May 19, 2023 • 43 mins
Inflation will eventually come down, but not rapidly or in the way it would have in previous years. So says Sharon Bell, managing director and senior European equity strategist at Goldman Sachs. She tells Merryn Somerset Webb on this week’s Merryn Talks Money that the reason for this state of affairs is specifically the tight labor market, and more broadly the demographics of the Western world.
Sign up to John Stepek's daily newsletter Money Distilled. https://www.bloomberg.com/account/newsletters/uk-wealth
Wanted — your questions. Merryn and John will be doing an AMA (Ask Me/Us Anything) session at 1pm on May 24 — which also happens to be the day the UK’s next monthly inflation data reading comes out — over on the UK Markets Today blog. So what do you want to ask us? Send your questions to jstepek2@bloomberg.net. The earlier you send them, the better the odds you’ll get a sensible answer.
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Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:00):
John, Hello, morning, Melton. There's so much to talk about.
I don't know where to start, and really importantly, so
much to talk about in areas where you and I
have just been right.
Speaker 2 (00:13):
That's always the best idious to talk about. I feel.
Speaker 1 (00:16):
I know, I know now you've written and we're not
going to talk about this. I just want to write
down a market so everyone knows that we were right.
You've written about the Japanese equity market today, and you
and I have been talking for a while about her.
Japanese equity is farty, cheap, everything's changing. When I say well,
I mean it really a very long while. And finally
they've broken through what our old friend Jonathan Allen mused
(00:40):
to call the iron coffin lid, which means that the
only way is up right, just say yes, because we're
all going to talk about this. They can go and
read Money Distilled and read all about it there. Your
job is just to say yes, yes, excellent. The thing
I really want to talk about today is the other
thing that you and I have been writing about for
a long time. We've been writing about her. Nobody understands
how widely spread read the tax burden is in the UK,
(01:03):
so we read you and I how many years ago
now we read an article I think in the New
York Times about fourteen twenty fourteen, because we also have
good memories, which is important to rather. You have a
good memory, and sometimes you remind me about stuff we've
talked about in the past, and we've read this article
which we thought was absolutely amazing because it explained the
(01:24):
fluidity of income earning in the US and how over
a lifetime people are sometimes in the bottom quintile of earning,
sometimes in the top quintile of earning, often in the
middle quintiles, et cetera. But seventy six percent of people,
according to the study, passed through the top quintile of
income generation in the US at least once during a career.
(01:48):
And you know what the top quintile income in the
US is.
Speaker 2 (01:52):
As you know, it's on my head.
Speaker 1 (01:53):
No, luckily I do. Back when back when the article
was written, it was was slightly lower, but it's now
about to two hundred and sixty nine thousand dollars, or
that was the number last year. So that mean seventy
six percent of income tax paying workers in the US,
at some point during a year earn around two hundred
and seventy thousand dollars. Absolutely amazing and a great testament
(02:14):
to the meritocracy and fluidity of the US economy. Now,
everybody thinks that that is not the case in the UK,
right So when we had all this stuff up from
the IFS this week explaining that in a couple of years,
twenty percent of income tax paying workers in the UK
would end up in the forty percent bracket, everyone went, oh,
(02:35):
my god, that's awful twenty percent of people. And you
and I thought back, and we remembered that article that
we'd read, and we thought, twenty percent people is the
bottom band there, because in fact there'll be fluidity in
the UK economy as well. Incomes are not static, particularly
in the private sector. They move around the place all
the time. You can sometimes be in a lower bracket,
(02:56):
you can sometimes be in a higher bracket. Let's go
back to the quintiles move around the place inside these
going to us. And what we didn't know though, is
exactly what those numbers might look like in the UK.
And now I'm handing out to you because one of
our brilliant colleagues at Bloomberg pointed us to some ons
data which gave us some clues.
Speaker 2 (03:14):
Right, Yeah, So Conrad in the office very kindly dugout
this particular port called income dynamics. I think is that
the name of the report, and it's often I mean,
it's nowhere on there is granular. I think that was
an academic study that the US was referencing, and so
that I had actually gone through an entire lifetime. But
(03:36):
even looking at just ten years, what this study found
was that while people in the top quin title in
twenty ten were more likely to stay there for the
whole time, between twenty ten and twenty twenty, you still
found just basically half of them weren't there by the
(03:59):
time that the decade ended. You also found that more
than half the people who started in the bottom quint
title had then moved out of it by the time
that kind of decade ended. And in the middle there's
virtually there was just a lot of moving about, so
people were in the second and then the third, and
then the fourth and vice versa. So the point isn't
(04:20):
so much that, and I mean there are specific kind
of statistics and money distilled from earlier this week, but
the point is that, yes, there is a lot of
income fluidity here too, and there might not be as
much as the US. In fact, I'd be astonished if
there is as much as in the US, because obviously
the US is the kind of kreme de la creme
of meritocracy and kind of capitalist dynamic and all that
(04:42):
sort of stuff. But it's very clear that, as you said,
the idea that twenty percent of income tax payers will
be paying forty percent tax is a very low bar estimate.
And I would wager that the majority of work use
as in more than half will pay forty percent income
(05:03):
tax at some point during their careers. And I think
that the important thing about that is that it should
make us think about this differently. I mean the one
actually that I pick up on and I think we
should discuss this another time, But we're always talking about
who you know, maybe tax relief on pensions is skewed,
and two it should be done differently. But the thing is,
(05:26):
if there are points in most people's careers where they
are forty percent tax payers, those are also the times
in their lives where they're going to be wanting to
put away as much as possible for their pensions. So
perhaps this idea kind of flattening the tax releaf and pensions,
isn't such a good idea and not is it actually
particularly fair, particularly in anyone who has yet to be benefit
(05:48):
from that tax relief. That's slightly separate issue.
Speaker 1 (05:51):
Well, I think I just pick up that one quickly.
Oh yeah, I obviously I agree with you on everything,
and I particularly agree with you on this, and it's
one of the main reasons why I feel that the
annual allowance is the problem, that the lifetime allowance was
never the problem. The problem is the annual allowance because
as soon as people get to a point, which as
it turns out, more people than you think do, get
(06:11):
to their few high earning years, those are the years
when they're then told they're not allowed to contry be
very much into a pension. And that's where the problem comes,
you know. So it's the whole system is set up
with the belief that politicians have because most politicians cannot
see be on the end of their own noses, they
believe that everybody's income is like there's the same every year.
(06:33):
Because anyone who works in the public sector will, particularly
as an MP, because you don't get promoted or demoted
outside going in and out of the cabinet, right, their income,
bar a little inflation adjustment, remains static year after year
after year, and they make policies for that situation, not
for the situation which these these numbers that we're looking
(06:54):
at show most people on or in.
Speaker 3 (06:58):
See.
Speaker 1 (06:59):
I'll give you wyes.
Speaker 2 (06:59):
Think that's an interesting point. The one thing I would
say is I just query slightly whether they have that excuse,
because I mean.
Speaker 1 (07:10):
You're too nice to have I been too nice.
Speaker 2 (07:14):
I mean, career politicians may have a sort of static income,
but I mean, you know, every four years they run
the risky getting thrown out in their backsides and then
they don't have anything. And then also there's all the
ones who you know, quite rightly in my view, kind
of make money on the side. So in a funny
kind of I think they should be more used to,
(07:35):
you know, ups and downs in their their annual income
than so I'm not sure that they have the excuse
that I could see if they want normal public sector workers,
you know, because there's like pay grades and bands and
all that sort of stuff, and it generally is kind
of matter, you know, as long as you stay in work,
you go up the way. But with politicians, they have
a much more volatile career path if they're at all
(07:57):
I mean, if they're at all ambitious. So it just
strikes me that actually, I'm not sure they have that excuse.
Speaker 1 (08:04):
Well, they're just making crap then anyway, that was that
was a sign. Where were you actually going with this conversation?
Speaker 2 (08:12):
I have totally forgotten already, But no, I think it's
it's this thing of well, actually, the other interesting about
this politically is that I do think that people will
start to notice because it's been popular to talk about taxing,
you know, the rich and then throwing income at a
(08:33):
certain level in as being the rich, and the more
people who get hit by higher rate tax not to
mention kind of horrendous kind of marginal tax rates as
child benefits, withdrawing, etc. The less likely that charge is
to stick.
Speaker 1 (08:49):
I mean.
Speaker 2 (08:49):
One of the things that I thought was interested and
quite clever about the way the IFS publicized this is
they made the point that in the early nineteen nineties,
virtually no nurse toll was paying forty percent tax, and
by twenty twenty seven, some poate one in eight of
them will be paying twenty percent. One in four teachers
(09:15):
almost like I mean like well over our third to
police officers.
Speaker 1 (09:19):
Yeah, but that's at one static point. Yeah, exactly, Many
many more of them will move through this rate over
their careers. And that's the key thing. The point that
we're desperately trying to get across to everybody is that
it might be one in four policemen in two years
if you if you take a static point, but it'll
be many, many, many more of a career. So this
(09:41):
explains why, and this is really important listen our politicians.
This explains why electorates are generally against the top rate
of taxes going up, because they know that there's a
very strong chance that they're going to pay that rate
of tax at some point, and it's going to be
in the one or two years when they suddenly go,
(10:02):
oh wow, I'm really earning now. Someone else took everything.
Speaker 2 (10:07):
Yeah, it's yeah. They should learn that and they're going.
I mean the point thing that worries means they'll learn
the wrong lesson and they'll decide to just shunt a
load of tacks when it's something else and make our
lives miserable that way. But yes, I think the focus
needs to fall on how do we make more money? Overall,
how do we grow the pie again rather than sitting
(10:31):
kind of you don't threaten about saving bets here and
there and cutting this and cutting that, and all of
that kind of goes back to we should have a
smaller state, et cetera, et cetera, regulation, you.
Speaker 1 (10:46):
Know, and that we had horrible productivity numbers. Again today,
focus on growing, focus on productivity read money to stilled
by the way, because there's also some bits and bobs
in there. There's a growing body of anecdotal evidence at
least that people are virting with their feet and wealth
creators are beginning to leave the UK for warmer climbs
in every possible way. So that's very important. I just
want to leave you with these numbers again. We've told
(11:07):
you them before, but in this podcast, but listen again.
