November 17, 2025 • 40 mins
Host Merryn Somerset Webb speaks to Jim Reid, head of Macro and Thematic Research at Deutsche Bank, to unpack why too much cash is risky over the long run and why starting valuations drive real investment outcomes. They dig into 200 years of data on equities versus cash, the role of 60/40 portfolios, gold’s surprising century and today’s artificial intelligence-fueled market dynamics—with practical pointers on cheap versus expensive markets and time horizons.
Find the report here: https://www.dbresearch.com/PROD/RI-PROD/PDFVIEWER.calias?pdfViewerPdfUrl=PROD0000000000607211
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Episode Transcript
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Speaker 1 (00:02):
Bloomberg Audio Studios, Podcasts, radio news. Hello, Maren Talks Money. Listeners. Now,
before we get started, a quick reminder, we are recording
an episode of Maren Talks Money in front of a
live audience. You could be in that audience. We are
doing this the morning after Rachel Reeve's UK budget, so
please join us at Bloomberg's European headquarters in the heart
(00:23):
of the city of London for quaissants, smart analysis, and
probably a cup of coffee too. I will be joined
by Helen Thomas of Blonde Money, Stephanie Flanders, Bloomberg's head
of Government and Economics, and of course John Steppeck will
be there. Find the registration linked to this in the
show notes. Space is limited. Sign up soon. We would
love to see you. Welcome to Meren Talks Money, the
(00:54):
podcast in which people who know the markets explain the markets.
I'm Maren sumset Web this week with me Jim Read,
head of macro and Thematic research at Deutsche Bank. We
have bought Jim back on the show. You'll remember his
last appearance to talk to us about the latest long
term asset return study from the Deutsche Bank Research Institute.
It's a super interesting report. John has already looked in
(01:14):
one of his newsletters, so some of you may already
know a little bit about this year is The idea
is that it looks at real after inflation returns for
a range of asset classes across a fold two hundred
years and fifty six different global markets. So a lot
to look at that and some very interesting takeaways that
we will get into now. Jim, welcome to Marin Talks Money.
Speaker 2 (01:35):
Lovely to be here. Thank you for the invite again.
Speaker 1 (01:39):
Again, well exactly. Not many people get two appearances. I'm
flattered mainly an admin fail, but not many people get
to get on twice, so we're very pleased to have
you now listen. Before we start, I want to tell
listeners that this is a long and interesting report. We're
going to go through some of the main things, but
if you want to hear what you can read it yourself.
We will put the link in the show notes that
(01:59):
you can get to it from there. But also, Jim
is on the website, right, How do they find it
direct like that?
Speaker 2 (02:05):
Yeah, if you just google Deutsche Bank Research Institute. We've
made it publicly available to everybody, so you can look
at it on that good.
Speaker 1 (02:13):
Now, where I want to start, Jim, if you don't mind,
is with cash, holding cash instead of investing. This has
been a subject under much discussion in the UK over
the last couple of years because various reports have come
out across the board showing how many hundreds of billions
we hold in cash that we really shouldn't, the most
recent number being six hundred and ten billion held in
(02:34):
cash that really could be invested, And the UK Saver
is actually much worse at this than the saver in
many other countries. We tend to hold a lot more
cash than other people in the amount of cash that
we're holding in that way is up quite a lot
even since twenty twenty two, because rising interest rates, of course,
have encouraged people to hold even more of their money
(02:54):
in cash. There is some conversation about there being some
pushes in the to try and get people to put
more of their money into stock markets in general, perhaps
by changing the way that you can invest inside your
ISO wrapper, less allowance for cash, more allowance for stocks
and shares, et cetera. But let's just talk about what
a terrible idea it is to have too much of
(03:17):
your cash. Well to words, for your cash and cash
over the long term.
Speaker 2 (03:21):
Yeah, it is right. And I must admit when I
speak to kind of family and friends and they say, well,
you know it's risky to invest in markets, I kind
of almost flip it around. In the long term, it's
risky to have money in cash over the long run
because it will always be inflated away. And I think,
especially in the last fifty five years, when we've lived
in a fa money system where nothing is back in
(03:43):
paper money, there is always going to be a crisis
and there is always going to be a reason why
the money supply is expanded. And while that while norminal
activity goes up because the authorities need it to. Really so,
I think you always have to be predisposed to try
to invest in riskier assets. However uncomfortable it feels. And
it does feel uncomfortable, and you know, I as an analyst,
(04:06):
I look at things sometimes I think this is this
is a terrible moment to invest. But you just for
the long term, you just have to look at the
historical data and realize that cash is an incredibly risky asset.
I mean, over the two hundred years of our report,
it gives you a minus two percent real return per annum,
and I think that that's probably accelerated rather than decelerated.
(04:26):
Are you got worse over time?
Speaker 1 (04:28):
And if you look at that nominal equities that I'm
looking at your data now, normal equities have only a
zero point eight percent probability of underperforming cash under the mattress.
Are you earning no return at all over a twenty
five year period? Now, that probability rises slightly over over
ten years and over five years, six point three percent
every ten years, thirteen point six percent over five years.
(04:49):
So obviously the shorter your time period are, the more
likely it is that maybe you be better off in cash,
But it's still pretty low odds.
Speaker 2 (04:57):
Yeah, no, it is. And you know, when we drill
down into those probabilities you've just discussed, the times that
cash have outperformed have often been around just you know,
massive events like you know, world wars, you know, massive
massive dislocations. And look that these events you know, will
happen over two hundred year period, but it's very difficult
(05:19):
to set your portfolio up solely to wait for them,
if that makes sense.
Speaker 1 (05:22):
Yeah, And one thing that we do always say, John
and I is that you know when equities are very expensive.
Perhaps it makes sense a little bit more cashtan than
usual in that it does give you optionality. Cash means
that when when something bad happens, you have the cash
available to dive into the market. So there are there
are times where it makes sense to have more cash
than other times, but really not for very long.
Speaker 2 (05:43):
Yeah, and it's a good point that the title of
this report is the Ultimate Guide to long term invest
in and it's a little bit of a grandiose title.
I apologize for that, but you know, one of the
things we're trying to do is how can you get
the probabilities on your side over the long on long run.
And obviously we know that riskier assets perform better the
longer horizon you have. But one of the way you
(06:03):
can get probabilities on your side is is to look
at valuations. Now it's not rocket science, just simple valuations.
And obviously if markets that achieve you probably wait a
little bit more. To markets are expensive, you wagh a
little bit less to I think valuations are more important
for long term investment than they are obviously for short
term investment, which clearly in my day job I have
(06:25):
to tell I fund managers et cetera, how to invest
their money in three months. And that is a difficult job.
That is the really difficult job. Long term investment is
a lot easier.
Speaker 1 (06:33):
Well, it is, isn't it, because you can tell people
you know, everything reverts to the mean in the end.
And we have all the very very long time data
that tells us that works, tells us what works in
value investing works. I mean, you have a very clear
line in when you've got this section in the report,
which variables predict long term performance best? And the answer
is starting valuations matter anormously. A low pee portfolio has
(06:56):
returned twenty point two percent a year of the last
seventy years, and the high portfolio eleven point four percent,
So you're starting your starting point really matters. The same
with dividends, the high dividend portfolio in terms twelve point
eight percent a year over two hundred years, the low
dividend portfolio nine point three percent.
Speaker 2 (07:13):
The one thing I'll pick you up on I think
you said the low pee portfolio instead of the high
pea portfolio.
Speaker 1 (07:18):
There, oh did I sorry? Low pe portfolio is the
good one. High pee portfolio is the bad one. Just
to be.
Speaker 2 (07:25):
Absolutely clear, you had me worried there.
Speaker 1 (07:27):
Sorry about that. Now. Some people would say that pees
don't matter as long as you get growth.
Speaker 2 (07:34):
Yeah, and look, I think what we came up with
in the report is that you can have expensive markets
that perform well, and obviously the US is an example
of that. But I think that the problem with the
US market because it's so important, because it's so big,
it's easy to get biased by thinking that the US
way to outperform is the global way to outperform, if
(07:58):
that makes sense, And it's it's also easy to think
that it will continue to go down that route. So
I suppose the report looks at enough countries, so it
looks at fifty six countries to realize that the US
is the exception, massive exception rather than the norm. And
if you look at over an aggregated, wider collection of countries,
valuations matter more than anything else.
Speaker 1 (08:20):
And it isn't necessarily the case that the US has
always been more expensive than other markets. I mean you
say here that it's obviously an incredibly interesting case study
because despite having these very high valuations, both the p
and the cape ratios and pretty much anything else you
look at, dividends, etc. It is extraordinarily expensive, and we
look at that and we go, oh, yeah, well that's
(08:41):
the that's the premium for being exceptional. But it hasn't
always been there, has it, And it was relatively recent,
this idea that the US market should be valued at
a much higher level than other markets.
Speaker 2 (08:51):
Yeah, and look at it has kind of emerged over
the last two or three decades. Obviously, within that two
or three decades there's been times where the US is
as plumber down to more normal valuations. But I suppose
for the last twenty thirty years you've kind of had
this role in higher valuation than the rest of the world.
But yeah, if you go back before that, that was
(09:12):
not really a massive premium on valuations in the US.
