January 20, 2023 • 42 mins
Pictet Chief Strategist Luca Paolini says that while there’s a lot to be negative about these days, things aren’t as bad as they seem—even in the UK. He joins Merryn Somerset Webb on this week’s Merryn Talks Money to explain why things are looking up there and elsewhere. There’s also a chance there could be more happy surprises in 2023. According to Paolini, a ceasefire in Russia’s war on Ukraine would be a massive positive economically—one that could see commodity prices and interest rates fall, as well as a European boom. And when it comes to other investments, Paolini says avoid crypto but move some money into bonds. As for stocks, he advises think emerging markets—and don’t forget gold.
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Episode Transcript
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Speaker 1 (00:00):
John. Hello, Hello, I have a question for you. What
good are you to anybody? That's a good question. There's
one that I've often asked myself, but I haven't usually
as my wife I asked me that way, she would
never say that. And now listen, I'm asking you because
I was speaking to an academic and author of the
other night who specializes in writing about and we'll talk
(00:22):
about this more another time, a fantastic book I'm reading
about the history of wealth management and financial advice, which
I mean, it's so good. We will come to that
another time. But she was asked. I was at an
event where she was speaking, and she was asked what
use financial journalists are and what financial journalists bring to
the party, and she kind of said, well, nothing really,
(00:42):
she said, you know, everything any stock they might write about,
or any sector they might write about, by the time
they get to it, you know, the stories in the market,
it's in the price. There's nothing to be gained. Um,
so you know, they're reduced to kind of vendor. As
she said, I'm right, she said hocus pocus. So that's
an interesting nnswer. Yeah, but you know, she has a
(01:05):
point about some things. And I was thinking we'll hanging
on it. Take what use Army and John? What do
we bring? What are we for? You know, full existential
crisis after after you know, ten minutes of watching this event.
But do you know, I don't know what your answer is,
But actually I think the financial journalist writing for the
retail investor brings a huge amount to the party. I mean,
(01:27):
I was thinking about the podcast that we're going to
listen to after this. We talk a lot about how
suddenly the UK is investable again. This is great. Everyone
was invested in the UK. Now people are pouring in,
pouring in, and there's no longer as cheap as it was. Now.
Who was buying the UK last year and the and
the year before, your readers and my readers, because for them,
(01:48):
the UK was not uninvestable for them, They don't have
all the sort of international political blah fussing about Brexit whatever.
They just saw cheap because we told them stuff was cheap,
so they were out there buying. Yeah, that's delivering value, right.
I would agree entirely. Um, and I think I get
I do get the point. I agree about the if
it's in the press, it's in the price that that's
(02:09):
generally true. That's one reason why you and I tend
to take the contrarian view of things. It's true somebody
did interrupt during this conversation and say, Mary normally writes
about stuff that's going down, don't you marry Yes, but
a good way. That's a voice point. Um no. But
also to be fair, I think they on that point
(02:30):
that i'd make um And I mean, in a way
this is almost more the personal finance than the investment
inside is it was partly yours, a campaigning by you
actually very specifically, and if you select others that got
their financial conductor thought it so financial Services Authority Awards
then do the retail distribution review and basically put an
(02:53):
end to the fact that financial advisors in this country
with a freelance salesforce for like the fund management groups.
I mean, when you back and that it's utterly insane
that that was ever deemed acceptable. Fund my age was
getting kicked bikes from the people whose funds they solved
in order to you and them, I mean, why was
that ever your mind? Years but I remember finding out
(03:17):
about that for the first time, and that we know
when I was very very young journalist and someone explaining
this black like that can't be true. They could possibly
be true, but it was. And also years of campaigning
from the like use have brought down fees on funds
and all that kind of thing. We've had a significant
interest influence on the way that the fund management industry charges.
But the main thing I was thinking about is that
(03:38):
you know, when you write specifically for the retail investor,
the retail investor, the ordinary person invests differently to the
institutional investor, and if they don't, just because they don't
understand that they can have a much longer time frame,
they don't have to worry about liquidity in the same way.