You think that in the UK the rich of the
rich and the poorer the poor, But in this quintear
data we've been looking at over the ten year period,
nearly fifty percent of those in the top quartile at
the beginning were not there at the end, and over
sixty percent of those who are in the bottom quartile
(11:28):
at the beginning were not there at the end. The
rich are not the rich and the poor are not
the poor. There's a lot of fluidity in the UK,
right John.
Speaker 2 (11:38):
Yep, it's not all lost, and you know.
Speaker 1 (11:41):
Maybe the US is better, but I wonder I'd really
like to have proper data on this right.
Speaker 2 (11:46):
Hopefully somebody out there listening right now is the start
offices or a university somewhere. You might have this data.
You might be looking at it.
Speaker 1 (11:56):
Send it to us, Send it to us. Put your
political prejudices aside one at universities, send us the data.
Welcome to Merendalk's Money, the podcast in which people who
know the markets explain the markets. I'm Meren sum Set
where this week a conversation with Sharon Bell, Managing director
and senior European equity strategist at Goldman Sachs. Yes, our
(12:17):
first guest from Goldman Sachs. Sharon, thank you so much
for joining us today. We hugely appreciate it.
Speaker 4 (12:24):
Thank you, Thanks for in fighting me kind.
Speaker 1 (12:26):
Of come now listen. I want I know, I know
that you're basically one of those rare guests we have
who knows absolutely everything. And you know, I could ask
you about any market around the world and you'd know
the answer. So what I'd like to do, if you
don't mind, and I think that their listeners will love this,
is just start by saying, could you give us an
overview the huge question right an overview of global markets
(12:48):
at the moment? What is going on out there, what
are the main dynamics bind market moves, and what should
we be looking at.
Speaker 4 (12:55):
I will tell you everything, But in some ways I
think global markets is surprised people this year.
Speaker 3 (13:01):
On the positive side, a lot of investors expected weaker
returns this year. We've had pretty strong returns actually, especially
in Europe, double digit returns for a lot of indices
already and we're not even halfway through the year. And
the US market as well, especially the NASDAK, but the
S and P five hundred as well up to year
(13:23):
to date, so reasonably good returns on equities, and particularly
given all the things that actually face interest rates have
been rising, commodity prices have come down, growth has definitely slowed,
orbit not in recession yet, so in some ways I
would say the market's been quite resilient so far this year.
And then on top of all of that, we've had
(13:44):
all the stress in the US banks with some bank failures, etc.
And concerns about slowing a loan growth as well. But
I guess the things that have really boosted the market
and helped the market, especially in Europe, which is my
focus is energy, is gas prices weren't as high as
people feed worried about coming into this year.
Speaker 4 (14:04):
They came down.
Speaker 3 (14:05):
That's how the consumer, it's how governments as well, hell,
because they promised to cushion the consumer from higher prices. Also,
the contagion, the feared contagion from the bank stress in
the US hasn't been as bad yet as feared.
Speaker 4 (14:21):
Of course that could come.
Speaker 3 (14:22):
But at the moment we've only seen a small tightening
and credit conditions and a small fall in loan growth.
So I'd say that markets have digested things relatively well.
But our main concern for the equity market at the moment,
particularly in the US, is that it's not cheap. It
trades on a pe ratio of sort of eighteen to
nineteen times, that's about its twenty year average. And of
(14:44):
course there is now another asset class out there which
is quite attractive, offering you four or five percent yield,
and that's short term rates.
Speaker 4 (14:53):
Given where interest rates are now.
Speaker 3 (14:54):
So I would say resilient, but a little bit mixed,
and we do have and that returns will be low
from here.
Speaker 1 (15:02):
Yeah. So basically when you say resilient, what you mean
is it's too resilient, it's scarily resilient. Something doesn't feel
quite right. I mean, last year, we had this sense
that we were going to revert to some kind of
valuation norm and possibly you know, profit margins were going
to revert to some beginning to revert some kind of
historical norm as well, and that that was something that
we'd see going through into this year. And some of
(15:24):
that didn't happen this year. Instead, we've seen a reversion
back to the dynamic of the last few years, the
prove twenty twenty two years, as opposed to a continuation
of the dynamic of twenty twenty two. Very unexpected.
Speaker 3 (15:37):
Yes, I'd say that's probably fair in a number of senses.
One in the sense that great expectations have started to
come down, so that twenty twenty two was very characterized
by high inflation, inflation constantly surprising on the upside, economists
had to let go of this idea that it was transient.
It turned out that inflation was very sticky. Last year,
our interest rates had to go up and were constantly
(15:58):
rising above people's expertsations. So while this year, I think
a big boost equities in many ways has been the
expectation that interest rates will be peaking.
Speaker 4 (16:07):
We in fact, do you think that interest rates have
peaked now in the US at the short end.
Speaker 3 (16:12):
Where we differ, I think from the consensus is that
we don't expect them to come down very rapidly, so
we think rates will plateau for a period of time.
But yes, you're right, it's been very resilient, and maybe
overly resilient, not reflecting some of the risks out there,
which is that the remainder of this year you'll like
to see very slow grows. There's a risk of recession.
It's not in our forecast, but there's certainly a risk
(16:33):
of that. And there's also not much risk premium priced
into equities. I guess you would say, because the yould
you can get another other assets is quite attractive relative
to equity.
Speaker 1 (16:44):
Okay, so let's just stick briefly with the interest rate
inflation dynamics. So you're expecting that rates have pretty much
plattered what peaked, shall we say, But are going to
stay at this kind of level for a longer period
than some others might think. Does that also suggests that
you expect inflation to remain reasonably high in the short
(17:05):
to medium term.
Speaker 3 (17:06):
We do expect inflation to come down. Inflation has already
come down from its peaks in most places to remain
quite sticky and high in the UK, but in most
places and the US inflation recently printed below five percent
headline inflation. Core inflation has been coming down to so
that is helpful for global economies because you won't need
(17:28):
such heart interest rate rises if inflation is already starting
to normalize. The fact that energy prices and commodity prices
have come down from their peaks as well, it's also
helpful in.
Speaker 4 (17:38):
Bringing down inflation. But there are some elements of inflation
that are like to be sticky.
Speaker 3 (17:42):
The service sector still looks very strong, and that's services
consumption is a big part of economies in pretty much
all Western economies. Also, wage growths, although it's come down
off its peaks in the US, are still very high
and in Europe there is often two year wage deals,
so it took a wa Wages to pick up in Europe,
(18:02):
member sort of a year org. Also, people were constantly
asking why aren't German wages picking up more? But I
think that's largely because the two year deals. You're starting
to see those come through now. Also, labor markets are
very tight still. We keep hearing about this, and pretty
much every country labor markets are tight, and again that's
going to be higher wages.
Speaker 4 (18:20):
Higher wages feeds into core inflation.
Speaker 3 (18:22):
So for those reasons, we think inflation will come down,
but it's not going to come down rapidly in the
way that it would have done before because of this
tight labor market.
Speaker 1 (18:32):
It's interesting, I mean, wages, fast rising wages seem to
be the major worry. I mean, in some sense, of course,
there's not a worry. If wonderful, If people can keep
their real incomes constant, right, or even if real wages
don't go up a little, possibly even significantly, that's a
good thing in general. But of course it's very bad
for inflation. And one of the things that people keep
telling me is that again this rising wages is transient,
(18:54):
that it's a one off that will get high rises
that this year, but then that'll be that. But I
keep looking even thinking, well, hang on, a take you know,
after many, many years of people not demanding high wage
rises because they haven't seen high levels of inflation, they
now understand the inflation dynamic and see what happens when
(19:14):
inflation is high and erodes their real learnings, etc. So
it seems to me that there's been a bit of
a sea change in the way that labor and the
unions approach wage increases, and that this could easily carry
on for many years from here. Them say inflation settles
that four percent as opposed to two percent, which seems
quite likely, right, or that it's volatile around four percent,
(19:36):
why would the unions and workers in general not demand
with rises next year of another five six seven percent.
I mean, private sector wages are running at what about
seven percent at the moment. It's hard for me to
see why that wouldn't continue next year.
Speaker 4 (19:50):
Yeah, I understand. I have a lot of sympathy with
that view.
Speaker 3 (19:54):
I think that real wages have deteriorated over time. Even
nominal wages have been reading and good in the last
couple of years, and then for a long time, medium
wages in real terms haven't really increased. So I think
this is a bit of a fight back by workers
and unions in particular to regain some of that income
(20:15):
over time. Company margins are quite high, so they could
try and push for higher wages workers take a little
bit more of the share of the overall pie of
the economy. And I think that the other thing which
is the cause allowing allowing this is the tightness of
the labor market. And I think there's a few potential
reasons for why the labor market is so tight, but
(20:36):
you see it in many different regions, and I do
think there's an element of different things going on here.
One of them is just's cyclically quite tight, but also
I wonder if it's structurally a bit more type now
given declining working auge populations, not necessarily declining overall populations,
but declining working out population.
Speaker 4 (20:55):
In Europe, we're seeing.
Speaker 3 (20:57):
Population declines of half percent to one percent a year
in terms of working age population that's quite large accumulates
very very quickly, so that decline in working as population
means those workers now have potentially more power.
Speaker 4 (21:11):
And then another trend is that in the.
Speaker 3 (21:13):
Last couple of decades, companies either moved their workforce to
the emerging world, to China in particular, where wages were cheaper.
Wages have gone up in those places now, so slightly
less obvious move. But also there are concerns about moving
your labor force to those areas, given geopolitical risk, given
what's happened with Russia, given that the ESG dynamics as well,
(21:37):
wanting to bring your supply chain back home to your region,
given political policies as well.
Speaker 4 (21:43):
The Inflation Production Act in the US has got.
Speaker 3 (21:46):
An element of local supply, and so has the Green
Deal in Europe as well, I got an element of
local supply.
Speaker 4 (21:53):
So there's a couple of things going on.
Speaker 3 (21:55):
Policies trying to support bringing labor back into some particular region.