It's it has been really something that's developed over the
last two or three decades, and obviously in particular in
the last seven or eight years with the mag seven
and the megacaps. So the current kind of difference between
valuations in the US and the rest of the world
are probably as wide as they ever have been because obviously,
(09:34):
as you and I remember from two thousand, everything was
pretty expensive. In two thousand, most markets were pretty expensive,
whereas this is a slightly different market in the US
is quite considerably more expensive than most of the other
global markets.
Speaker 1 (09:49):
I mean, this is interesting, then, isn't it, Because this
is one of those occasions when other options are available.
And we could have said back back in the period
when the Japanese market was insanely expensive, when everyone thought
that that would continue forever because japan was so special.
I remember when I went to work in the Japanese
market not long after the crash in the early nineteen nineties,
the clear expectation was that Japanese exceptionalism was so clear
(10:11):
that the market would soon return to its previous valuations,
which of course it never did and probably never would.
But that was another example of the time when other
options were available, because it was an exceptionally expensive market
but surrounded by markets which weren't particularly expensive.
Speaker 2 (10:25):
Yeah, And actually it's an interesting one because as part
of the portfolio returns you mentioned earlier, what we did.
We took our fifty six countries and every year we
ranked them high to low, and we basically bought the
twenty eight sheepest markets and we sold the twenty eight
most expensive markets, and then every year we rebalanced it.
(10:47):
And when we do that the returns from the lower
PE portfolio are so much better than the higher PA
portfolio over time, and that you know, Japan would have
been a classic example of where that would have ranked
right at the top and we would have completely left
it and other markets would have been cheap. It won't
work on a year to year basis. There will be
(11:08):
you know, the peer be piers where clearly momentum and
high valuations just keep on going. But I don't think
it takes particularly long. We show a couple of graphs
in the piece where we look at the twenty five
year returns and then we look at the five year returns,
and actually the correlation between valuation and twenty five year
returns are very linear. I High valuations, low returns, low
(11:29):
valuation to high returns. It's a fairly linear relationship, even
though with five years it isn't quite as linear, but
it's still very good. So even over a five year period,
valuations mattering. You know, from the two hundred years of
data we've looked at.
Speaker 1 (11:44):
So do you think that when we talk about long
term investing, short term investing, hold in cash, etc. That
somebody new to the market. One of these people the
FCA gets so cross with because they've got more than
ten thousand pounds in savings and they hold one hundred
percent of it in cash, and this is considered to
be a very bad day if they are going to invest.
Is the bare minimum five years?
Speaker 2 (12:05):
I mean, obviously luck plays a part of it, so
one you know, you can't rule out being unlucky. I
think five years is probably where you start to see
the probabilities get much more in your favor. No guarantees,
but you get much more in favor. If you know,
listeners want to have a look at the report, they'll
(12:25):
they'll see a nice graph where we show five, ten,
and twenty five year probabilities of outperforming from different asset classes, well,
stocks bonds, sixty forty portfolio and stocks versus bonds, etcetera.
So you can kind of do your own kind of
judgment about where your risk tolerance is. But I think
probably five years is what you need to give yourself
(12:46):
and to give yourself the best chance anyway.
Speaker 1 (12:48):
Yeah, but when you talk about that probability, I mean,
it's interesting because if let's say, let's still keep a
hypothetical person who has only cash in mind, and I
was thinking Okay, well that sounds good. I will now
go and invest, knowing that if I put the money
in the market for five years, I've got an excellent
chance of at the very least not losing it. Right.
But if they now go and do that, the odds
(13:09):
are that they will go and buy a global tracker,
and that will mean that they are not buying what
you are talking about. They are, in fact buying because
all of these indices are market cab based. They are
in fact buying the most expensive markets in great volume,
and the cheapest ones really not at all. Whereas what
you're talking about is I think an equal weighted portfolio. Right,
(13:32):
we're talking about something very different.
Speaker 2 (13:34):
I suppose it's difficult to pitch this obviously, because you
know that there are people who are experts in their
own field, but they're not particularly experts in the finance field.
And it's easy, as you say, to buy a tracker.
And there's also people that are more sophisticated, and I think, yeah,
you probably need to find a way of removing that
expensiveness bias into a portfolio. So some kind of equal
(13:59):
weight global portfolio or a global portfolio X you can
buy ATFS or trackers that are global portfolio x a
certain market. You know, I'd rather not give individual kind
of No.
Speaker 1 (14:11):
No, I'm not expecting you to give into the advice.
What I'm just trying to point out is that the
automatic and easy way for a novice to invest over
a five year period based on your research, is probably
the wrong way.
Speaker 2 (14:25):
I think the entry easy entry option, yes, is typically
a kind of a global tracker, so I think it
still would be a decent long term investment, but it
probably wouldn't be getting at the key of this report,
and that is that valuations matter.
Speaker 1 (14:40):
Okay, we're going to come back to that in a minute,
but before we do that, I just want to pick
up on gold, which you also wrote about, which has
been the standout investment of the century so far, right
to everyone's everyone's massive surprise, not to hours, by the way,
not to this podcast surprise, but to everyone else's surprise.
And it is true, isn't it that a portfolio of
just gold would pretty much have you even with inflation
(15:02):
over the long term. But that's about it.
Speaker 2 (15:05):
Gold is a fascinating one because obviously we've got two
hundred plus years of data here, and if you look
at that full two hundred year period, gold has only
given you zero point four percent per annum over inflation.
But I suppose what you have to take into account
is that for the best part of one hundred and
fifteen hundred and seventy years, the price of gold was
(15:26):
fixed to the dollar, and the dollar was fixed to
most other currencies, so you had a gold based financial system. However,
I mean that broke down a cup a few times
in the last couple of centuries when there was a war, depression,
bad economic times, and maybe the gold price got reset
(15:47):
of your currency to gold. But it wasn't until nineteen
seventy one where you know, Nixon effectively pulled the US
out of the Breton was system, which was a system
that was the dollar was tied to gold and every
other currency was tied to the dollar. It wasn't until
that point that we completely broke free of gold based money,
(16:07):
and since then we've been in a more inflationary environment
because there's nothing back in paper money, and gold has
been a good performer. Now in that full fifty five
year period, gold hasn't beaten equities. It's been competitive, but
it hasn't beaten equities. But actually in the twenty first century,
it has beaten equities quite convincingly. But at the start
(16:31):
of the twenty first century it was quite low. It
has gone low because a lot of central banks had
sold their holdings and gold had gone out of fashion
in the kind of nineteen nineties. So look, I think
gold is is a good inflation hedge, and I think
it should be part of a portfolio. The two things
that make me a bit nervous upon gold is the
fact that it doesn't pay a coupon or a dividend
(16:52):
whereas other assets do, and also just how far it's
run in the last year or two. I mean, I
think I was on your podcast eighteen months ago and
ask me if I prefer gold or bitcoin, and I said,
I prefer gold. I think it's a great inflation hedge.
I probably should have held bitcoin. I haven't done the
math to see which is outperformed since that point, but
you know, I wouldn't say that. I wouldn't say I
(17:14):
was as optimistic on gold today as I was eighteen
months ago, purely because valuations have changed.
Speaker 1 (17:20):
But also, I mean, it should be distressing when you
see gold outperform equities. It's not right for something that
is merely an inflation hedge to outperform an asset class
that is supposed to reflect their productivity and the growth
of well humanity.
Speaker 2 (17:36):
Yeah, to me, most commodities, because they go into production
of various things that we consume around the world, they
probably should be in inflation hedge because if their price
goes up too much, people should look at alternatives. Now,
I appreciate gold is slightly different because.
Speaker 1 (17:52):
Gold doesn't really have an alternative. Yeah.
Speaker 2 (17:54):
Yeah, it's a store of value. But I mean you could,
you know, you could own other precious metals if you
really wanted to. But look, I'm not anti gold at all,
because I've been a bit of a gold bug for
a long period of time. It's just when I see
such violent upward moving price, it kind of makes me
a little bit nervous on the valuation side.
Speaker 1 (18:11):
Interesting though, isn't it. I mean, I rather expected when
it came back down through four thousand. I mean, not
a chartist, obviously having it come down below four thousand,
it slightly expected it to keep going down, that is,
but it absolutely didn't. It really come hanging on.
Speaker 2 (18:25):
Yeah, and I suppose if you wanted to create the
ball story for gold, it's that central banks are buying again,
and I think that you know, their holdings are still
a fraction of where they were in let's say nineteen eighty.
Now that doesn't mean to say they get anywhere close
to that, But if you're looking for the ball story,
it's that central banks are still buying.
Speaker 1 (18:44):
Don't fight the central banks.
Speaker 2 (18:45):
Eh, that's not been a bad bit of a vice
through once for it.
Speaker 1 (19:04):
Let's look at a wider portfolio construction. So we tell
people that over a five year period, the probability of
them losing money in real terms in the acta market
is relatively low. But obviously a one hundred percent equity
portfolio is pushing it a little. You've looked again at
a sixty to forty portfolio. Forty percent in the bond
market has historically given the lowest probability of making nominal
(19:26):
losses at least chance of a negative nominal returns over
twenty five years to zero point one percent. It doesn't
sound so.
