dateline NBC completely free, or subscribe to Dateline Premium for ad-free listening and exclusive bonus content: DatelinePremium.com
24/7 News: The Latest
The latest news in 4 minutes updated every hour, every day.
Therapy Gecko
An unlicensed lizard psychologist travels the universe talking to strangers about absolutely nothing. TO CALL THE GECKO: follow me on https://www.twitch.tv/lyleforever to get a notification for when I am taking calls. I am usually live Mondays, Wednesdays, and Fridays but lately a lot of other times too. I am a gecko.