The labor forces out a shrinking a little bit, so
I think for all those reasons, you're starting to see
labor looking to regain a little bit more of the pie.
Speaker 4 (22:10):
So I do have sympathy with that view.
Speaker 1 (22:13):
Yes, okay, so inflation could be slightly more sticky than
many people think for quite a few years to come
on that basis. Okay, So inside all this, as you know,
there's one more thing I want to talk about before
we go to markets that got more specific markets. You
mentioned profit margins being consistently high, and that there's space
(22:34):
in there for wage increases. But one of the things
that we have been expecting, or many economists have been
expecting for years, is some kind of reversion to the
mean of profit margins, and particularly US profit margins, and
it simply hasn't happened. And even you know, last year
and this year, when we're seeing inflation coming through, when
we're seeing these wage rises, and do you think, well,
surely now, surely now profit margins will start to shrink,
(22:57):
But no, what is going on there?
Speaker 3 (23:01):
You know? I think profit margins did come down last year,
even for those really big companies, the FANG companies, the
top five, also US big tech companies. Margins have started
to come down for these companies. So from very very
high levels, margins have come down in the US and
(23:24):
a tiny bit in Europe as well.
Speaker 4 (23:26):
Estimates have started to come down.
Speaker 3 (23:27):
And I think that's a combination of things, but sort
of rising costs certainly one of them.
Speaker 4 (23:32):
But margins are still pretty high.
Speaker 3 (23:35):
I agree, And when I say they've come down, it's
quite small versus the games that margins have made in
the last twenty or so years. And our US strategus
have recently wrote a paper on this. Most of the
games in the last twenty years or so have been
in what they call costs of goods sold, so that
is you're either squeezing your suppliers, we were just getting
(23:58):
cheaper raw materials globally, and it is difficult to see
that sort of constantly cheaper global raw materials persisting when
we know that there hasn't been a lot of investment
in recent years into commodities and things like that, which
makes those markets very roadlind other reasons why you've had
higher margins have been lower taxes. That doesn't seem likely
(24:20):
at the moment given government indebtedness globally. Number all the
tax cuts that Trump first put in when he came
into power, and that definitely boosted s and p margins.
And then another thing has been interest costs coming down
constantly because you always borrowed at lower and lower rates,
and that's in reversal now.
Speaker 4 (24:40):
So it may not be a really sharpfaul, but I
do think that you will start to.
Speaker 3 (24:49):
See margins certainly not expand in the way that they
did over the last decade.
Speaker 1 (24:53):
Okay, so it certainly feels like a turning point.
Speaker 3 (24:56):
Yes, it's certainly going to be a very different cycle
this next one than it last.
Speaker 1 (25:01):
Okay, that doesn't sound great for exit markets.
Speaker 3 (25:03):
Now, and again this comes back to this point of
equities levitating a little bit this year at quite high levels.
I've described it as resilient in the face of starring
economic growth, a sort of pattern of potential for margins
which isn't so strong this next cycle, and another competing
asset class, which is which is casual bonds, which now
offer your better yield. Having said that, equities do have
(25:26):
some factors which I understand which would kind of explain
a little bit their resilience. I think that you have
got in the biggest cap stocks in equities in.
Speaker 4 (25:37):
The US, You've got the tech companies.
Speaker 3 (25:39):
They're seen as the developers the gainers from artificial intelligence,
which is a big new technology wave. Obviously that's going
to influence economies and markets over this next decade. So
that's that's going to be crutal for those stocks, and
they are a big part of the market cap. I
also think with interest rates peaking, so we think the
FED has got to the peak in its cycle, and
(26:00):
even though we don't expect a sharp cutting interest rates
we're no longer interest rates rising, and that's helpful for
these long duration companies, these tech companies in particular. And
then in Europe you've got we call them the granolas.
The biggest companies in Europe are really healthcare companies, brand
and consumer goods companies, some of the big tech companies
in Europe. These are by far the largest in terms
(26:21):
of market cap. And these companies, they I think they
will benefit in the next few years from trends like
aging populations are going to help healthcare companies. AI will
help healthcare companies as well. Some of the tech companies
will benefit from AI. Brand and consumer goods is extremely strong,
(26:42):
so I think, and protect their margins even in higher
inflation environments. So some of the what's in the markets,
I guess you could say what the markets are made
up of?
Speaker 4 (26:51):
Since this environment.
Speaker 1 (26:53):
Okay, interesting, Let's go back to commodities, because you mentioned
when we were talking about inflation that it seems unlike
actually that will continue to see what we saw until
a few years ago, constantly falling commodity prices exactly, so
the cost of them for companies falling, falling, falling, And
you mentioned those markets are much tighter. Now, is that
an area where the ordinary retail investors should be invested?
Speaker 4 (27:14):
Do you think so? Intercommodities directly or intel?
Speaker 1 (27:18):
Not directly, I don't think that's a good idea, But
in commodity related equities.
Speaker 3 (27:23):
If you're invest in commodities directly, you've got the danger
that suddenly you might certainly find it in your house. Yeah,
Finns and oil turning off in your golden which may
obviously good.
Speaker 4 (27:33):
So yeah, I.
Speaker 3 (27:34):
Probably wouldn't recommend direct investment in commodities, but I do
think that it is one of the scarce resources going forward,
and therefore some exposure to commodities is a good idea.
And you can get that ya the equity market, because
of course there are companies which are commodity producers in
the equity market, so energy stocks or the mining companies
(27:56):
for example.
Speaker 1 (27:57):
And the UK is a brilliant place for that because
you've got a great big miners, the reattended, b Top etc.
Which pay you a fabulous yield while you said around
waiting for commodity prices to go up.
Speaker 3 (28:06):
Yeah, So those and those companies are doing two things
with their cash at the moment. They are paying a difference,
and they're buying by shares, but they're not really doing
one thing but their cash, which is investing it in
new quantity supply.
Speaker 4 (28:20):
Investors aren't really paying for that at the moment, they're
not key on them doing so.
Speaker 3 (28:25):
And now that's partly for ESG reasons, partly for environmental reasons.
You want see more of cash stid towards the companies
of investing in renewable projects. Certainly true that big oil
and big energy is as well investing in some lower
carbon projects, so some incrementally going into that, but there
isn't a lot going into traditional energy production or into
(28:46):
other commodities like industrial metal investment.
Speaker 4 (28:48):
So because of that, and these are quite long lead times.
Speaker 3 (28:51):
Because of that, these markets are quite tight, probably going
to mean higher prices this next cycle than the last one.
Speaker 1 (28:57):
It's tricky and isn't it, though, Because if you want
an environmentally friendly energy transition, you have to dig up
and all a lot of metals together. You need those
industrial metals, you need all those minerals, you need the
rarer metals, etc.
Speaker 4 (29:09):
Etc.
Speaker 1 (29:10):
You know, and it might be nasty to dig copper up,
but you can't have an energy transition without digging up
an awful lot of copper.
Speaker 3 (29:15):
Yeah, absolutely, I mean copper is needed for electrification, which
in Europe is largely going for electrification as a way
of producing pollution, and that's going to require lots of cables,
lots of copper, lots of investment. That requires equipment, machinery, metals,
et cetera.
Speaker 4 (29:31):
So we will still need a lot in this next
decade for that transition.
Speaker 1 (29:35):
So there are some hideous conflicts there in the world
of ESG aren't there That always off? But you need
you need to be really dirty to get clean.
Speaker 4 (29:47):
Maybe that's the case. I don't know.
Speaker 1 (29:50):
I give that to you as a title for a
note one day. Thank you for that.
Speaker 3 (29:56):
Now.
Speaker 1 (29:56):
The other thing we talked a little bit about the
UK is we talked about the HP and and real
Jinto etc. And the yields available. And one of the
things that we talk about a lot on the podcast
because it's incredibly irritating is the state of the UK market.
And you recently put out a note called UK in
pursuit of the American Dream about the UK companies or
(30:16):
desperate to shift their listening to the US so that
they can get much higher valuations and of course the
CEOs can be considerably better paid, because that's one of
the big parts of moving to the US is that
not just to your sholders get more money because you
hope your rating goes up. But of course your your
management can get paid as much as they like without
being constantly nagged by shaholders as they are here. So
(30:38):
this is true, this is happening. Is there a way
out for the UK?
Speaker 3 (30:42):
So I think when you say it's true, it's happening,
it is happening for a few companies. But I always
think that if you're going too maybe you're listening, you
do have to have a reason for maybe you're listening.
So you need to be a company with a lot
American footprint, for example, And there are to be fair
lots of UK companies in that position, so that you
(31:03):
know that mainly narrows your list of companies, but it's
not really narrow. There are lots of companies in that position.
So I do think you or you have to be
in an area where you believe that you can attract
a lot more US investment. So if you're a domestic
UK company or a company with a footprint which is
more European then there is really less reason for listing
(31:25):
in the US.
Speaker 4 (31:26):
I think, look, it's it's a tricky one.
Speaker 3 (31:29):
I do feel the main reason that UK and European
companies because I don't think it's just a UK issue,
but the main reason that European companies are on lower
valuations in US companies is that there isn't a large
domestic investor base in Europe.
Speaker 4 (31:44):
If you look at the US.
Speaker 3 (31:45):
Dock market, around eighteen to ninety percent of its own
domestically by the big pension funds endownment funds, but also
by individuals themselves.
Speaker 4 (31:54):
You know, all the meme stocks and things like that.
Speaker 3 (31:56):
They're generally US companies that people have wanted to hold directly.
If you ask most people, they would know they've heard
of the Dow and the S and P and those
big indices in the US, whereas investment in Europe has
seen as much more niche fewer people invest and it's
a smaller share of household wealth. Households in Europe tend
(32:18):
to invest more in housing, more in bonds, and more
in cash deposits, so that has been.
Speaker 4 (32:26):
A bit of a problem. Really Europe can't attract it all.
Speaker 3 (32:29):
This point about the US's deeper capital markets or yes,
but that's because there are lots more domestic investors and
the UK in particular, I think has an issue it.
Speaker 4 (32:39):
Didn't used to in the nineteen nineties.