Speaker 2 (19:33):
Bad, yeah, I think. I think if you're very loss
a verse, you really don't like losing money, then I
think a six forty portfolio is a reasonably good way
of minimizing that risk, and the stats in this document
you can look at it. I'm going to tell you
it's on page thirty four. You can look at it
at your leisure. That the stats basically tell you that
(19:57):
bonds do have a nice hedge in property. So in
the times where equities that are the most vulnerable, bonds
tend to rally. And although over time you're not going
to outperform equities, you are going to probably minimize your
drawdown risk. So you know, again everything depends on your
risk tolerance and how much you hate losses.
Speaker 1 (20:18):
So we talked there about it being a very very
low possibility of anomenal loss, But what about a real
terms loss for.
Speaker 2 (20:25):
A sixty forty portfolio over twenty five years, it's a
round about eight percent. For equities it's around about seven
and a half. So it's it's similar in real terms,
because over twenty five years, the fact that equities gives
a superior return starts to, you know, make it more
(20:45):
attractive to own an outright equity portfolio.
Speaker 1 (20:48):
Okay, so what point, at what time frame should we
say to our listeners, perhaps get the bond a bit
and go all in on equities cheap equity.
Speaker 2 (21:00):
Going back to the sixty forty question, I suppose twenty
five years is probably the point where you don't need
a sixty forty portfolio, if that makes sense, because equities
are probably better if you had twenty years. You might
actually say that sixty forty give you a slightly better
chance of not having a loss, if that makes sense.
So I think that the kind of break even for
where your lost probability starts to favor equities is probably
(21:26):
in the twenty to twenty five year bucket. But this
is don't forget, this is just a loss avoiding strategy.
This is not a maximizing your return strategy.
Speaker 1 (21:34):
Okay, how do we maximize our returns one hundred percent
equities always.
Speaker 2 (21:38):
And as I said earlier, by it by the lowest
p ones.
Speaker 1 (21:41):
Okay, So if I want to make the most possible
money over a twenty five year period, I've had the
cheapest possible markets and only hold equities for twenty five years.
Speaker 2 (21:50):
That's what the data would say. Yeah, I'll hide behind
the data.
Speaker 1 (21:55):
Hide behind the data definitely. And what are those very
cheap pe markets right now? What page are the charts
for that?
Speaker 2 (22:01):
On the charts that you'll see that, and I'm going
to flick through my document here. And the reason I
don't want to kind of say is because I'm not
a micro analyst. I actually heard your podcast with Albert
Edwards and he kind of took fright when he was
asked to comment on micro names and stuff, and I
agree with him. It gives us macro people a bit
(22:23):
of cause for concern when we're asked to talk about
individual countries or companies. But if you look at page
twenty three in the report, we basically show the cheapest
and most expensive markets of our fifty six countries in
our study by the P ratio, by the CAPE ratio,
(22:43):
and for those who don't know, the CAPE ratio just
looks at earnings over a ten year horizon rather than
just a single year, just to give you a bit
of sick horcality moving to it. And we've also done
it by dividend yiels. Now you've got to be slightly
careful on dividend yeals because countries like the US have
used by backs to replace dividends, so the dividend yield
(23:04):
on the US is quite low. Doesn't mean to say
that investors aren't getting distribution from other means, so you've
got to be slightly careful. But on page twenty three
of the report, you know listeners can can look at
what markets are cheap and what markets are expensive.
Speaker 1 (23:19):
Okay, So for those who really want to know, right now,
I can tell you that up at the expensive end,
you've got the US, India and New Zealand, Taiwan, what what's
called Greece up there expensive all of a sudden, in Canada, Netherlands, etc.
And if you want the cheap end, you've got Israel, Turkey, Austria, Columbia, Brazil, Argentina, Hungary.
(23:40):
And you go to the UK about a third in
sandwiched between China and Malaysia. And then if you look
at dividend yield again, I would have thought the UK
would be much more towards the cheaper end, but it's not. Actually,
if you look at dividend yields in particular, down at
the cheap end, you've got oh no, hang on, I'm
reading this one the wrong way around. If you look
at high dividends, we're up at Columbia, Nigeria, Brazil. Can
(24:04):
you pack us down in their? UK is only halfway
through sandwiched there again, right, next to Singapore, sandwich between
Singapore and Australia.
Speaker 2 (24:12):
Yeah, but look, there isn't an emerging market bias to
the cheaper end of the spectrum. And I think you know,
people can take a kind of a again an overlay
if they do only want to have developed markets, they
could probably look at this and see which are the
cheapest developed markets, which are the most expensive, et cetera.
Speaker 1 (24:29):
Yeah, and then you have some markets that don't have
long enough data to give you the CAPE data, right.
Speaker 2 (24:34):
Yep, So there's and we just do the PE for that.
But the one thing I would say is that again
in the report, we look at demographics and the interesting
thing about the next twenty five years is that we've
never really had a period before where so many countries
are going to have lower working age population. And you know,
(24:54):
if you look at how that's split between DM and
EM world, you know it's more biased towards the DM
world is going to see less workers in the next
twenty five years. So although it may look a little
bit scary sometimes to see some of the emerging market
countries being the cheapest, in some ways they've got the
best demographics. And you know, we showed up on page twelve,
rank in the same countries by demographic for the next
(25:16):
twenty five years.
Speaker 1 (25:17):
And what difference do we think those demographics are going
to make. I mean, there's perfectly good argument to be
made that it doesn't matter if you have fewer workers
now because you have AI, so developed economies will be
able to shift all the work that may be middle rankers.
Middle ranking workers might have done off onto robots of
one sort or another and generative AI, and so it's
not necessarily the case that demographics will affect economies and
(25:40):
maybe markets in the same way they would have if
we were in this situation thirty years ago.
Speaker 2 (25:44):
Yeah, I mean, it's a very valid point and one
that is gathering a bit of steam. I would probably say,
even as a minimum, I would say the rankings of
the country's matter. So if and when AI becomes successful,
it's probably a price point that a lot of countries
will be able to use it, and therefore the relative
ranking of demographics probably still matter. It just might lift
(26:06):
all the boats higher, if that makes sense. You know,
one maybe more controversial thing to say is that, you know,
if you look at history, ever since the Industrial Revolution,
we have constantly been worried about new technologies destroying jobs
or replacing jobs. I know your question slightly framed, slightly different,
(26:27):
but what economic history tells us is that innovation probably
creates jobs, if it improves productivity, if it improves growth,
and therefore the labor market in aggregate might not look
too different in the longer term. But it just might
be a compositional change, where you know, instead of having
lots of people doing data entry stuff, that they're doing
(26:50):
more lifestyle things. I don't know. I wish I knew
the industries of tomorrow, but as an economic history I'm
less concerned about AI destroying jobs. Yeah.
Speaker 1 (26:58):
Well, as we always say, if she looked back twenty years,
you wouldn't have believed that half the jobs that exist
today could possibly have xed them. I give mine as
a classic cample. Who could possibly have known? Who could
possibly have known? Podcasting influencing online yoga teachers, et cetera,
et cetera, who could have guessed?
Speaker 2 (27:15):
Absolutely. I'm not sure I'm ready to be an online
yoga teacher yet, though, so hopefully there's still a market
for me.
Speaker 1 (27:23):
I think you'd be extremely good at a gen well
for macro economists. I think that macro strategists. What do
we call you a macro strategist, don't we Really?
Speaker 2 (27:30):
As long as there's a market for it, I'm happy
to be called it.
Speaker 1 (27:33):
And now listen, I mean, I know that we're obsessed
with page twenty three at the moment, but I'm personally
obsessed with the page thirty six, which is the maximum
maximum draw down page. So how much you've actually lost
in markets, particular markets, and how long it's taken for
them to get back to that nominal level. And it's
(27:55):
mainly Italy seems to suffer a lot from this down
ninety one percent in nineteen oh six, again in nineteen twelve,
again in nineteen thirteen. France has suffered from it, Italy
again in the sixties, Sweden seems to have some troubles
in this area. Kenya just pops up all the time.
And then of course there was Japan, which is interesting
(28:15):
because you know, very recent, very developed market, one of
the greatest bubbles of all time, and your draw down
there was seventy percent and you didn't make your money
back in nominal times well and about a week ago
actually very recently.
Speaker 2 (28:30):
Yeah, I think it's a bit longer than that three weeks,
but relatively Yeah.
Speaker 1 (28:35):
So you know, when we talk about when we talk
about cheap markets and looking at them, sometimes sometimes cheap
for a reason and your money won't come back for
a long time. Thirty thirty three years, you say, have
negative real returns from Japan secuity slump.
Speaker 2 (28:47):
Yeap And obviously, as you pointed out earlier, that was
a very expensive market at the time, which is why
it took so long. I suppose this list of drawdown
here in some ways a bit of comfort, though, because
a lot of these have occurred in countries that have
(29:08):
had a you know, a once in a century, once
in a maybe a two century event like a World war.
And actually the list is relatively small relative to the
amount of data we have. But the point we're trying
to make is that you know that you can have
these long drawdowns and you know, trying to identify what
(29:30):
causes them. You know, something like Italy has probably been
the least stable country politically in our database in terms
of the amount of governments it's had in the period
of our study. Two of the countries with the highest returns,
almost stealth you don't really notice them, are kind of Denmark,
and Sweden, And these are two countries that have actually
had a long, long period of political stability. They've they've
(29:53):
managed to kind of size step major conflicts and they've
been fairly stable countries. So it's an interesting country between Italy,
which has until recently, I mean, actually the last few
years have been one of the most stable for Italy
in terms of politics. You know, for a cent you know,
maybe centuries, maybe a little bit over the states in it,
but decades at least, And you know, the political instability
(30:16):
we've had in the past has actually weighed on Italy
longer term, whereas the political stability we've had in a
place like Denmark and Sweden have actually meant that their
returns have been reasonably good.