So I would take another one, another example, energy stock.
For the last couple of years, we've been saying, look,
you know, if they weren't buy them, the institutional sector
(04:00):
won't buy energy stocks because he sgo cause whatever or
because not forward thinking. What as I look at it, um,
you can you can buy this cheap stuff that powers
the world. Uh. And you know I do think that's
the kind of thing that that adds value. Well, yeah, exactly,
I mean that I think I take this person's point
from the point of view that the kind of commodity
(04:21):
news element of it, and the kind of group think
element is, you know, not especially valuable. But I think
that if you've got people who are trying to, if
you like, for one of a better world champion the
retail investor against the massive kind of set of institutions
that largely want to funnel them into things that will
(04:43):
make money for the institutions rather than for the individuals,
then no, we you know, we do add value. We
had value as much as anyone else does. I mean,
what value did your average fund manager I had? I
mean seriously, I mean I don't know. I mean like,
if you look at I mean, you might as well
ask what what value does any individual component of the
financial industry? And I think most people will plunge in
(05:06):
an existential crisis if you asked them. I see, what
is the point of your job? I feel better now.
I knew that if I asked you about this, you
would validate me completely. Cognitive biases absolutely absolutely tell me
what I want to hear. Um, now tell everyone else
what they want to hear. Briefly before we go, you're
writing about house prices again falling faster, falling faster than
anyone imagined, but as fast as you thought they would,
(05:29):
he adds value everyone. See there you go. If you've
been listening to me, you'd have had the pint skilled
off your other anything. Quite right. We had the Brick
survey out right, which you and I both think is
the most validable the House Press Service. Yeah, and it's
it's surprisingly good government. It's just the opinion of the
agents and somebody. But but it does you know, it's timely. Um,
(05:52):
and they're certainly yeah, they're not. They're not feeling very
happy a bout of things. And actually the Eden was
worse than you know, the usual economists have expected. I mean,
I think the thing that just want to emphasize about
whose places this thing an there's I don't think he's
like whose places can come down without causing the massive
problem for the way that economy. And I also don't
(06:14):
think the way the economy has to be in a
massive state for whose places to come down? It really
is just partly so it's mostly a function of interest
rates not being at one and a half percent anymore,
going up to somewhere of closely four and a half percent.
That happens, whose places just half to come down? It's
just it's just part of the Great normalization, the Great normalization.
(06:36):
I was looking a wonderful chart today of the volume
of negative yielding bonds around the world, and I haven't
seen this chart. Is absolutely wonderful. It's basically zero zero,
zero zeros forever and then suddenly it goes absolutely berserk
stores to the sky the line, and then suddenly straight
back down to Earth. We're basically at zero again. It's
one of the most wonderful reversion to the mean graphs
(06:58):
you've ever seen. What is the plankage of and was
the last was the last hold out? Wasn't it? So
the g GPS now at all largely kind of like
positive yield in a game um and that was that
was the that was the thing that brought it back.
But it's it's it's one of the weirdest financial phenomenon
that we've seen in the last ten years of a
(07:18):
lot of weird financial phenomenon and hopefully we won't see
it again, I mean ideally in our lifetimes, and I
certainly think that's possible. Although french Band did point out
to me a couple of days ago that he's still
paying to have this deposit account still paying. It didn't
shooast very nearly over. They still use fact season white
(07:38):
seals into fans. We're all were doing this. There's there's
a lot of yeah, yeah, we better. Welcome to Marion
Talks Money, the podcast in which people who know the
markets explain the markets. I'm there in some set well
(08:00):
this week, I guess there's Luca Plini, who's the chief
strategist to pick t A asset management. He's got a
long history of being a strategist at various places, so
we can simply accept before we start that Luca knows
pretty much everything about everything. We started our conversation discussing
the World Economic Forum taking place this weekend Davos, and
I was telling Luca about everything I've been reading about
last year's summuch, the comments made by attendees on what
(08:22):
they're expecting in the year to come, and how most
turned out. We're worried about all the wrong things, very
few of them. For example, we're worried about the collapse
of a great financial bubble. They just didn't see it coming.