Speaker 3 (32:41):
We never talked about this, and the reason we never
talked about it was that eighty five percent of the
market in the mid nineteen nineties was owned domestically.
Speaker 4 (32:50):
In the UK.
Speaker 3 (32:51):
Now only around a third of the markets owned domestically
in the UK, and that's because insurance and pension funds
that were the big holders of UK equity having sellers
in the last twenty or thirty years, and that means
that there isn't really a domestic investor base which wants
to buy UK listed.
Speaker 1 (33:10):
Shares and they've sold for that. There are all sorts
of reasons. It's about their decline of defined benefit pension schemes.
It's about regulation that has driven them to be supposedly
more diversified or into so course stay for assets like
government bonds and that kind of thing. So there've been
all kinds of regulator changes that have shifted the way
that the huge UK pension funds invest and it's a
(33:31):
rather worrying when you think that you're pretty much everyone
in work in the UK at the moment is inequity
invested via their auto enrollment pension. But they're not really
invested in the UK in the way that we like
to think they should be. And this doesn't look like
it's going to turn around, does it. So domestic invested
us still into a much smaller degree, but still net
sellers of UK stocks.
Speaker 4 (33:51):
Yeah, they are still net sellers.
Speaker 3 (33:53):
They have less and less to sell because they're a
smaller share of the UK market now. But I think
that they're encouraging more domestic investment in public equity, would
would encourage sort of high evaluations for public equity as well,
and I think that there have been in the past
(34:16):
or of ways when you had in the late eighties
and nineties a lot of privatizations for example, people became
involved in those and wanted to invest in those. Insurance
companies and pension funds as well did use to own
a lot of UK equity, and I agree with you
for regulation, asset match and reasons they.
Speaker 4 (34:33):
Produced that weight.
Speaker 3 (34:34):
But I do think a little bit more of an
ecty culture in Europe and the UK will be helpful,
and it's one of the reasons that you don't see
such deep capital markets in Europe.
Speaker 1 (34:45):
Might the cheapness of the UK equity market really began
to attract external investors, so foreign investors and a net
bias right over the UK again not only huge scale,
but net bios and the discount of the US market
KA market to the US market vast. And while everyone says, oh, well,
that's about sectors and it's about as not having growth
and Isabella's not being tech, etcetera, etcetera, I know that
(35:06):
even when you adjust for that, the discount is still
pretty big. And we're beginning to see private equity bids
forall for some of our companies, smaller ones in particular.
So is there a chance that you just get to
the point where the market is cheap enough that American
investors in particular look at it and today, well, why
are we invested here? Or we give invested in similar
companies over there at half the price and we begin
(35:26):
to see a wave of capital coming into the UK?
Or is that high in this guy thinking, which I'm prone.
Speaker 3 (35:31):
To definitely not, I actually think this has been happening
and well continued to happen. So I have a lot
of conversations with global investors that see that UK up
as being relatively inexpensive. So I think in a way,
this gap between the US and the UK, or the
US and Europe overall, there are really only are four
ways it can close.
Speaker 4 (35:50):
It can either.
Speaker 3 (35:51):
Close because you see global investors buying Europe and the
UK sort of fun and flows as it were, and
you have seen fun flows out of the US in
recent years and into Europe over the last few months,
particularly sort of the end of last year very early
this year, so we have seen some of that fun
flow move. Another way that it can close, as you mentioned,
(36:12):
is acquisitions. So companies buying companies are private equity companies
buying public listed equity, which perhaps looks quite inexpensive. And
again we have seen quite a lot of inward acquisitions
into the UK in recent years, particularly smaller companies, not
necessarily the high profile ones that make the news, but
a lot of smaller companies.
Speaker 4 (36:32):
That's another way the gap could close.
Speaker 3 (36:33):
Another one we've talked about before is UK companies or
European companies relisting in the US and trying to close
the gap via that. Although I do think that will
be relatively niche not not every company can or would want.
Speaker 4 (36:45):
To do that.
Speaker 3 (36:46):
And then the final way the gap could close is
just that UK companies say we're too cheap, we've got
cash on our balank sheet, we will use that to
buy our own equity. And you've seen buybacks rise considerably
in the UK, particularly amongst financials, oil companies, mining companies, etc.
Speaker 4 (37:04):
Which are on very low valuations.
Speaker 3 (37:06):
So buying back your own shares has been another route
to try to close this gap.
Speaker 1 (37:12):
As recommended by Warren Buffett in his latest letter.
Speaker 3 (37:16):
Yeah, I mean look, it's also going to help in
terms of improving your earnings per share. If you've got
fewer shares the same number of earnings, same amount of earnings,
then you'll see a better earnings per share grows over time.
Speaker 4 (37:27):
And the US market's.
Speaker 3 (37:29):
Been fantastic at achieving that in recent years, and I
think increasingly, particularly if you've got If you're in a
more cycnical business like a commodity business for example financials,
you don't necessarily want to commit to dividends every year,
but when you have additional cash, buying back shares if
your share price achieved makes a lot of sense.
Speaker 1 (37:46):
Although there's always a slight worry that a lot of
those buybacks are related to chief executive bonuses.
Speaker 3 (37:51):
Yeah, I mean, I guess it's one way of boosting
the share price and creating should return and a lot
of people would like to see more money in best
did in growth, and I do think that's one area
of the UK and the whole of Europe.
Speaker 4 (38:06):
Is not keeping pace with the US, to be fair,
and I do wonder.
Speaker 3 (38:10):
I don't think this is necessarily the incentives placed on
top management. I'm not quite sure of the reasons for it,
but if you think about the US, there's a lot
of incentive to on top management to do share prices
by any short term means. They often have renumeration related
to return on actuity or shareholder returns, which is quite
short term. So, if anything, US companies should be quite
(38:30):
short terms, but they tend not to be so much.
They invest a higher share of their cash vow from
operations in what we would call growth capex, which is
either capital expenditure open above depreciation or R and D.
Speaker 4 (38:44):
SO US companies they spend.
Speaker 3 (38:47):
About a third of their cash vow from operations on
that gross investment, whereas European companies.
Speaker 4 (38:54):
It's around a fifth.
Speaker 3 (38:55):
So even in a place like the US where there's
a lots will focus on the top managements, renumeration being
related to share prices, etc. Even there, they've got quite
a lot more full sight and they are looking and
investing for growth.
Speaker 1 (39:10):
Maybe we should stay invested in the US now, Sharon,
With all these things that we've talked about, where do
you think the most interesting parts of the market are
for retail investors at the moment? So, you know, speak
Japan has had a fabulous run so far this year.
Speaker 4 (39:25):
Is that.
Speaker 1 (39:25):
I know it's not quite your area, but maybe that
is interesting. I know you've written recently about the luxury
goods companies being very interesting. We've talked about commodities. We've
talked about the UK and Europe relative to the US.
But if you had to pick out a couple of
areas that were particularly interesting to you and therefore should
be interesting to ordinary investors right now, what do you
think they would be?
Speaker 3 (39:45):
Yeah, So, I think for ordinary investors there's a combination
of lots of different assets you can invest in right now.
Even cash and bonds provide you with some reasonable return,
whereas if you don't the clock three or four years ago,
you were getting certainly negative real returns in those if
(40:05):
not zero nominal returns, so.
Speaker 4 (40:08):
You didn't have a lot of opportunities.
Speaker 3 (40:10):
So I think there's an opportunity for diversification, which is
always important for retail investors. For all of us, we
want to diversify. I don't want to put everything into
one basket and take on too much risk. But if
I'm looking with be in the UK equity, which I
don't think is particularly expensive at the moment. I mentioned
right at the outset that US equity looks quite expensive
on eighteen or nineteen times PE, the UK market is
(40:31):
on ten or eleven, and some of the cheapest areas
are financials and commodities.
Speaker 4 (40:35):
So as a kind of.
Speaker 3 (40:36):
Longer term, medium, longer term view on these areas being undersupplied,
particularly commodities, and being relatively inexpensive, and the companies having
options like buying back their own shares or paying additional dividends,
that looks like a reasonable area. But having said that,
I would have a bit of a bar bow strategy.
We're going for some of this cheaper stuff that looks
(40:57):
potentially undersupplied, but also some of the newer growth that
areas look interesting. Anything that looks like it would likely
gain from productivity improvements from AI for example, bits of healthcare,
luxury goods, tech all look reasonable as well.
Speaker 4 (41:13):
From the medium term for investors, you won't get paid
so much in the way of.
Speaker 3 (41:16):
Dividends from those or buybacks, but you probably will have nice.
Speaker 4 (41:19):
Longer term growth.
Speaker 1 (41:20):
Yeah, okay, that's interesting. Now, final question, no warning for
this bitcoin or gold gold for.
Speaker 4 (41:29):
Me, No shadow of down are there.
Speaker 3 (41:34):
I think bitcoin is highly volatile asset, very difficult to
pin down in any way to sort of economic fundamentals.
In comparison, gold I think provides you a nice little
hedge against two risks that.
Speaker 4 (41:49):
Are around there.
Speaker 3 (41:51):
One is that we do go into a deeper down
term and expected maybe there is a further banking stress
causing loans to tighten.
Speaker 4 (41:59):
Credit congits to Titan. Gold is attractive in that sense.
Speaker 3 (42:03):
The other risk that's out there, and we talked about
a lack of supply of commodities. We talked about maybe
higher inflation because of that lack of commodity supply, but
also higher wage growth. Higher inflation means you really want
to own real assets and gold in a sense as
a real asset as well, so I prefer gold on
that basis.
Speaker 1 (42:21):
Okay, brilliant.
Speaker 4 (42:22):
Do you know.
Speaker 1 (42:22):
I don't think I've had anybody yet He's chosen bitcoin
spread my net wider. There's got to be someone out there. Sarah,
thank you so much for joining us today. That was
great fun. I hope we can talk against you.
Speaker 4 (42:36):
Thank you, thanks for inviting me.