Speaker 1 (30:28):
Yeah, I speak clear and say the drawdowns we were
talking about hero was mentioning in Sweden earlier were all
in the nineteen tens. Can we talk about more recent stuff.
You said earlier that one of the most stressful parts
of your day job was telling people what they should
invest in the short term, whether they should go over
a three month period. What are you telling them now,
ha ha.
Speaker 2 (30:48):
It is challenging because I think the biggest topic in
the market at the moment is AI in a bubble,
and that unfortunately dictates a lot of different asset classes
because these companies now are so big that they are
countries in terms of their influence on the global financial market.
So I was having a chat with our rate strategist
(31:11):
this morning and he's got a very very well defined
framework of predicting where rates will go interest rates go,
and he said, look, the biggest risk is the AI story.
It's not you know, is inflation going to be higher
or lower? Is it not that supply of government bonds
is going to be hire and lower. The biggest risk
to him is the AI story. So I think the
(31:32):
AI story dominates everything. And within Deutsche Bank we have
different views on this. So I don't really want to
kind of be too aggressive on my view because there
I can find you other views.
Speaker 1 (31:43):
Okay, what is your view?
Speaker 2 (31:46):
Well, coming back to this long term study and trying
to be a politician here, give you a politicians answer,
as I.
Speaker 1 (31:53):
Won't accept a politician answer. I can't do that. It's
not that kind of show that you have the BBC
for that.
Speaker 2 (32:01):
No comment I would say I prefer cheap markets would
be my comment. But look, over the short term that
that can can iron out. I do think that if
this is a bubble in AI, if the FED is
cut in rates that could be blown up further, if
that makes sense, So.
Speaker 1 (32:21):
There could be a melt up in the AI story
as rates to cut further.
Speaker 2 (32:26):
Yeah, I mean, if you look at the history of
rate cutting cycles, equities in the US do phenomenally well.
So I think in every rate cutting cycle in the
last seventy years from the first cut in the cycle,
equities on average do about fifty percent up and they're
probably already thirty let's say thirty percent up since So
(32:46):
if this was if this rate cutting cycle is a
kind of a template for well history is a template
for this one, then there could still be a bit
of a melt up. I suppose. The interesting thing would be,
what you know, with the government shut down now coming
to a close and you get all the data, we're
going to have a lot of macro information to work
out whether the FED should be cut in. And maybe
(33:08):
the risk scenario for the AI story is that the
data is stronger and suddenly you get a load of
cuts that just get priced out of the market.
Speaker 1 (33:16):
Okay, so there's expected cuts once baee, the data may
look less likely and that would have an impact on
the US market.
Speaker 2 (33:25):
Yeah. I think the presumption at the moment is that
the FED will continue to ease a reasonable mount internet
year and that supports probably the risk environment. I think
that's the default market assumption.
Speaker 1 (33:37):
Okay, and let's look go back to the UK market briefly,
which we've been talking about is being cheap for ages
and I think last time year on we talked about
the UK market and the foot to one hundred really
looks like it would like to go through ten thousand now,
doesn't it.
Speaker 2 (33:49):
It seems to be fairly immune to kind of negative
domestic news, which to be fair, as we know, is
fair because it's not a domestic focused constituencys within THEI
in debt. So it does seem to be momentum. I
suppose in my travels I just see an incremental increase
from overseas of people at least looking at them at
(34:11):
the market, whereas maybe twelve eighteen months ago that they weren't.
Speaker 1 (34:15):
Yeah, should we be nervous about the UK? The sovereign
bond market and also the sovereign bond markets are very
highly indebted countries and it does slightly feel like we're
nearing a public debt tipping point in some developed economies.
Speaker 2 (34:34):
I think we all know that the debt profile of
a lot of developed market countries is totally unsustainable. The
problem the UK has is that it has a higher
proportion of overseas investors than many other developed markets, so
it's more difficult to control, if that makes sense. If
the overall global bond market is having a bad period,
(34:56):
the UK often joins it because it's owned by a
lot of high proportion of it is owned by overseas investors.
There are some European countries that obviously also got unsustainable
debt profiles, but they're probably a slightly more domestic owned,
so a you've got a bit more control over your
(35:16):
domestic owners, and also you've got the ECB that may
be there to backstop it. So the UK is vulnerable,
but I don't think that's an imminent thing. I think
it's something that if you left it left, the debt
rising year after year at some point there would be
a real real issue.
Speaker 1 (35:36):
It feels like it is going to rise year after year.
Speaker 2 (35:39):
I mean, look at everything points in that direction in
most developed market countries, so I think the day of
reckoning will come, but it's just it's not clear when
that is really.
Speaker 1 (35:49):
Do you think there's anything that Rachel Ribs could do
in her upcoming budget to prevent that day of reckoning coming?
Speaker 2 (35:54):
Without going into specific policies, I think we desperately need
growth everywhere, and I think whatever country you're looking at,
I do think there should be more priority on how
can you maximize economic growth? And I think that would
be for the betterment of everybody, what end of the
kind of income spectrum they are, because the end of
the day, growth is what funds most of our lifestyle.
(36:17):
So I think, you know, if to be glib, I
think any country at the moment, I would look to
try to get as higher economic growth as possible.
Speaker 1 (36:27):
Easier said than done, I guess, Jem. Sorry I went
off topic a bit. There is there anything in the
report we haven't talked about that you'd like to talk about?
Speaker 2 (36:36):
No, I think the main thing is that valuations matter. Clearly,
valuations are the most important thing. And I you know,
without wanting to give away my secret message for free,
the kind of secret thing in financial markets is by
low so high. That is the kind of secret source
of financial markets. The one thing I would say is
(36:58):
that nominal GDP is the speed limit for a global
for global equity. So if you told me for the
next five, ten, fifteen, twenty years, nominal GDP would be
two percent, I would tell you that equity returns are
going to be very low, very low.
Speaker 1 (37:13):
Because the valuation starting point combined with the low growth. Yeah.
Speaker 2 (37:16):
I look, I think global equities are probably neutral valuations
if I had to aggregate them in total. So I
don't have a big problem with the kind of the
median country in the world. But if you're if your
next you know, ten twenty years is two percent norminal
GDP growth, you're not going to get much more than
you know, two percent from nominal from equities. But I
(37:37):
do think we're in a financial system where, because of
how much debt we have, the authorities are almost incentivized
to keep nominal GDP high, if not high, at a
level which can at least celiate the debt. Yeah, so
I don't think there's any danger of nominal GDP collapsing
when you've got feit money and authorities able to manipulate
(37:58):
money supply.
Speaker 1 (37:59):
But it's real gd keep ahead we care about, isn't
it In the end, the end game of everything is
supposed to be improved living standards for each and every person,
not some random nominal number.
Speaker 2 (38:12):
Yeah, it is for you know, the economy. But I
suppose if you're making a decision do I hold my
money in cash or do I invest in the equity market,
then nominal GDP matters? Is it matters? Yeah?
Speaker 1 (38:26):
I wanted to end on a more upbeat note than that,
but it failed.
Speaker 2 (38:32):
On a scale of naught to ten, this is near
ten of my upbeatness. So I'm sorry.
Speaker 1 (38:37):
Okay, so we can take it no further than this.
Speaker 2 (38:39):
I have out upbeat myself, so I don't think I
can go any further.
Speaker 1 (38:43):
Oh okay, all right, brilliant. I'll accept that. If that's
as good as it gets. It was pretty good. Let
me ask you another question, then, are you reading anything
uplifting at the moment?
Speaker 2 (38:51):
What's besides your bad The problem is because I like
to think, I work long hours when I read, I
tend to read non financial books these days.
Speaker 1 (38:59):
That's okay, I'll take that. Recommend a nice crime novel
to us. We like that. Well.
Speaker 2 (39:05):
I'm always a big fan of the strike books.
Speaker 1 (39:07):
Oh yeah, I've just finished the latest one.
Speaker 2 (39:10):
Yep, I finished that too, so I won't give any spoilers.
Speaker 1 (39:14):
Oh, I'm hanging on a thread. I mean, how long
is it going to take it to write.
Speaker 2 (39:17):
The next one? I hope not too long. But yeah,
that's been my favorite book in recent times.
Speaker 1 (39:23):
I see I made the mistake if I haven't read
them all, and now the way that the plot develops,
I can't go back and read the earlier ones. It
won't work. So I'm now start hanging off the next one.
I feel like I've wasted a lot of my reading time.
Speaker 2 (39:34):
Yeah, I can't help you with that, but sorry.
Speaker 1 (39:38):
Thank you very much, Jim. Thank you so much for
coming on today. It's been super interesting pleasure.
Speaker 2 (39:43):
Thank you very much. And obviously remember people can go
on the Deutsche Bank Research Institute and look at this
study for themselves. So thank you very much for having
me on.