So given that it wasn't actually that hard to see coming,
I started by asking Luca how that could be, you know,
(08:43):
to be honest, maryn Last year was was abnormal in
a number of respects, right because we had obviously a
massive duo political shocks. We we had what I would
I like to say, and I'm very unwelcome guest, it
was inflation. You can also blame central back that you know,
they didn't see it coming. So I think it was abnormal.
(09:04):
But I think, you know, when you look at this year,
it seems like there is a consensus and that was
that it would be a recession and maybe they will
be wrong again. So but I agree with you that
looking back to you know, a year ago, where the
expectation was, you know, market will be fine, central Bank
would be very very slow. In I can rate it's
inflationer we rise, but you know it's a one off. Well,
(09:26):
a lot of things have changed. But you know, let's
project ourselves and at the end, by at the end
of this year the situation we actually look much much
better than than everybody seems to expect now, so we
will see. But yes, I think, look, last year was
really abnormal and we and I think we a lot
of people got wrong quite a few things. So I
(09:46):
think it's we have to accept that. We just have
to let that go, I'm not sure I'm prepared to
do that that easily, and that you know, these are
the people who run our world right now. You and
I know we we we used to think we knew
that in a few briend a lot of money you
get inflashed, and that inflation pretty much always comes from
money printing from lest fiscal policy. Add in an oil
price spike, exceptera last year, and a bit of war.
(10:08):
It amazes me that we can look back and people
would have thought that we would not have an inflation problem.
In the same way it amazes me that we can
we can look back and think that people really believed
at the beginning of last year that central banks had
the ability to control inflation in individual countries when the
inflation was coming from a more global orientation. And it
also amazes me that we can look at where valuations
(10:31):
were at the peak of this bubble and say, well,
we don't really have to worry about a collapsing bubble.
But but I think you know, the real issue that
we have here is that you know, on our own models,
we saw inflation going up a lot, but you know,
the last thirty years we have seen only very low inflation,
and it's difficult to go against your the history, the
(10:51):
lot of the last three decades. Obviously, looking back, it
was obvious right as you said, too much money, supply constraints.
People are told with a lot of money to spend.
During during COVID, there was kind of an almost a
perfect mix of things that would push inflation higher. But
when you have three decades of four decades where the
(11:12):
main world was low inflation, it's difficult to change that.
This is one of the lessons I think of last
year that you know, things may change. There are some
historical patterns, but they may change. But at the end
of the day, basic economics hasn't changed. As you said,
if you print money and for a long time, at
(11:32):
the end you're going to get inflation. This is actually
the really the big lessons that we that we go
from from two thousand and twenty two. It's amazing, isn't
it That lesson needs to be learned over and over
again every generation. We have to relearn that this is
how money works. Yes, and look, the only good thing
about this rising inflation is that everybody now understands that
(11:56):
inflation is never a solution, is always a problem. Do
you remember when a few years ago the debate was
we need more inflation, because you know, if you have
more inflation, if we reduce the depth to GDP ratio,
it doesn't work like this. Inflation is attacks is a
very by the way, is not it's not progressive, and
it's attacks on the consumer, but those attacks on on investors.
(12:19):
And I think we we finally realized that inflation is
really never a solution. And and and and last year, if
you look at the you know, if you look at
bounds equity, almost all as a classes went down. Why
because inflation went up. Is as simple as that. I
think the last few decades we got into this kind
of mindset that we need more inflation. With more inflation,
actually inflation and one or two percent is fine. Inflation
(12:42):
attend is not fine. But then a dream world. Look
what people really want? What I'm assuming that central bankers
and politicians wanted inflation four or five percent? Well I did.