Speaker 1 (42:43):
Thanks for listening to this week's Marin Talks Money. We
will be back next week in the meantime. If you
like our show, rate review, and subscribe wherever you listen
to podcasts. This episode was hosted by Me, Marry and
Sunset Web. It was produced by Some Society. Additional editing
by Blake Maple's special thanks to Sharon Bell and of
course as ever to John Steppe and of course our
weekly reminder designed up John's daily newsletter, Money Distilled. The
(43:06):
link is in this show notes at the top of
the podcast. John and I discussed all sorts of topics.
You will find detail on all those things in those
Money Distilled newsletters. Do not miss them.
John, Hello, morning, Melton. There's so much to talk about.
I don't know where to start, and really importantly, so
much to talk about in areas where you and I
have just been right.
Speaker 2 (00:13):
That's always the best idious to talk about. I feel.
Speaker 1 (00:16):
I know, I know now you've written and we're not
going to talk about this. I just want to write
down a market so everyone knows that we were right.
You've written about the Japanese equity market today, and you
and I have been talking for a while about her.
Japanese equity is farty, cheap, everything's changing. When I say well,
I mean it really a very long while. And finally
they've broken through what our old friend Jonathan Allen mused
(00:40):
to call the iron coffin lid, which means that the
only way is up right, just say yes, because we're
all going to talk about this. They can go and
read Money Distilled and read all about it there. Your
job is just to say yes, yes, excellent. The thing
I really want to talk about today is the other
thing that you and I have been writing about for
a long time. We've been writing about her. Nobody understands
how widely spread read the tax burden is in the UK,
(01:03):
so we read you and I how many years ago
now we read an article I think in the New
York Times about fourteen twenty fourteen, because we also have
good memories, which is important to rather. You have a
good memory, and sometimes you remind me about stuff we've
talked about in the past, and we've read this article
which we thought was absolutely amazing because it explained the
(01:24):
fluidity of income earning in the US and how over
a lifetime people are sometimes in the bottom quintile of earning,
sometimes in the top quintile of earning, often in the
middle quintiles, et cetera. But seventy six percent of people,
according to the study, passed through the top quintile of
income generation in the US at least once during a career.
(01:48):
And you know what the top quintile income in the
US is.
Speaker 2 (01:52):
As you know, it's on my head.
Speaker 1 (01:53):
No, luckily I do. Back when back when the article
was written, it was was slightly lower, but it's now
about to two hundred and sixty nine thousand dollars, or
that was the number last year. So that mean seventy
six percent of income tax paying workers in the US,
at some point during a year earn around two hundred
and seventy thousand dollars. Absolutely amazing and a great testament
(02:14):
to the meritocracy and fluidity of the US economy. Now,
everybody thinks that that is not the case in the UK,
right So when we had all this stuff up from
the IFS this week explaining that in a couple of years,
twenty percent of income tax paying workers in the UK
would end up in the forty percent bracket, everyone went, oh,
(02:35):
my god, that's awful twenty percent of people. And you
and I thought back, and we remembered that article that
we'd read, and we thought, twenty percent people is the
bottom band there, because in fact there'll be fluidity in
the UK economy as well. Incomes are not static, particularly
in the private sector. They move around the place all
the time. You can sometimes be in a lower bracket,
(02:56):
you can sometimes be in a higher bracket. Let's go
back to the quintiles move around the place inside these
going to us. And what we didn't know though, is
exactly what those numbers might look like in the UK.
And now I'm handing out to you because one of
our brilliant colleagues at Bloomberg pointed us to some ons
data which gave us some clues.
Speaker 2 (03:14):
Right, Yeah, So Conrad in the office very kindly dugout
this particular port called income dynamics. I think is that
the name of the report, and it's often I mean,
it's nowhere on there is granular. I think that was
an academic study that the US was referencing, and so
that I had actually gone through an entire lifetime. But
(03:36):
even looking at just ten years, what this study found
was that while people in the top quin title in
twenty ten were more likely to stay there for the
whole time, between twenty ten and twenty twenty, you still
found just basically half of them weren't there by the
(03:59):
time that the decade ended. You also found that more
than half the people who started in the bottom quint
title had then moved out of it by the time
that kind of decade ended. And in the middle there's
virtually there was just a lot of moving about, so
people were in the second and then the third, and
then the fourth and vice versa. So the point isn't
(04:20):
so much that, and I mean there are specific kind
of statistics and money distilled from earlier this week, but
the point is that, yes, there is a lot of
income fluidity here too, and there might not be as
much as the US. In fact, I'd be astonished if
there is as much as in the US, because obviously
the US is the kind of kreme de la creme
of meritocracy and kind of capitalist dynamic and all that
(04:42):
sort of stuff. But it's very clear that, as you said,
the idea that twenty percent of income tax payers will
be paying forty percent tax is a very low bar estimate.
And I would wager that the majority of work use
as in more than half will pay forty percent income
(05:03):
tax at some point during their careers. And I think
that the important thing about that is that it should
make us think about this differently. I mean the one
actually that I pick up on and I think we
should discuss this another time, But we're always talking about
who you know, maybe tax relief on pensions is skewed,
and two it should be done differently. But the thing is,
(05:26):
if there are points in most people's careers where they
are forty percent tax payers, those are also the times
in their lives where they're going to be wanting to
put away as much as possible for their pensions. So
perhaps this idea kind of flattening the tax releaf and pensions,
isn't such a good idea and not is it actually
particularly fair, particularly in anyone who has yet to be benefit
(05:48):
from that tax relief. That's slightly separate issue.
Speaker 1 (05:51):
Well, I think I just pick up that one quickly.
Oh yeah, I obviously I agree with you on everything,
and I particularly agree with you on this, and it's
one of the main reasons why I feel that the
annual allowance is the problem, that the lifetime allowance was
never the problem. The problem is the annual allowance because
as soon as people get to a point, which as
it turns out, more people than you think do, get
(06:11):
to their few high earning years, those are the years
when they're then told they're not allowed to contry be
very much into a pension. And that's where the problem comes,
you know. So it's the whole system is set up
with the belief that politicians have because most politicians cannot
see be on the end of their own noses, they
believe that everybody's income is like there's the same every year.
(06:33):
Because anyone who works in the public sector will, particularly
as an MP, because you don't get promoted or demoted
outside going in and out of the cabinet, right, their income,
bar a little inflation adjustment, remains static year after year
after year, and they make policies for that situation, not
for the situation which these these numbers that we're looking
(06:54):
at show most people on or in.
Speaker 3 (06:58):
See.
Speaker 1 (06:59):
I'll give you wyes.
Speaker 2 (06:59):
Think that's an interesting point. The one thing I would
say is I just query slightly whether they have that excuse,
because I mean.
Speaker 1 (07:10):
You're too nice to have I been too nice.
Speaker 2 (07:14):
I mean, career politicians may have a sort of static income,
but I mean, you know, every four years they run
the risky getting thrown out in their backsides and then
they don't have anything. And then also there's all the
ones who you know, quite rightly in my view, kind
of make money on the side. So in a funny
kind of I think they should be more used to,
(07:35):
you know, ups and downs in their their annual income
than so I'm not sure that they have the excuse
that I could see if they want normal public sector workers,
you know, because there's like pay grades and bands and
all that sort of stuff, and it generally is kind
of matter, you know, as long as you stay in work,
you go up the way. But with politicians, they have
a much more volatile career path if they're at all
(07:57):
I mean, if they're at all ambitious. So it just
strikes me that actually, I'm not sure they have that excuse.
Speaker 1 (08:04):
Well, they're just making crap then anyway, that was that
was a sign. Where were you actually going with this conversation?
Speaker 2 (08:12):
I have totally forgotten already, But no, I think it's
it's this thing of well, actually, the other interesting about
this politically is that I do think that people will
start to notice because it's been popular to talk about taxing,
you know, the rich and then throwing income at a
(08:33):
certain level in as being the rich, and the more
people who get hit by higher rate tax not to
mention kind of horrendous kind of marginal tax rates as
child benefits, withdrawing, etc. The less likely that charge is
to stick.
Speaker 1 (08:49):
I mean.
Speaker 2 (08:49):
One of the things that I thought was interested and
quite clever about the way the IFS publicized this is
they made the point that in the early nineteen nineties,
virtually no nurse toll was paying forty percent tax, and
by twenty twenty seven, some poate one in eight of
them will be paying twenty percent. One in four teachers
(09:15):
almost like I mean like well over our third to
police officers.
Speaker 1 (09:19):
Yeah, but that's at one static point. Yeah, exactly, Many
many more of them will move through this rate over
their careers. And that's the key thing. The point that
we're desperately trying to get across to everybody is that
it might be one in four policemen in two years
if you if you take a static point, but it'll
be many, many, many more of a career. So this
(09:41):
explains why, and this is really important listen our politicians.
This explains why electorates are generally against the top rate
of taxes going up, because they know that there's a
very strong chance that they're going to pay that rate
of tax at some point, and it's going to be
in the one or two years when they suddenly go,
(10:02):
oh wow, I'm really earning now. Someone else took everything.
Speaker 2 (10:07):
Yeah, it's yeah. They should learn that and they're going.
I mean the point thing that worries means they'll learn
the wrong lesson and they'll decide to just shunt a
load of tacks when it's something else and make our
lives miserable that way. But yes, I think the focus
needs to fall on how do we make more money? Overall,
how do we grow the pie again rather than sitting
(10:31):
kind of you don't threaten about saving bets here and
there and cutting this and cutting that, and all of
that kind of goes back to we should have a
smaller state, et cetera, et cetera, regulation, you.
Speaker 1 (10:46):
Know, and that we had horrible productivity numbers. Again today,
focus on growing, focus on productivity read money to stilled
by the way, because there's also some bits and bobs
in there. There's a growing body of anecdotal evidence at
least that people are virting with their feet and wealth
creators are beginning to leave the UK for warmer climbs
in every possible way. So that's very important. I just
want to leave you with these numbers again. We've told
(11:07):
you them before, but in this podcast, but listen again.
You think that in the UK the rich of the
rich and the poorer the poor, But in this quintear
data we've been looking at over the ten year period,
nearly fifty percent of those in the top quartile at
the beginning were not there at the end, and over
sixty percent of those who are in the bottom quartile
(11:28):
at the beginning were not there at the end. The
rich are not the rich and the poor are not
the poor. There's a lot of fluidity in the UK,
right John.