Speaker 1 (40:02):
Thanks for listening to this week's Marin Talks Money. If
you like our show, rate review, and subscribe wherever you
listen to podcasts. I keep sending questions or comments to
Merron Money at Blueberg dot net. You can also follow
me and John on Twitter or x I'm at Marinus
w and John is John Underscore Step Back. This episode
was hosted by me Maren. Sunset were both produced by
Summersadi and Moses, and it sound designed by Blake Maples
(40:23):
and Aaron Casper. Special thanks, of course to Jim Red
Bloomberg Audio Studios, Podcasts, radio news. Hello, Maren Talks Money. Listeners. Now,
before we get started, a quick reminder, we are recording
an episode of Maren Talks Money in front of a
live audience. You could be in that audience. We are
doing this the morning after Rachel Reeve's UK budget, so
please join us at Bloomberg's European headquarters in the heart
(00:23):
of the city of London for quaissants, smart analysis, and
probably a cup of coffee too. I will be joined
by Helen Thomas of Blonde Money, Stephanie Flanders, Bloomberg's head
of Government and Economics, and of course John Steppeck will
be there. Find the registration linked to this in the
show notes. Space is limited. Sign up soon. We would
love to see you. Welcome to Meren Talks Money, the
(00:54):
podcast in which people who know the markets explain the markets.
I'm Maren sumset Web this week with me Jim Read,
head of macro and Thematic research at Deutsche Bank. We
have bought Jim back on the show. You'll remember his
last appearance to talk to us about the latest long
term asset return study from the Deutsche Bank Research Institute.
It's a super interesting report. John has already looked in
(01:14):
one of his newsletters, so some of you may already
know a little bit about this year is The idea
is that it looks at real after inflation returns for
a range of asset classes across a fold two hundred
years and fifty six different global markets. So a lot
to look at that and some very interesting takeaways that
we will get into now. Jim, welcome to Marin Talks Money.
Speaker 2 (01:35):
Lovely to be here. Thank you for the invite again.
Speaker 1 (01:39):
Again, well exactly. Not many people get two appearances. I'm
flattered mainly an admin fail, but not many people get
to get on twice, so we're very pleased to have
you now listen. Before we start, I want to tell
listeners that this is a long and interesting report. We're
going to go through some of the main things, but
if you want to hear what you can read it yourself.
We will put the link in the show notes that
(01:59):
you can get to it from there. But also, Jim
is on the website, right, How do they find it
direct like that?
Speaker 2 (02:05):
Yeah, if you just google Deutsche Bank Research Institute. We've
made it publicly available to everybody, so you can look
at it on that good.
Speaker 1 (02:13):
Now, where I want to start, Jim, if you don't mind,
is with cash, holding cash instead of investing. This has
been a subject under much discussion in the UK over
the last couple of years because various reports have come
out across the board showing how many hundreds of billions
we hold in cash that we really shouldn't, the most
recent number being six hundred and ten billion held in
(02:34):
cash that really could be invested, And the UK Saver
is actually much worse at this than the saver in
many other countries. We tend to hold a lot more
cash than other people in the amount of cash that
we're holding in that way is up quite a lot
even since twenty twenty two, because rising interest rates, of course,
have encouraged people to hold even more of their money
(02:54):
in cash. There is some conversation about there being some
pushes in the to try and get people to put
more of their money into stock markets in general, perhaps
by changing the way that you can invest inside your
ISO wrapper, less allowance for cash, more allowance for stocks
and shares, et cetera. But let's just talk about what
a terrible idea it is to have too much of
(03:17):
your cash. Well to words, for your cash and cash
over the long term.
Speaker 2 (03:21):
Yeah, it is right. And I must admit when I
speak to kind of family and friends and they say, well,
you know it's risky to invest in markets, I kind
of almost flip it around. In the long term, it's
risky to have money in cash over the long run
because it will always be inflated away. And I think,
especially in the last fifty five years, when we've lived
in a fa money system where nothing is back in
(03:43):
paper money, there is always going to be a crisis
and there is always going to be a reason why
the money supply is expanded. And while that while norminal
activity goes up because the authorities need it to. Really so,
I think you always have to be predisposed to try
to invest in riskier assets. However uncomfortable it feels. And
it does feel uncomfortable, and you know, I as an analyst,
(04:06):
I look at things sometimes I think this is this
is a terrible moment to invest. But you just for
the long term, you just have to look at the
historical data and realize that cash is an incredibly risky asset.
I mean, over the two hundred years of our report,
it gives you a minus two percent real return per annum,
and I think that that's probably accelerated rather than decelerated.
(04:26):
Are you got worse over time?
Speaker 1 (04:28):
And if you look at that nominal equities that I'm
looking at your data now, normal equities have only a
zero point eight percent probability of underperforming cash under the mattress.
Are you earning no return at all over a twenty
five year period? Now, that probability rises slightly over over
ten years and over five years, six point three percent
every ten years, thirteen point six percent over five years.
(04:49):
So obviously the shorter your time period are, the more
likely it is that maybe you be better off in cash,
But it's still pretty low odds.
Speaker 2 (04:57):
Yeah, no, it is. And you know, when we drill
down into those probabilities you've just discussed, the times that
cash have outperformed have often been around just you know,
massive events like you know, world wars, you know, massive
massive dislocations. And look that these events you know, will
happen over two hundred year period, but it's very difficult
(05:19):
to set your portfolio up solely to wait for them,
if that makes sense.
Speaker 1 (05:22):
Yeah, And one thing that we do always say, John
and I is that you know when equities are very expensive.
Perhaps it makes sense a little bit more cashtan than
usual in that it does give you optionality. Cash means
that when when something bad happens, you have the cash
available to dive into the market. So there are there
are times where it makes sense to have more cash
than other times, but really not for very long.
Speaker 2 (05:43):
Yeah, and it's a good point that the title of
this report is the Ultimate Guide to long term invest
in and it's a little bit of a grandiose title.
I apologize for that, but you know, one of the
things we're trying to do is how can you get
the probabilities on your side over the long on long run.
And obviously we know that riskier assets perform better the
longer horizon you have. But one of the way you
(06:03):
can get probabilities on your side is is to look
at valuations. Now it's not rocket science, just simple valuations.
And obviously if markets that achieve you probably wait a
little bit more. To markets are expensive, you wagh a
little bit less to I think valuations are more important
for long term investment than they are obviously for short
term investment, which clearly in my day job I have
(06:25):
to tell I fund managers et cetera, how to invest
their money in three months. And that is a difficult job.
That is the really difficult job. Long term investment is
a lot easier.
Speaker 1 (06:33):
Well, it is, isn't it, because you can tell people
you know, everything reverts to the mean in the end.
And we have all the very very long time data
that tells us that works, tells us what works in
value investing works. I mean, you have a very clear
line in when you've got this section in the report,
which variables predict long term performance best? And the answer
is starting valuations matter anormously. A low pee portfolio has
(06:56):
returned twenty point two percent a year of the last
seventy years, and the high portfolio eleven point four percent,
So you're starting your starting point really matters. The same
with dividends, the high dividend portfolio in terms twelve point
eight percent a year over two hundred years, the low
dividend portfolio nine point three percent.
Speaker 2 (07:13):
The one thing I'll pick you up on I think
you said the low pee portfolio instead of the high
pea portfolio.
Speaker 1 (07:18):
There, oh did I sorry? Low pe portfolio is the
good one. High pee portfolio is the bad one. Just
to be.
Speaker 2 (07:25):
Absolutely clear, you had me worried there.
Speaker 1 (07:27):
Sorry about that. Now. Some people would say that pees
don't matter as long as you get growth.
Speaker 2 (07:34):
Yeah, and look, I think what we came up with
in the report is that you can have expensive markets
that perform well, and obviously the US is an example
of that. But I think that the problem with the
US market because it's so important, because it's so big,
it's easy to get biased by thinking that the US
way to outperform is the global way to outperform, if
(07:58):
that makes sense, And it's it's also easy to think
that it will continue to go down that route. So
I suppose the report looks at enough countries, so it
looks at fifty six countries to realize that the US
is the exception, massive exception rather than the norm. And
if you look at over an aggregated, wider collection of countries,
valuations matter more than anything else.
Speaker 1 (08:20):
And it isn't necessarily the case that the US has
always been more expensive than other markets. I mean you
say here that it's obviously an incredibly interesting case study
because despite having these very high valuations, both the p
and the cape ratios and pretty much anything else you
look at, dividends, etc. It is extraordinarily expensive, and we
look at that and we go, oh, yeah, well that's
(08:41):
the that's the premium for being exceptional. But it hasn't
always been there, has it, And it was relatively recent,
this idea that the US market should be valued at
a much higher level than other markets.
Speaker 2 (08:51):
Yeah, and look at it has kind of emerged over
the last two or three decades. Obviously, within that two
or three decades there's been times where the US is
as plumber down to more normal valuations. But I suppose
for the last twenty thirty years you've kind of had
this role in higher valuation than the rest of the world.
But yeah, if you go back before that, that was
(09:12):
not really a massive premium on valuations in the US.
It's it has been really something that's developed over the
last two or three decades, and obviously in particular in
the last seven or eight years with the mag seven
and the megacaps. So the current kind of difference between
valuations in the US and the rest of the world
are probably as wide as they ever have been because obviously,
(09:34):
as you and I remember from two thousand, everything was
pretty expensive. In two thousand, most markets were pretty expensive,
whereas this is a slightly different market in the US
is quite considerably more expensive than most of the other
global markets.