Look at the end of the day, I'm not that
excited about this debate about it. Should the inflation target
be for percent instead of two? What really matters is
the volatidity of inflation. So if you know, marrying that
(13:05):
inflation is going to be four percent for the next
ten years, and you are one sure the central bank
and deliver on that. It doesn't matter if it's for
two or one percent. It doesn't matter because everybody will
adjust their expectations. The problem is when you go in
you have a target of two, inflation goes to ten
or the other way around. So I think that by
the way, changing or moving the goal post now, given
(13:28):
the central banks have done a huge mistake, would be
an horrendous mistake. Honestly, I think this debate on on
inflation target I think is not particularly helpful. Let's try
to to get inflation down to two percent and then
if it's three percent in a way it doesn't matter.
But really moving the goal posts when we just or
(13:50):
central memberedis horrendous call, and inflation I think would be
really really an helpful. Yeah. I suspect that it's volatility
that we're going to get. And maybe the big mistake
that we've made for the last couple of day case
and are still making now, is to think that it
is actually possible for central banks to control inflation. And
that's the mistake that we as in a way as
an industry were making this that we give too much
(14:11):
I think importance to what central banks are doing. Do
you remember marrying the time where they were really boring
and very if you paid attention to them. Now they're
basically like the biggest players. So everybody's obsessed what the
central banks are doing. You have to read every single statement,
the commas what, And I think they're also not helpful.
At the end of the day, the economy obviously needs
(14:33):
central banks, but central banks shouldn't be the one basically
playing the music all the time. I think it's not
it's again, it's not healthy, it's not helpful. But that's
actually has been the story of the last basically the
last decade or the last two decades. It's important to remember,
someone was pointing out the other day, I'm putant to
remember that central banks weren't actually originally set up to
control inflation, but to burrow money for governments. That's true.
(14:57):
Some of the involved in this completely different which there
are absolutely useless at whereas you know, they're quite good
at raising money for governments and really really useless at
controlling inflation. So we've got it slightly the wrong way around, right,
So let's talk a little bit about what you might
have been expecting coming into this year. I mean, as
we came into this year, there was something of a
consensus building right that you know, you shouldn't touch China
(15:18):
with a barge pole, entirely uninvestable. That you know, Europe
is moving into recession, the UK is moving into recession.
Everyone's moving into recession. Then reflation is going to slow
very quickly as a result, etcetera, etcetera. The general consensus
coming in. But already that consensus seems to be slightly
breaking up in that there sort of very dramatic and
sudden reopening of China clearly must produce a big bump
(15:41):
of global demand that perhaps will will totally derail the
recession story. Um and of course markets that most people
at the end of twenty twenty two, when I looked
at the expectations of the year ed most everyone was going, well, well,
you know, now the bubbles started bursting, it's kind of
going to keep going. There's some way to go here.
And of course we've had a rather good start to
the years, so already all the expectations for this year
(16:01):
are beginning to turn out to be not quite right.
Brackets again, Yeah, I mean, it's it's interesting that when
you look at the performance of portfolio fifty percent equities
fifty percent bonds in US dollars, last year has been
the worst basically in in a century. You know, we're
talking about minus seventeen percent. Again, we're talking about a
fifty percent equities fift government months portfolio orrendous here. This
(16:26):
year is one of the best. Okay, we just that
two weeks and a half, but the start of that
has been incredibly good. Positive. You see actually what brokers
are doing that everybody is revising up. They're kind of
GDP forecast for this year. Everybody seems to be getting
much more positive about Europe. Europe has outperformed massively US
(16:46):
talks in the last three months in dollar terms. But
you know, to be honest, what has really changed, and
I think that's that's important, is the inflation outlook. You know,
just a few months ago, the idea was inflation with
forb for very it is slowly what we see is
significant decline in inflation across across the globe, even in Europe.