Speaker 2 (11:38):
Yep, it's not all lost, and you know.
Speaker 1 (11:41):
Maybe the US is better, but I wonder I'd really
like to have proper data on this right.
Speaker 2 (11:46):
Hopefully somebody out there listening right now is the start
offices or a university somewhere. You might have this data.
You might be looking at it.
Speaker 1 (11:56):
Send it to us, Send it to us. Put your
political prejudices aside one at universities, send us the data.
Welcome to Merendalk's Money, the podcast in which people who
know the markets explain the markets. I'm Meren sum Set
where this week a conversation with Sharon Bell, Managing director
and senior European equity strategist at Goldman Sachs. Yes, our
(12:17):
first guest from Goldman Sachs. Sharon, thank you so much
for joining us today. We hugely appreciate it.
Speaker 4 (12:24):
Thank you, Thanks for in fighting me kind.
Speaker 1 (12:26):
Of come now listen. I want I know, I know
that you're basically one of those rare guests we have
who knows absolutely everything. And you know, I could ask
you about any market around the world and you'd know
the answer. So what I'd like to do, if you
don't mind, and I think that their listeners will love this,
is just start by saying, could you give us an
overview the huge question right an overview of global markets
(12:48):
at the moment? What is going on out there, what
are the main dynamics bind market moves, and what should
we be looking at.
Speaker 4 (12:55):
I will tell you everything, But in some ways I
think global markets is surprised people this year.
Speaker 3 (13:01):
On the positive side, a lot of investors expected weaker
returns this year. We've had pretty strong returns actually, especially
in Europe, double digit returns for a lot of indices
already and we're not even halfway through the year. And
the US market as well, especially the NASDAK, but the
S and P five hundred as well up to year
(13:23):
to date, so reasonably good returns on equities, and particularly
given all the things that actually face interest rates have
been rising, commodity prices have come down, growth has definitely slowed,
orbit not in recession yet, so in some ways I
would say the market's been quite resilient so far this year.
And then on top of all of that, we've had
(13:44):
all the stress in the US banks with some bank failures, etc.
And concerns about slowing a loan growth as well. But
I guess the things that have really boosted the market
and helped the market, especially in Europe, which is my
focus is energy, is gas prices weren't as high as
people feed worried about coming into this year.
Speaker 4 (14:04):
They came down.
Speaker 3 (14:05):
That's how the consumer, it's how governments as well, hell,
because they promised to cushion the consumer from higher prices. Also,
the contagion, the feared contagion from the bank stress in
the US hasn't been as bad yet as feared.
Speaker 4 (14:21):
Of course that could come.
Speaker 3 (14:22):
But at the moment we've only seen a small tightening
and credit conditions and a small fall in loan growth.
So I'd say that markets have digested things relatively well.
But our main concern for the equity market at the moment,
particularly in the US, is that it's not cheap. It
trades on a pe ratio of sort of eighteen to
nineteen times, that's about its twenty year average. And of
(14:44):
course there is now another asset class out there which
is quite attractive, offering you four or five percent yield,
and that's short term rates.
Speaker 4 (14:53):
Given where interest rates are now.
Speaker 3 (14:54):
So I would say resilient, but a little bit mixed,
and we do have and that returns will be low
from here.
Speaker 1 (15:02):
Yeah. So basically when you say resilient, what you mean
is it's too resilient, it's scarily resilient. Something doesn't feel
quite right. I mean, last year, we had this sense
that we were going to revert to some kind of
valuation norm and possibly you know, profit margins were going
to revert to some beginning to revert some kind of
historical norm as well, and that that was something that
we'd see going through into this year. And some of
(15:24):
that didn't happen this year. Instead, we've seen a reversion
back to the dynamic of the last few years, the
prove twenty twenty two years, as opposed to a continuation
of the dynamic of twenty twenty two. Very unexpected.
Speaker 3 (15:37):
Yes, I'd say that's probably fair in a number of senses.
One in the sense that great expectations have started to
come down, so that twenty twenty two was very characterized
by high inflation, inflation constantly surprising on the upside, economists
had to let go of this idea that it was transient.
It turned out that inflation was very sticky. Last year,
our interest rates had to go up and were constantly
(15:58):
rising above people's expertsations. So while this year, I think
a big boost equities in many ways has been the
expectation that interest rates will be peaking.
Speaker 4 (16:07):
We in fact, do you think that interest rates have
peaked now in the US at the short end.
Speaker 3 (16:12):
Where we differ, I think from the consensus is that
we don't expect them to come down very rapidly, so
we think rates will plateau for a period of time.
But yes, you're right, it's been very resilient, and maybe
overly resilient, not reflecting some of the risks out there,
which is that the remainder of this year you'll like
to see very slow grows. There's a risk of recession.
It's not in our forecast, but there's certainly a risk
(16:33):
of that. And there's also not much risk premium priced
into equities. I guess you would say, because the yould
you can get another other assets is quite attractive relative
to equity.
Speaker 1 (16:44):
Okay, so let's just stick briefly with the interest rate
inflation dynamics. So you're expecting that rates have pretty much
plattered what peaked, shall we say, But are going to
stay at this kind of level for a longer period
than some others might think. Does that also suggests that
you expect inflation to remain reasonably high in the short
(17:05):
to medium term.
Speaker 3 (17:06):
We do expect inflation to come down. Inflation has already
come down from its peaks in most places to remain
quite sticky and high in the UK, but in most
places and the US inflation recently printed below five percent
headline inflation. Core inflation has been coming down to so
that is helpful for global economies because you won't need
(17:28):
such heart interest rate rises if inflation is already starting
to normalize. The fact that energy prices and commodity prices
have come down from their peaks as well, it's also
helpful in.
Speaker 4 (17:38):
Bringing down inflation. But there are some elements of inflation
that are like to be sticky.
Speaker 3 (17:42):
The service sector still looks very strong, and that's services
consumption is a big part of economies in pretty much
all Western economies. Also, wage growths, although it's come down
off its peaks in the US, are still very high
and in Europe there is often two year wage deals,
so it took a wa Wages to pick up in Europe,
(18:02):
member sort of a year org. Also, people were constantly
asking why aren't German wages picking up more? But I
think that's largely because the two year deals. You're starting
to see those come through now. Also, labor markets are
very tight still. We keep hearing about this, and pretty
much every country labor markets are tight, and again that's
going to be higher wages.
Speaker 4 (18:20):
Higher wages feeds into core inflation.
Speaker 3 (18:22):
So for those reasons, we think inflation will come down,
but it's not going to come down rapidly in the
way that it would have done before because of this
tight labor market.
Speaker 1 (18:32):
It's interesting, I mean, wages, fast rising wages seem to
be the major worry. I mean, in some sense, of course,
there's not a worry. If wonderful, If people can keep
their real incomes constant, right, or even if real wages
don't go up a little, possibly even significantly, that's a
good thing in general. But of course it's very bad
for inflation. And one of the things that people keep
telling me is that again this rising wages is transient,
(18:54):
that it's a one off that will get high rises
that this year, but then that'll be that. But I
keep looking even thinking, well, hang on, a take you know,
after many, many years of people not demanding high wage
rises because they haven't seen high levels of inflation, they
now understand the inflation dynamic and see what happens when
(19:14):
inflation is high and erodes their real learnings, etc. So
it seems to me that there's been a bit of
a sea change in the way that labor and the
unions approach wage increases, and that this could easily carry
on for many years from here. Them say inflation settles
that four percent as opposed to two percent, which seems
quite likely, right, or that it's volatile around four percent,
(19:36):
why would the unions and workers in general not demand
with rises next year of another five six seven percent.
I mean, private sector wages are running at what about
seven percent at the moment. It's hard for me to
see why that wouldn't continue next year.
Speaker 4 (19:50):
Yeah, I understand. I have a lot of sympathy with
that view.
Speaker 3 (19:54):
I think that real wages have deteriorated over time. Even
nominal wages have been reading and good in the last
couple of years, and then for a long time, medium
wages in real terms haven't really increased. So I think
this is a bit of a fight back by workers
and unions in particular to regain some of that income
(20:15):
over time. Company margins are quite high, so they could
try and push for higher wages workers take a little
bit more of the share of the overall pie of
the economy. And I think that the other thing which
is the cause allowing allowing this is the tightness of
the labor market. And I think there's a few potential
reasons for why the labor market is so tight, but
(20:36):
you see it in many different regions, and I do
think there's an element of different things going on here.
One of them is just's cyclically quite tight, but also
I wonder if it's structurally a bit more type now
given declining working auge populations, not necessarily declining overall populations,
but declining working out population.
Speaker 4 (20:55):
In Europe, we're seeing.
Speaker 3 (20:57):
Population declines of half percent to one percent a year
in terms of working age population that's quite large accumulates
very very quickly, so that decline in working as population
means those workers now have potentially more power.
Speaker 4 (21:11):
And then another trend is that in the.
Speaker 3 (21:13):
Last couple of decades, companies either moved their workforce to
the emerging world, to China in particular, where wages were cheaper.
Wages have gone up in those places now, so slightly
less obvious move. But also there are concerns about moving
your labor force to those areas, given geopolitical risk, given
what's happened with Russia, given that the ESG dynamics as well,
(21:37):
wanting to bring your supply chain back home to your region,
given political policies as well.
Speaker 4 (21:43):
The Inflation Production Act in the US has got.
Speaker 3 (21:46):
An element of local supply, and so has the Green
Deal in Europe as well, I got an element of
local supply.
Speaker 4 (21:53):
So there's a couple of things going on.
Speaker 3 (21:55):
Policies trying to support bringing labor back into some particular region.
The labor forces out a shrinking a little bit, so
I think for all those reasons, you're starting to see
labor looking to regain a little bit more of the pie.
Speaker 4 (22:10):
So I do have sympathy with that view.