Speaker 1 (09:49):
I mean, this is interesting, then, isn't it, Because this
is one of those occasions when other options are available.
And we could have said back back in the period
when the Japanese market was insanely expensive, when everyone thought
that that would continue forever because japan was so special.
I remember when I went to work in the Japanese
market not long after the crash in the early nineteen nineties,
the clear expectation was that Japanese exceptionalism was so clear
(10:11):
that the market would soon return to its previous valuations,
which of course it never did and probably never would.
But that was another example of the time when other
options were available, because it was an exceptionally expensive market
but surrounded by markets which weren't particularly expensive.
Speaker 2 (10:25):
Yeah, And actually it's an interesting one because as part
of the portfolio returns you mentioned earlier, what we did.
We took our fifty six countries and every year we
ranked them high to low, and we basically bought the
twenty eight sheepest markets and we sold the twenty eight
most expensive markets, and then every year we rebalanced it.
(10:47):
And when we do that the returns from the lower
PE portfolio are so much better than the higher PA
portfolio over time, and that you know, Japan would have
been a classic example of where that would have ranked
right at the top and we would have completely left
it and other markets would have been cheap. It won't
work on a year to year basis. There will be
(11:08):
you know, the peer be piers where clearly momentum and
high valuations just keep on going. But I don't think
it takes particularly long. We show a couple of graphs
in the piece where we look at the twenty five
year returns and then we look at the five year returns,
and actually the correlation between valuation and twenty five year
returns are very linear. I High valuations, low returns, low
(11:29):
valuation to high returns. It's a fairly linear relationship, even
though with five years it isn't quite as linear, but
it's still very good. So even over a five year period,
valuations mattering. You know, from the two hundred years of
data we've looked at.
Speaker 1 (11:44):
So do you think that when we talk about long
term investing, short term investing, hold in cash, etc. That
somebody new to the market. One of these people the
FCA gets so cross with because they've got more than
ten thousand pounds in savings and they hold one hundred
percent of it in cash, and this is considered to
be a very bad day if they are going to invest.
Is the bare minimum five years?
Speaker 2 (12:05):
I mean, obviously luck plays a part of it, so
one you know, you can't rule out being unlucky. I
think five years is probably where you start to see
the probabilities get much more in your favor. No guarantees,
but you get much more in favor. If you know,
listeners want to have a look at the report, they'll
(12:25):
they'll see a nice graph where we show five, ten,
and twenty five year probabilities of outperforming from different asset classes, well,
stocks bonds, sixty forty portfolio and stocks versus bonds, etcetera.
So you can kind of do your own kind of
judgment about where your risk tolerance is. But I think
probably five years is what you need to give yourself
(12:46):
and to give yourself the best chance anyway.
Speaker 1 (12:48):
Yeah, but when you talk about that probability, I mean,
it's interesting because if let's say, let's still keep a
hypothetical person who has only cash in mind, and I
was thinking Okay, well that sounds good. I will now
go and invest, knowing that if I put the money
in the market for five years, I've got an excellent
chance of at the very least not losing it. Right.
But if they now go and do that, the odds
(13:09):
are that they will go and buy a global tracker,
and that will mean that they are not buying what
you are talking about. They are, in fact buying because
all of these indices are market cab based. They are
in fact buying the most expensive markets in great volume,
and the cheapest ones really not at all. Whereas what
you're talking about is I think an equal weighted portfolio. Right,
(13:32):
we're talking about something very different.
Speaker 2 (13:34):
I suppose it's difficult to pitch this obviously, because you
know that there are people who are experts in their
own field, but they're not particularly experts in the finance field.
And it's easy, as you say, to buy a tracker.
And there's also people that are more sophisticated, and I think, yeah,
you probably need to find a way of removing that
expensiveness bias into a portfolio. So some kind of equal
(13:59):
weight global portfolio or a global portfolio X you can
buy ATFS or trackers that are global portfolio x a
certain market. You know, I'd rather not give individual kind
of No.
Speaker 1 (14:11):
No, I'm not expecting you to give into the advice.
What I'm just trying to point out is that the
automatic and easy way for a novice to invest over
a five year period based on your research, is probably
the wrong way.
Speaker 2 (14:25):
I think the entry easy entry option, yes, is typically
a kind of a global tracker, so I think it
still would be a decent long term investment, but it
probably wouldn't be getting at the key of this report,
and that is that valuations matter.
Speaker 1 (14:40):
Okay, we're going to come back to that in a minute,
but before we do that, I just want to pick
up on gold, which you also wrote about, which has
been the standout investment of the century so far, right
to everyone's everyone's massive surprise, not to hours, by the way,
not to this podcast surprise, but to everyone else's surprise.
And it is true, isn't it that a portfolio of
just gold would pretty much have you even with inflation
(15:02):
over the long term. But that's about it.
Speaker 2 (15:05):
Gold is a fascinating one because obviously we've got two
hundred plus years of data here, and if you look
at that full two hundred year period, gold has only
given you zero point four percent per annum over inflation.
But I suppose what you have to take into account
is that for the best part of one hundred and
fifteen hundred and seventy years, the price of gold was
(15:26):
fixed to the dollar, and the dollar was fixed to
most other currencies, so you had a gold based financial system. However,
I mean that broke down a cup a few times
in the last couple of centuries when there was a war, depression,
bad economic times, and maybe the gold price got reset
(15:47):
of your currency to gold. But it wasn't until nineteen
seventy one where you know, Nixon effectively pulled the US
out of the Breton was system, which was a system
that was the dollar was tied to gold and every
other currency was tied to the dollar. It wasn't until
that point that we completely broke free of gold based money,
(16:07):
and since then we've been in a more inflationary environment
because there's nothing back in paper money, and gold has
been a good performer. Now in that full fifty five
year period, gold hasn't beaten equities. It's been competitive, but
it hasn't beaten equities. But actually in the twenty first century,
it has beaten equities quite convincingly. But at the start
(16:31):
of the twenty first century it was quite low. It
has gone low because a lot of central banks had
sold their holdings and gold had gone out of fashion
in the kind of nineteen nineties. So look, I think
gold is is a good inflation hedge, and I think
it should be part of a portfolio. The two things
that make me a bit nervous upon gold is the
fact that it doesn't pay a coupon or a dividend
(16:52):
whereas other assets do, and also just how far it's
run in the last year or two. I mean, I
think I was on your podcast eighteen months ago and
ask me if I prefer gold or bitcoin, and I said,
I prefer gold. I think it's a great inflation hedge.
I probably should have held bitcoin. I haven't done the
math to see which is outperformed since that point, but
you know, I wouldn't say that. I wouldn't say I
(17:14):
was as optimistic on gold today as I was eighteen
months ago, purely because valuations have changed.
Speaker 1 (17:20):
But also, I mean, it should be distressing when you
see gold outperform equities. It's not right for something that
is merely an inflation hedge to outperform an asset class
that is supposed to reflect their productivity and the growth
of well humanity.
Speaker 2 (17:36):
Yeah, to me, most commodities, because they go into production
of various things that we consume around the world, they
probably should be in inflation hedge because if their price
goes up too much, people should look at alternatives. Now,
I appreciate gold is slightly different because.
Speaker 1 (17:52):
Gold doesn't really have an alternative. Yeah.
Speaker 2 (17:54):
Yeah, it's a store of value. But I mean you could,
you know, you could own other precious metals if you
really wanted to. But look, I'm not anti gold at all,
because I've been a bit of a gold bug for
a long period of time. It's just when I see
such violent upward moving price, it kind of makes me
a little bit nervous on the valuation side.
Speaker 1 (18:11):
Interesting though, isn't it. I mean, I rather expected when
it came back down through four thousand. I mean, not
a chartist, obviously having it come down below four thousand,
it slightly expected it to keep going down, that is,
but it absolutely didn't. It really come hanging on.
Speaker 2 (18:25):
Yeah, and I suppose if you wanted to create the
ball story for gold, it's that central banks are buying again,
and I think that you know, their holdings are still
a fraction of where they were in let's say nineteen eighty.
Now that doesn't mean to say they get anywhere close
to that, But if you're looking for the ball story,
it's that central banks are still buying.
Speaker 1 (18:44):
Don't fight the central banks.
Speaker 2 (18:45):
Eh, that's not been a bad bit of a vice
through once for it.
Speaker 1 (19:04):
Let's look at a wider portfolio construction. So we tell
people that over a five year period, the probability of
them losing money in real terms in the acta market
is relatively low. But obviously a one hundred percent equity
portfolio is pushing it a little. You've looked again at
a sixty to forty portfolio. Forty percent in the bond
market has historically given the lowest probability of making nominal
(19:26):
losses at least chance of a negative nominal returns over
twenty five years to zero point one percent. It doesn't
sound so.
Speaker 2 (19:33):
Bad, yeah, I think. I think if you're very loss
a verse, you really don't like losing money, then I
think a six forty portfolio is a reasonably good way
of minimizing that risk, and the stats in this document
you can look at it. I'm going to tell you
it's on page thirty four. You can look at it
at your leisure. That the stats basically tell you that
(19:57):
bonds do have a nice hedge in property. So in
the times where equities that are the most vulnerable, bonds
tend to rally. And although over time you're not going
to outperform equities, you are going to probably minimize your
drawdown risk. So you know, again everything depends on your
risk tolerance and how much you hate losses.