(17:07):
And this has changed really everything, right because now there's
an expectation of rate cuts, the expectation of the consumer
across the group, we feel better and so they will
spend more. But I think it's amazing, especially where the
the What has changed in terms of the expectations around Europe?
As you mentioned, everybody was expecting a deep recession in Europe.
(17:28):
Then we say, well, it's gonna be mine. Now most
actually economies expect no recession in Europe, even in the UK,
where you know wearing the situation is not great. But
the number seems to suggest the economy is is more
resident than we thought. And this is if if it
happens the most widely anticipated recession in a living memory.
(17:48):
Everybody was expecting a recession, me too, But the number
seems to suggest that there is some underlying kind of
resilience that I think is surprising. So what is that resilience?
What what has gone right? I think the conventional kind
of wisdom is that there is so much money that
in bank accounts, and so much money that's been saved
during the pandemic that is there to be spent. I'm
(18:12):
not buying that argument, because if you're really worried about everything,
you just save more. You don't be saved. I think
what has changed, really, I think is that the outrut
for inflation as significant and improved. You see that actually
in consumer service as well. And there is also another
element that has changed is obviously China. You mentioned that before. China,
(18:33):
I mean in the last three months as standing incredibly
well is almost fifty right. Obviously that comes from a
long period of underperformance. But the fact that the Chinese economy,
which let's not forget is the second big in the world,
is basically reopening, well, that's that's a massive boost to everything,
right to the global economy, to commodities as well. So
(18:55):
I think there isn't again China reopening boost to growth,
the commodity prices fully, you know, inflation down, so both
to um to consumption in developed world. There are a
lot of things that are going right, but I would
say you have to mention one is the declining commodity price,
especially Europe. It's amazing how for example, natural grass prices
(19:17):
are below the level of a February of last years.
So when Russian Bay, Ukraine, and that's maybe one lessons
that for all of us is that the economy is
economies consumer can adjust pretty well. You know, Germany is
a fantastic example. You know, GDP and industry production a up.
You have a year, but the imports of gas is down.
(19:39):
So I think we have to give also europe and
credits sometimes and I think this is actually one of
the positive surprises of last year. I would say, but
we might see commodity prices across the board, not necessarily
natural gas, but commodities in general beginning to rise toplic
at once that they already are they already are as
China opens properly. I mean as as it's regularly pointed
(20:02):
out at the moment, China has been looked down for
so long. But the in various different ways that the
consumption impulse from the population has got to be absolutely huge.
And we also in our own economies the massive boosting
demand as we were released from all these the Bonker's lockdowns,
and that was only after a few months here and
a few months there and a few months here. China,
we're talking close to three years now, people coming out
(20:24):
to spend. That's got to be a consumption enhanced demand
impulse great than anything we've seen elsewhere. Yeah, But but
the year. The point though, is that the consumption boom
that we're going to see in China we're going to
see would be basically focused on services. So tourism for
example is a good example. So the demand for commodity,
you know that, you know when you look at copper
(20:45):
or iron or China consumed roughly fift of what is
produced globally, so it's a massive obviously, But I have
to say that the demand for copper and iron ore
normally goes into infrastructure projects, let's say housing. I think
there's not much demand. So I think the when you
look at where the consumption will we come from Chinese
(21:06):
many service is not going to be very commodity intensive.
But there is no question on the fact that everybody
see the connection between China's growth and commodity price, So
there is obviously commodity prices will go higher, but I
think again the rebound will not be very commodity intensive
for China, so I think we may actually not see
the usual spike in commodity prices then typically follows a
(21:30):
period of strong Chinese growth. Okay, interesting, So a lot
of the people I'm speaking to the moment are telling
me that when they're looking at the asset classes they're
interested in over the next year or so, the commodities
is right at the top. It doesn't sound like you're
in that gang. Yeah, so what what I'm saying is
that if we if we look at what asset classes
are doing, or what are the best asset classes in
(21:51):
this inflation and growth environment, commodities the well when the
economy is booming and inflation is booming. Two, But the
economy is not me anymore. So I think the best
time to buy commodities was probably a year ago. Now
we are more into the kind of in an area
where goal should do well because inflation is high and
(22:12):
gross is weaker, and then we should go potentially into
a bond phase when both inflation and gross are weaker.