Speaker 1 (22:13):
Yes, okay, so inflation could be slightly more sticky than
many people think for quite a few years to come
on that basis. Okay, So inside all this, as you know,
there's one more thing I want to talk about before
we go to markets that got more specific markets. You
mentioned profit margins being consistently high, and that there's space
(22:34):
in there for wage increases. But one of the things
that we have been expecting, or many economists have been
expecting for years, is some kind of reversion to the
mean of profit margins, and particularly US profit margins, and
it simply hasn't happened. And even you know, last year
and this year, when we're seeing inflation coming through, when
we're seeing these wage rises, and do you think, well,
surely now, surely now profit margins will start to shrink,
(22:57):
But no, what is going on there?
Speaker 3 (23:01):
You know? I think profit margins did come down last year,
even for those really big companies, the FANG companies, the
top five, also US big tech companies. Margins have started
to come down for these companies. So from very very
high levels, margins have come down in the US and
(23:24):
a tiny bit in Europe as well.
Speaker 4 (23:26):
Estimates have started to come down.
Speaker 3 (23:27):
And I think that's a combination of things, but sort
of rising costs certainly one of them.
Speaker 4 (23:32):
But margins are still pretty high.
Speaker 3 (23:35):
I agree, And when I say they've come down, it's
quite small versus the games that margins have made in
the last twenty or so years. And our US strategus
have recently wrote a paper on this. Most of the
games in the last twenty years or so have been
in what they call costs of goods sold, so that
is you're either squeezing your suppliers, we were just getting
(23:58):
cheaper raw materials globally, and it is difficult to see
that sort of constantly cheaper global raw materials persisting when
we know that there hasn't been a lot of investment
in recent years into commodities and things like that, which
makes those markets very roadlind other reasons why you've had
higher margins have been lower taxes. That doesn't seem likely
(24:20):
at the moment given government indebtedness globally. Number all the
tax cuts that Trump first put in when he came
into power, and that definitely boosted s and p margins.
And then another thing has been interest costs coming down
constantly because you always borrowed at lower and lower rates,
and that's in reversal now.
Speaker 4 (24:40):
So it may not be a really sharpfaul, but I
do think that you will start to.
Speaker 3 (24:49):
See margins certainly not expand in the way that they
did over the last decade.
Speaker 1 (24:53):
Okay, so it certainly feels like a turning point.
Speaker 3 (24:56):
Yes, it's certainly going to be a very different cycle
this next one than it last.
Speaker 1 (25:01):
Okay, that doesn't sound great for exit markets.
Speaker 3 (25:03):
Now, and again this comes back to this point of
equities levitating a little bit this year at quite high levels.
I've described it as resilient in the face of starring
economic growth, a sort of pattern of potential for margins
which isn't so strong this next cycle, and another competing
asset class, which is which is casual bonds, which now
offer your better yield. Having said that, equities do have
(25:26):
some factors which I understand which would kind of explain
a little bit their resilience. I think that you have
got in the biggest cap stocks in equities in.
Speaker 4 (25:37):
The US, You've got the tech companies.
Speaker 3 (25:39):
They're seen as the developers the gainers from artificial intelligence,
which is a big new technology wave. Obviously that's going
to influence economies and markets over this next decade. So
that's that's going to be crutal for those stocks, and
they are a big part of the market cap. I
also think with interest rates peaking, so we think the
FED has got to the peak in its cycle, and
(26:00):
even though we don't expect a sharp cutting interest rates
we're no longer interest rates rising, and that's helpful for
these long duration companies, these tech companies in particular. And
then in Europe you've got we call them the granolas.
The biggest companies in Europe are really healthcare companies, brand
and consumer goods companies, some of the big tech companies
in Europe. These are by far the largest in terms
(26:21):
of market cap. And these companies, they I think they
will benefit in the next few years from trends like
aging populations are going to help healthcare companies. AI will
help healthcare companies as well. Some of the tech companies
will benefit from AI. Brand and consumer goods is extremely strong,
(26:42):
so I think, and protect their margins even in higher
inflation environments. So some of the what's in the markets,
I guess you could say what the markets are made
up of?
Speaker 4 (26:51):
Since this environment.
Speaker 1 (26:53):
Okay, interesting, Let's go back to commodities, because you mentioned
when we were talking about inflation that it seems unlike
actually that will continue to see what we saw until
a few years ago, constantly falling commodity prices exactly, so
the cost of them for companies falling, falling, falling, And
you mentioned those markets are much tighter. Now, is that
an area where the ordinary retail investors should be invested?
Speaker 4 (27:14):
Do you think so? Intercommodities directly or intel?
Speaker 1 (27:18):
Not directly, I don't think that's a good idea, But
in commodity related equities.
Speaker 3 (27:23):
If you're invest in commodities directly, you've got the danger
that suddenly you might certainly find it in your house. Yeah,
Finns and oil turning off in your golden which may
obviously good.
Speaker 4 (27:33):
So yeah, I.
Speaker 3 (27:34):
Probably wouldn't recommend direct investment in commodities, but I do
think that it is one of the scarce resources going forward,
and therefore some exposure to commodities is a good idea.
And you can get that ya the equity market, because
of course there are companies which are commodity producers in
the equity market, so energy stocks or the mining companies
(27:56):
for example.
Speaker 1 (27:57):
And the UK is a brilliant place for that because
you've got a great big miners, the reattended, b Top etc.
Which pay you a fabulous yield while you said around
waiting for commodity prices to go up.
Speaker 3 (28:06):
Yeah, So those and those companies are doing two things
with their cash at the moment. They are paying a difference,
and they're buying by shares, but they're not really doing
one thing but their cash, which is investing it in
new quantity supply.
Speaker 4 (28:20):
Investors aren't really paying for that at the moment, they're
not key on them doing so.
Speaker 3 (28:25):
And now that's partly for ESG reasons, partly for environmental reasons.
You want see more of cash stid towards the companies
of investing in renewable projects. Certainly true that big oil
and big energy is as well investing in some lower
carbon projects, so some incrementally going into that, but there
isn't a lot going into traditional energy production or into
(28:46):
other commodities like industrial metal investment.
Speaker 4 (28:48):
So because of that, and these are quite long lead times.
Speaker 3 (28:51):
Because of that, these markets are quite tight, probably going
to mean higher prices this next cycle than the last one.
Speaker 1 (28:57):
It's tricky and isn't it, though, Because if you want
an environmentally friendly energy transition, you have to dig up
and all a lot of metals together. You need those
industrial metals, you need all those minerals, you need the
rarer metals, etc.
Speaker 4 (29:09):
Etc.
Speaker 1 (29:10):
You know, and it might be nasty to dig copper up,
but you can't have an energy transition without digging up
an awful lot of copper.
Speaker 3 (29:15):
Yeah, absolutely, I mean copper is needed for electrification, which
in Europe is largely going for electrification as a way
of producing pollution, and that's going to require lots of cables,
lots of copper, lots of investment. That requires equipment, machinery, metals,
et cetera.
Speaker 4 (29:31):
So we will still need a lot in this next
decade for that transition.
Speaker 1 (29:35):
So there are some hideous conflicts there in the world
of ESG aren't there That always off? But you need
you need to be really dirty to get clean.
Speaker 4 (29:47):
Maybe that's the case. I don't know.
Speaker 1 (29:50):
I give that to you as a title for a
note one day. Thank you for that.
Speaker 3 (29:56):
Now.
Speaker 1 (29:56):
The other thing we talked a little bit about the
UK is we talked about the HP and and real
Jinto etc. And the yields available. And one of the
things that we talk about a lot on the podcast
because it's incredibly irritating is the state of the UK market.
And you recently put out a note called UK in
pursuit of the American Dream about the UK companies or
(30:16):
desperate to shift their listening to the US so that
they can get much higher valuations and of course the
CEOs can be considerably better paid, because that's one of
the big parts of moving to the US is that
not just to your sholders get more money because you
hope your rating goes up. But of course your your
management can get paid as much as they like without
being constantly nagged by shaholders as they are here. So
(30:38):
this is true, this is happening. Is there a way
out for the UK?
Speaker 3 (30:42):
So I think when you say it's true, it's happening,
it is happening for a few companies. But I always
think that if you're going too maybe you're listening, you
do have to have a reason for maybe you're listening.
So you need to be a company with a lot
American footprint, for example, And there are to be fair
lots of UK companies in that position, so that you
(31:03):
know that mainly narrows your list of companies, but it's
not really narrow. There are lots of companies in that position.
So I do think you or you have to be
in an area where you believe that you can attract
a lot more US investment. So if you're a domestic
UK company or a company with a footprint which is
more European then there is really less reason for listing
(31:25):
in the US.
Speaker 4 (31:26):
I think, look, it's it's a tricky one.
Speaker 3 (31:29):
I do feel the main reason that UK and European
companies because I don't think it's just a UK issue,
but the main reason that European companies are on lower
valuations in US companies is that there isn't a large
domestic investor base in Europe.
Speaker 4 (31:44):
If you look at the US.
Speaker 3 (31:45):
Dock market, around eighteen to ninety percent of its own
domestically by the big pension funds endownment funds, but also
by individuals themselves.
Speaker 4 (31:54):
You know, all the meme stocks and things like that.
Speaker 3 (31:56):
They're generally US companies that people have wanted to hold directly.
If you ask most people, they would know they've heard
of the Dow and the S and P and those
big indices in the US, whereas investment in Europe has
seen as much more niche fewer people invest and it's
a smaller share of household wealth. Households in Europe tend
(32:18):
to invest more in housing, more in bonds, and more
in cash deposits, so that has been.
Speaker 4 (32:26):
A bit of a problem. Really Europe can't attract it all.
Speaker 3 (32:29):
This point about the US's deeper capital markets or yes,
but that's because there are lots more domestic investors and
the UK in particular, I think has an issue it.
Speaker 4 (32:39):
Didn't used to in the nineteen nineties.
Speaker 3 (32:41):
We never talked about this, and the reason we never
talked about it was that eighty five percent of the
market in the mid nineteen nineties was owned domestically.
Speaker 4 (32:50):
In the UK.
Speaker 3 (32:51):
Now only around a third of the markets owned domestically
in the UK, and that's because insurance and pension funds
that were the big holders of UK equity having sellers
in the last twenty or thirty years, and that means
that there isn't really a domestic investor base which wants
to buy UK listed.