Speaker 1 (20:18):
So we talked there about it being a very very
low possibility of anomenal loss, But what about a real
terms loss for.
Speaker 2 (20:25):
A sixty forty portfolio over twenty five years, it's a
round about eight percent. For equities it's around about seven
and a half. So it's it's similar in real terms,
because over twenty five years, the fact that equities gives
a superior return starts to, you know, make it more
(20:45):
attractive to own an outright equity portfolio.
Speaker 1 (20:48):
Okay, so what point, at what time frame should we
say to our listeners, perhaps get the bond a bit
and go all in on equities cheap equity.
Speaker 2 (21:00):
Going back to the sixty forty question, I suppose twenty
five years is probably the point where you don't need
a sixty forty portfolio, if that makes sense, because equities
are probably better if you had twenty years. You might
actually say that sixty forty give you a slightly better
chance of not having a loss, if that makes sense.
So I think that the kind of break even for
where your lost probability starts to favor equities is probably
(21:26):
in the twenty to twenty five year bucket. But this
is don't forget, this is just a loss avoiding strategy.
This is not a maximizing your return strategy.
Speaker 1 (21:34):
Okay, how do we maximize our returns one hundred percent
equities always.
Speaker 2 (21:38):
And as I said earlier, by it by the lowest
p ones.
Speaker 1 (21:41):
Okay, So if I want to make the most possible
money over a twenty five year period, I've had the
cheapest possible markets and only hold equities for twenty five years.
Speaker 2 (21:50):
That's what the data would say. Yeah, I'll hide behind
the data.
Speaker 1 (21:55):
Hide behind the data definitely. And what are those very
cheap pe markets right now? What page are the charts
for that?
Speaker 2 (22:01):
On the charts that you'll see that, and I'm going
to flick through my document here. And the reason I
don't want to kind of say is because I'm not
a micro analyst. I actually heard your podcast with Albert
Edwards and he kind of took fright when he was
asked to comment on micro names and stuff, and I
agree with him. It gives us macro people a bit
(22:23):
of cause for concern when we're asked to talk about
individual countries or companies. But if you look at page
twenty three in the report, we basically show the cheapest
and most expensive markets of our fifty six countries in
our study by the P ratio, by the CAPE ratio,
(22:43):
and for those who don't know, the CAPE ratio just
looks at earnings over a ten year horizon rather than
just a single year, just to give you a bit
of sick horcality moving to it. And we've also done
it by dividend yiels. Now you've got to be slightly
careful on dividend yeals because countries like the US have
used by backs to replace dividends, so the dividend yield
(23:04):
on the US is quite low. Doesn't mean to say
that investors aren't getting distribution from other means, so you've
got to be slightly careful. But on page twenty three
of the report, you know listeners can can look at
what markets are cheap and what markets are expensive.
Speaker 1 (23:19):
Okay, So for those who really want to know, right now,
I can tell you that up at the expensive end,
you've got the US, India and New Zealand, Taiwan, what what's
called Greece up there expensive all of a sudden, in Canada, Netherlands, etc.
And if you want the cheap end, you've got Israel, Turkey, Austria, Columbia, Brazil, Argentina, Hungary.
(23:40):
And you go to the UK about a third in
sandwiched between China and Malaysia. And then if you look
at dividend yield again, I would have thought the UK
would be much more towards the cheaper end, but it's not. Actually,
if you look at dividend yields in particular, down at
the cheap end, you've got oh no, hang on, I'm
reading this one the wrong way around. If you look
at high dividends, we're up at Columbia, Nigeria, Brazil. Can
(24:04):
you pack us down in their? UK is only halfway
through sandwiched there again, right, next to Singapore, sandwich between
Singapore and Australia.
Speaker 2 (24:12):
Yeah, but look, there isn't an emerging market bias to
the cheaper end of the spectrum. And I think you know,
people can take a kind of a again an overlay
if they do only want to have developed markets, they
could probably look at this and see which are the
cheapest developed markets, which are the most expensive, et cetera.
Speaker 1 (24:29):
Yeah, and then you have some markets that don't have
long enough data to give you the CAPE data, right.
Speaker 2 (24:34):
Yep, So there's and we just do the PE for that.
But the one thing I would say is that again
in the report, we look at demographics and the interesting
thing about the next twenty five years is that we've
never really had a period before where so many countries
are going to have lower working age population. And you know,
(24:54):
if you look at how that's split between DM and
EM world, you know it's more biased towards the DM
world is going to see less workers in the next
twenty five years. So although it may look a little
bit scary sometimes to see some of the emerging market
countries being the cheapest, in some ways they've got the
best demographics. And you know, we showed up on page twelve,
rank in the same countries by demographic for the next
(25:16):
twenty five years.
Speaker 1 (25:17):
And what difference do we think those demographics are going
to make. I mean, there's perfectly good argument to be
made that it doesn't matter if you have fewer workers
now because you have AI, so developed economies will be
able to shift all the work that may be middle rankers.
Middle ranking workers might have done off onto robots of
one sort or another and generative AI, and so it's
not necessarily the case that demographics will affect economies and
(25:40):
maybe markets in the same way they would have if
we were in this situation thirty years ago.
Speaker 2 (25:44):
Yeah, I mean, it's a very valid point and one
that is gathering a bit of steam. I would probably say,
even as a minimum, I would say the rankings of
the country's matter. So if and when AI becomes successful,
it's probably a price point that a lot of countries
will be able to use it, and therefore the relative
ranking of demographics probably still matter. It just might lift
(26:06):
all the boats higher, if that makes sense. You know,
one maybe more controversial thing to say is that, you know,
if you look at history, ever since the Industrial Revolution,
we have constantly been worried about new technologies destroying jobs
or replacing jobs. I know your question slightly framed, slightly different,
(26:27):
but what economic history tells us is that innovation probably
creates jobs, if it improves productivity, if it improves growth,
and therefore the labor market in aggregate might not look
too different in the longer term. But it just might
be a compositional change, where you know, instead of having
lots of people doing data entry stuff, that they're doing
(26:50):
more lifestyle things. I don't know. I wish I knew
the industries of tomorrow, but as an economic history I'm
less concerned about AI destroying jobs. Yeah.
Speaker 1 (26:58):
Well, as we always say, if she looked back twenty years,
you wouldn't have believed that half the jobs that exist
today could possibly have xed them. I give mine as
a classic cample. Who could possibly have known? Who could
possibly have known? Podcasting influencing online yoga teachers, et cetera,
et cetera, who could have guessed?
Speaker 2 (27:15):
Absolutely. I'm not sure I'm ready to be an online
yoga teacher yet, though, so hopefully there's still a market
for me.
Speaker 1 (27:23):
I think you'd be extremely good at a gen well
for macro economists. I think that macro strategists. What do
we call you a macro strategist, don't we Really?
Speaker 2 (27:30):
As long as there's a market for it, I'm happy
to be called it.
Speaker 1 (27:33):
And now listen, I mean, I know that we're obsessed
with page twenty three at the moment, but I'm personally
obsessed with the page thirty six, which is the maximum
maximum draw down page. So how much you've actually lost
in markets, particular markets, and how long it's taken for
them to get back to that nominal level. And it's
(27:55):
mainly Italy seems to suffer a lot from this down
ninety one percent in nineteen oh six, again in nineteen twelve,
again in nineteen thirteen. France has suffered from it, Italy
again in the sixties, Sweden seems to have some troubles
in this area. Kenya just pops up all the time.
And then of course there was Japan, which is interesting
(28:15):
because you know, very recent, very developed market, one of
the greatest bubbles of all time, and your draw down
there was seventy percent and you didn't make your money
back in nominal times well and about a week ago
actually very recently.
Speaker 2 (28:30):
Yeah, I think it's a bit longer than that three weeks,
but relatively Yeah.
Speaker 1 (28:35):
So you know, when we talk about when we talk
about cheap markets and looking at them, sometimes sometimes cheap
for a reason and your money won't come back for
a long time. Thirty thirty three years, you say, have
negative real returns from Japan secuity slump.
Speaker 2 (28:47):
Yeap And obviously, as you pointed out earlier, that was
a very expensive market at the time, which is why
it took so long. I suppose this list of drawdown
here in some ways a bit of comfort, though, because
a lot of these have occurred in countries that have
(29:08):
had a you know, a once in a century, once
in a maybe a two century event like a World war.
And actually the list is relatively small relative to the
amount of data we have. But the point we're trying
to make is that you know that you can have
these long drawdowns and you know, trying to identify what
(29:30):
causes them. You know, something like Italy has probably been
the least stable country politically in our database in terms
of the amount of governments it's had in the period
of our study. Two of the countries with the highest returns,
almost stealth you don't really notice them, are kind of Denmark,
and Sweden, And these are two countries that have actually
had a long, long period of political stability. They've they've
(29:53):
managed to kind of size step major conflicts and they've
been fairly stable countries. So it's an interesting country between Italy,
which has until recently, I mean, actually the last few
years have been one of the most stable for Italy
in terms of politics. You know, for a cent you know,
maybe centuries, maybe a little bit over the states in it,
but decades at least, And you know, the political instability
(30:16):
we've had in the past has actually weighed on Italy
longer term, whereas the political stability we've had in a
place like Denmark and Sweden have actually meant that their
returns have been reasonably good.