Speaker 1 (33:10):
Shares and they've sold for that. There are all sorts
of reasons. It's about their decline of defined benefit pension schemes.
It's about regulation that has driven them to be supposedly
more diversified or into so course stay for assets like
government bonds and that kind of thing. So there've been
all kinds of regulator changes that have shifted the way
that the huge UK pension funds invest and it's a
(33:31):
rather worrying when you think that you're pretty much everyone
in work in the UK at the moment is inequity
invested via their auto enrollment pension. But they're not really
invested in the UK in the way that we like
to think they should be. And this doesn't look like
it's going to turn around, does it. So domestic invested
us still into a much smaller degree, but still net
sellers of UK stocks.
Speaker 4 (33:51):
Yeah, they are still net sellers.
Speaker 3 (33:53):
They have less and less to sell because they're a
smaller share of the UK market now. But I think
that they're encouraging more domestic investment in public equity, would
would encourage sort of high evaluations for public equity as well,
and I think that there have been in the past
(34:16):
or of ways when you had in the late eighties
and nineties a lot of privatizations for example, people became
involved in those and wanted to invest in those. Insurance
companies and pension funds as well did use to own
a lot of UK equity, and I agree with you
for regulation, asset match and reasons they.
Speaker 4 (34:33):
Produced that weight.
Speaker 3 (34:34):
But I do think a little bit more of an
ecty culture in Europe and the UK will be helpful,
and it's one of the reasons that you don't see
such deep capital markets in Europe.
Speaker 1 (34:45):
Might the cheapness of the UK equity market really began
to attract external investors, so foreign investors and a net
bias right over the UK again not only huge scale,
but net bios and the discount of the US market
KA market to the US market vast. And while everyone says, oh, well,
that's about sectors and it's about as not having growth
and Isabella's not being tech, etcetera, etcetera, I know that
(35:06):
even when you adjust for that, the discount is still
pretty big. And we're beginning to see private equity bids
forall for some of our companies, smaller ones in particular.
So is there a chance that you just get to
the point where the market is cheap enough that American
investors in particular look at it and today, well, why
are we invested here? Or we give invested in similar
companies over there at half the price and we begin
(35:26):
to see a wave of capital coming into the UK?
Or is that high in this guy thinking, which I'm prone.
Speaker 3 (35:31):
To definitely not, I actually think this has been happening
and well continued to happen. So I have a lot
of conversations with global investors that see that UK up
as being relatively inexpensive. So I think in a way,
this gap between the US and the UK, or the
US and Europe overall, there are really only are four
ways it can close.
Speaker 4 (35:50):
It can either.
Speaker 3 (35:51):
Close because you see global investors buying Europe and the
UK sort of fun and flows as it were, and
you have seen fun flows out of the US in
recent years and into Europe over the last few months,
particularly sort of the end of last year very early
this year, so we have seen some of that fun
flow move. Another way that it can close, as you mentioned,
(36:12):
is acquisitions. So companies buying companies are private equity companies
buying public listed equity, which perhaps looks quite inexpensive. And
again we have seen quite a lot of inward acquisitions
into the UK in recent years, particularly smaller companies, not
necessarily the high profile ones that make the news, but
a lot of smaller companies.
Speaker 4 (36:32):
That's another way the gap could close.
Speaker 3 (36:33):
Another one we've talked about before is UK companies or
European companies relisting in the US and trying to close
the gap via that. Although I do think that will
be relatively niche not not every company can or would want.
Speaker 4 (36:45):
To do that.
Speaker 3 (36:46):
And then the final way the gap could close is
just that UK companies say we're too cheap, we've got
cash on our balank sheet, we will use that to
buy our own equity. And you've seen buybacks rise considerably
in the UK, particularly amongst financials, oil companies, mining companies, etc.
Speaker 4 (37:04):
Which are on very low valuations.
Speaker 3 (37:06):
So buying back your own shares has been another route
to try to close this gap.
Speaker 1 (37:12):
As recommended by Warren Buffett in his latest letter.
Speaker 3 (37:16):
Yeah, I mean look, it's also going to help in
terms of improving your earnings per share. If you've got
fewer shares the same number of earnings, same amount of earnings,
then you'll see a better earnings per share grows over time.
Speaker 4 (37:27):
And the US market's.
Speaker 3 (37:29):
Been fantastic at achieving that in recent years, and I
think increasingly, particularly if you've got If you're in a
more cycnical business like a commodity business for example financials,
you don't necessarily want to commit to dividends every year,
but when you have additional cash, buying back shares if
your share price achieved makes a lot of sense.
Speaker 1 (37:46):
Although there's always a slight worry that a lot of
those buybacks are related to chief executive bonuses.
Speaker 3 (37:51):
Yeah, I mean, I guess it's one way of boosting
the share price and creating should return and a lot
of people would like to see more money in best
did in growth, and I do think that's one area
of the UK and the whole of Europe.
Speaker 4 (38:06):
Is not keeping pace with the US, to be fair,
and I do wonder.
Speaker 3 (38:10):
I don't think this is necessarily the incentives placed on
top management. I'm not quite sure of the reasons for it,
but if you think about the US, there's a lot
of incentive to on top management to do share prices
by any short term means. They often have renumeration related
to return on actuity or shareholder returns, which is quite
short term. So, if anything, US companies should be quite
(38:30):
short terms, but they tend not to be so much.
They invest a higher share of their cash vow from
operations in what we would call growth capex, which is
either capital expenditure open above depreciation or R and D.
Speaker 4 (38:44):
SO US companies they spend.
Speaker 3 (38:47):
About a third of their cash vow from operations on
that gross investment, whereas European companies.
Speaker 4 (38:54):
It's around a fifth.
Speaker 3 (38:55):
So even in a place like the US where there's
a lots will focus on the top managements, renumeration being
related to share prices, etc. Even there, they've got quite
a lot more full sight and they are looking and
investing for growth.
Speaker 1 (39:10):
Maybe we should stay invested in the US now, Sharon,
With all these things that we've talked about, where do
you think the most interesting parts of the market are
for retail investors at the moment? So, you know, speak
Japan has had a fabulous run so far this year.
Speaker 4 (39:25):
Is that.
Speaker 1 (39:25):
I know it's not quite your area, but maybe that
is interesting. I know you've written recently about the luxury
goods companies being very interesting. We've talked about commodities. We've
talked about the UK and Europe relative to the US.
But if you had to pick out a couple of
areas that were particularly interesting to you and therefore should
be interesting to ordinary investors right now, what do you
think they would be?
Speaker 3 (39:45):
Yeah, So, I think for ordinary investors there's a combination
of lots of different assets you can invest in right now.
Even cash and bonds provide you with some reasonable return,
whereas if you don't the clock three or four years ago,
you were getting certainly negative real returns in those if
(40:05):
not zero nominal returns, so.
Speaker 4 (40:08):
You didn't have a lot of opportunities.
Speaker 3 (40:10):
So I think there's an opportunity for diversification, which is
always important for retail investors. For all of us, we
want to diversify. I don't want to put everything into
one basket and take on too much risk. But if
I'm looking with be in the UK equity, which I
don't think is particularly expensive at the moment. I mentioned
right at the outset that US equity looks quite expensive
on eighteen or nineteen times PE, the UK market is
(40:31):
on ten or eleven, and some of the cheapest areas
are financials and commodities.
Speaker 4 (40:35):
So as a kind of.
Speaker 3 (40:36):
Longer term, medium, longer term view on these areas being undersupplied,
particularly commodities, and being relatively inexpensive, and the companies having
options like buying back their own shares or paying additional dividends,
that looks like a reasonable area. But having said that,
I would have a bit of a bar bow strategy.
We're going for some of this cheaper stuff that looks
(40:57):
potentially undersupplied, but also some of the newer growth that
areas look interesting. Anything that looks like it would likely
gain from productivity improvements from AI for example, bits of healthcare,
luxury goods, tech all look reasonable as well.
Speaker 4 (41:13):
From the medium term for investors, you won't get paid
so much in the way of.
Speaker 3 (41:16):
Dividends from those or buybacks, but you probably will have nice.
Speaker 4 (41:19):
Longer term growth.
Speaker 1 (41:20):
Yeah, okay, that's interesting. Now, final question, no warning for
this bitcoin or gold gold for.
Speaker 4 (41:29):
Me, No shadow of down are there.
Speaker 3 (41:34):
I think bitcoin is highly volatile asset, very difficult to
pin down in any way to sort of economic fundamentals.
In comparison, gold I think provides you a nice little
hedge against two risks that.
Speaker 4 (41:49):
Are around there.
Speaker 3 (41:51):
One is that we do go into a deeper down
term and expected maybe there is a further banking stress
causing loans to tighten.
Speaker 4 (41:59):
Credit congits to Titan. Gold is attractive in that sense.
Speaker 3 (42:03):
The other risk that's out there, and we talked about
a lack of supply of commodities. We talked about maybe
higher inflation because of that lack of commodity supply, but
also higher wage growth. Higher inflation means you really want
to own real assets and gold in a sense as
a real asset as well, so I prefer gold on
that basis.
Speaker 1 (42:21):
Okay, brilliant.
Speaker 4 (42:22):
Do you know.
Speaker 1 (42:22):
I don't think I've had anybody yet He's chosen bitcoin
spread my net wider. There's got to be someone out there. Sarah,
thank you so much for joining us today. That was
great fun. I hope we can talk against you.
Speaker 4 (42:36):
Thank you, thanks for inviting me.
Speaker 1 (42:43):
Thanks for listening to this week's Marin Talks Money. We
will be back next week in the meantime. If you
like our show, rate review, and subscribe wherever you listen
to podcasts. This episode was hosted by Me, Marry and
Sunset Web. It was produced by Some Society. Additional editing
by Blake Maple's special thanks to Sharon Bell and of
course as ever to John Steppe and of course our
weekly reminder designed up John's daily newsletter, Money Distilled. The
(43:06):
link is in this show notes at the top of
the podcast. John and I discussed all sorts of topics.
You will find detail on all those things in those
Money Distilled newsletters. Do not miss them.
Host
Merryn Somerset Webb
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