Speaker 1 (30:28):
Yeah, I speak clear and say the drawdowns we were
talking about hero was mentioning in Sweden earlier were all
in the nineteen tens. Can we talk about more recent stuff.
You said earlier that one of the most stressful parts
of your day job was telling people what they should
invest in the short term, whether they should go over
a three month period. What are you telling them now,
ha ha.
Speaker 2 (30:48):
It is challenging because I think the biggest topic in
the market at the moment is AI in a bubble,
and that unfortunately dictates a lot of different asset classes
because these companies now are so big that they are
countries in terms of their influence on the global financial market.
So I was having a chat with our rate strategist
(31:11):
this morning and he's got a very very well defined
framework of predicting where rates will go interest rates go,
and he said, look, the biggest risk is the AI story.
It's not you know, is inflation going to be higher
or lower? Is it not that supply of government bonds
is going to be hire and lower. The biggest risk
to him is the AI story. So I think the
(31:32):
AI story dominates everything. And within Deutsche Bank we have
different views on this. So I don't really want to
kind of be too aggressive on my view because there
I can find you other views.
Speaker 1 (31:43):
Okay, what is your view?
Speaker 2 (31:46):
Well, coming back to this long term study and trying
to be a politician here, give you a politicians answer,
as I.
Speaker 1 (31:53):
Won't accept a politician answer. I can't do that. It's
not that kind of show that you have the BBC
for that.
Speaker 2 (32:01):
No comment I would say I prefer cheap markets would
be my comment. But look, over the short term that
that can can iron out. I do think that if
this is a bubble in AI, if the FED is
cut in rates that could be blown up further, if
that makes sense, So.
Speaker 1 (32:21):
There could be a melt up in the AI story
as rates to cut further.
Speaker 2 (32:26):
Yeah, I mean, if you look at the history of
rate cutting cycles, equities in the US do phenomenally well.
So I think in every rate cutting cycle in the
last seventy years from the first cut in the cycle,
equities on average do about fifty percent up and they're
probably already thirty let's say thirty percent up since So
(32:46):
if this was if this rate cutting cycle is a
kind of a template for well history is a template
for this one, then there could still be a bit
of a melt up. I suppose. The interesting thing would be,
what you know, with the government shut down now coming
to a close and you get all the data, we're
going to have a lot of macro information to work
out whether the FED should be cut in. And maybe
(33:08):
the risk scenario for the AI story is that the
data is stronger and suddenly you get a load of
cuts that just get priced out of the market.
Speaker 1 (33:16):
Okay, so there's expected cuts once baee, the data may
look less likely and that would have an impact on
the US market.
Speaker 2 (33:25):
Yeah. I think the presumption at the moment is that
the FED will continue to ease a reasonable mount internet
year and that supports probably the risk environment. I think
that's the default market assumption.
Speaker 1 (33:37):
Okay, and let's look go back to the UK market briefly,
which we've been talking about is being cheap for ages
and I think last time year on we talked about
the UK market and the foot to one hundred really
looks like it would like to go through ten thousand now,
doesn't it.
Speaker 2 (33:49):
It seems to be fairly immune to kind of negative
domestic news, which to be fair, as we know, is
fair because it's not a domestic focused constituencys within THEI
in debt. So it does seem to be momentum. I
suppose in my travels I just see an incremental increase
from overseas of people at least looking at them at
(34:11):
the market, whereas maybe twelve eighteen months ago that they weren't.
Speaker 1 (34:15):
Yeah, should we be nervous about the UK? The sovereign
bond market and also the sovereign bond markets are very
highly indebted countries and it does slightly feel like we're
nearing a public debt tipping point in some developed economies.
Speaker 2 (34:34):
I think we all know that the debt profile of
a lot of developed market countries is totally unsustainable. The
problem the UK has is that it has a higher
proportion of overseas investors than many other developed markets, so
it's more difficult to control, if that makes sense. If
the overall global bond market is having a bad period,
(34:56):
the UK often joins it because it's owned by a
lot of high proportion of it is owned by overseas investors.
There are some European countries that obviously also got unsustainable
debt profiles, but they're probably a slightly more domestic owned,
so a you've got a bit more control over your
(35:16):
domestic owners, and also you've got the ECB that may
be there to backstop it. So the UK is vulnerable,
but I don't think that's an imminent thing. I think
it's something that if you left it left, the debt
rising year after year at some point there would be
a real real issue.
Speaker 1 (35:36):
It feels like it is going to rise year after year.
Speaker 2 (35:39):
I mean, look at everything points in that direction in
most developed market countries, so I think the day of
reckoning will come, but it's just it's not clear when
that is really.
Speaker 1 (35:49):
Do you think there's anything that Rachel Ribs could do
in her upcoming budget to prevent that day of reckoning coming?
Speaker 2 (35:54):
Without going into specific policies, I think we desperately need
growth everywhere, and I think whatever country you're looking at,
I do think there should be more priority on how
can you maximize economic growth? And I think that would
be for the betterment of everybody, what end of the
kind of income spectrum they are, because the end of
the day, growth is what funds most of our lifestyle.
(36:17):
So I think, you know, if to be glib, I
think any country at the moment, I would look to
try to get as higher economic growth as possible.
Speaker 1 (36:27):
Easier said than done, I guess, Jem. Sorry I went
off topic a bit. There is there anything in the
report we haven't talked about that you'd like to talk about?
Speaker 2 (36:36):
No, I think the main thing is that valuations matter. Clearly,
valuations are the most important thing. And I you know,
without wanting to give away my secret message for free,
the kind of secret thing in financial markets is by
low so high. That is the kind of secret source
of financial markets. The one thing I would say is
(36:58):
that nominal GDP is the speed limit for a global
for global equity. So if you told me for the
next five, ten, fifteen, twenty years, nominal GDP would be
two percent, I would tell you that equity returns are
going to be very low, very low.
Speaker 1 (37:13):
Because the valuation starting point combined with the low growth. Yeah.
Speaker 2 (37:16):
I look, I think global equities are probably neutral valuations
if I had to aggregate them in total. So I
don't have a big problem with the kind of the
median country in the world. But if you're if your
next you know, ten twenty years is two percent norminal
GDP growth, you're not going to get much more than
you know, two percent from nominal from equities. But I
(37:37):
do think we're in a financial system where, because of
how much debt we have, the authorities are almost incentivized
to keep nominal GDP high, if not high, at a
level which can at least celiate the debt. Yeah, so
I don't think there's any danger of nominal GDP collapsing
when you've got feit money and authorities able to manipulate
(37:58):
money supply.
Speaker 1 (37:59):
But it's real gd keep ahead we care about, isn't
it In the end, the end game of everything is
supposed to be improved living standards for each and every person,
not some random nominal number.
Speaker 2 (38:12):
Yeah, it is for you know, the economy. But I
suppose if you're making a decision do I hold my
money in cash or do I invest in the equity market,
then nominal GDP matters? Is it matters? Yeah?
Speaker 1 (38:26):
I wanted to end on a more upbeat note than that,
but it failed.
Speaker 2 (38:32):
On a scale of naught to ten, this is near
ten of my upbeatness. So I'm sorry.
Speaker 1 (38:37):
Okay, so we can take it no further than this.
Speaker 2 (38:39):
I have out upbeat myself, so I don't think I
can go any further.
Speaker 1 (38:43):
Oh okay, all right, brilliant. I'll accept that. If that's
as good as it gets. It was pretty good. Let
me ask you another question, then, are you reading anything
uplifting at the moment?
Speaker 2 (38:51):
What's besides your bad The problem is because I like
to think, I work long hours when I read, I
tend to read non financial books these days.
Speaker 1 (38:59):
That's okay, I'll take that. Recommend a nice crime novel
to us. We like that. Well.
Speaker 2 (39:05):
I'm always a big fan of the strike books.
Speaker 1 (39:07):
Oh yeah, I've just finished the latest one.
Speaker 2 (39:10):
Yep, I finished that too, so I won't give any spoilers.
Speaker 1 (39:14):
Oh, I'm hanging on a thread. I mean, how long
is it going to take it to write.
Speaker 2 (39:17):
The next one? I hope not too long. But yeah,
that's been my favorite book in recent times.
Speaker 1 (39:23):
I see I made the mistake if I haven't read
them all, and now the way that the plot develops,
I can't go back and read the earlier ones. It
won't work. So I'm now start hanging off the next one.
I feel like I've wasted a lot of my reading time.
Speaker 2 (39:34):
Yeah, I can't help you with that, but sorry.
Speaker 1 (39:38):
Thank you very much, Jim. Thank you so much for
coming on today. It's been super interesting pleasure.
Speaker 2 (39:43):
Thank you very much. And obviously remember people can go
on the Deutsche Bank Research Institute and look at this
study for themselves. So thank you very much for having
me on.
Speaker 1 (40:02):
Thanks for listening to this week's Marin Talks Money. If
you like our show, rate review, and subscribe wherever you
listen to podcasts. I keep sending questions or comments to
Merron Money at Blueberg dot net. You can also follow
me and John on Twitter or x I'm at Marinus
w and John is John Underscore Step Back. This episode
was hosted by me Maren. Sunset were both produced by
Summersadi and Moses, and it sound designed by Blake Maples
(40:23):
and Aaron Casper. Special thanks, of course to Jim Red
Host
Merryn Somerset Webb
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