So I think that yes, I can see commodity process
stabilizing from here, but I don't see a big rebound
because global gross let's not forget it's still weak. China
is rebounded, but the rest of the world is effectively slagnating,
So I don't see a big rebounding commodity process. Even
(22:34):
if I see the secular gross story, low inventories is
probably one that has been supplies very limited. So I
buy the long term story and commodities, But for the
next six to twelve months. I think it's much more.
I think it's not that obvious to me. Okay, when
you say by the long term story and commodities, what
does the you mean by that just as a general
(22:56):
long term supplied mond story. Yeah, it basically means that
where are the two key drivers of commodity prices? Dollar
and the supply and demand balance. Now, the demand is
dependent obviously on on global growth. Supply is very weak
because there have been very limited investment in the past
ten years. When you look at industrial medals and oil
(23:17):
as well, and and and the dollar, we expect the
dollar to be much weaker. So this is normally a
good combination for commodity prices. Right again, if you look
at this year, yes, the dollar is down, but the
global economy in fact, in fact is stagnating. So I
I yes, there is more demand from China, but it
is not a booming economy that would normally allow commodity
(23:39):
prices to rise. So I think it's yes, you're going
to see an improvement probably on on on old private
I think the upside is on gold, and I know
the gold is also something that you like, But I
don't see a big, big spike in commodity prices for
the in the for this year. Now, okay, so explain
in a little more detail if you don't mind, why
this is a good environment for gold. I refer to
(24:00):
this kind of diagram right, inflation and let's keep it simple.
Gold typically as well, you know, it's typically seen as inflation. Hatch.
Last year didn't workwide because the dollar was exception is strong.
So what gold needs is a weaker dollar, inflation being high,
and actually a decline of real interest rates, because this
(24:23):
is actually the opportunity cost of all the goals. So
when you on gold, you don't basically don't get any interests,
you don't get any couple, nothing. So the opportunity cost
of all the gold invest in goal is the real
interest rate. They're still low. We tend to forget that
interest rates have gone up quite a lot, but if
you look at the interest rates relatitive inflation is just
(24:43):
didn't get it. So I think this combination of you know,
still low real interest rates and the weaker dollar and
inflation risk, to me makes gold very attractive. The only
issue that we have with gold is that on our
evaluation metric, the gold prices asn't. Let's say, it's still
relatively high. So the evaluation case for gold is not
(25:05):
the strong but all the drivers that historically has pushed
the gold higher they are all present now. So I
think gold and funny enough, I was actually looking yesterday.
If you look at the performance of gold here to day,
is actually the best among the major as a classes.
But also in the last five years. If you look
at the last five years, gold is the best as
a class. So I think it's it's not just tactical.
(25:27):
You know, we are very abolish and gold, let's say
from a second point of view, but tactically, given the
weakness in the dollar and is still relatively eye inflation risks,
I think gold should do well this year, and it
is doing well so far. Yeah, last question on gold,
because you know, I'd like to hang around on gold
for a best. When you say that in valuation terms,
(25:47):
it doesn't look that attractive, how do you value gold
eading that relative to silver, relative to oil, relative to inflation,
how is it working well? We have a very simple
model based on the dollar and the interest rates, and
obviously the model is clearly but otherwise it wouldn't be
a good model. Very cool, litty with actual prices. But
(26:08):
now the gold price is higher than it should be
given the strength of the dollar basically last year. So
in a sense, you know, the evaluation the gold price
is not cheap, but valuation is not everything. Valuation is
one of the elements that you have to look at
when you make an investment decision. So that's why we
(26:29):
expect gold to go high this year, but not to
to go up I think probably if you go to
tenient is what we expect. But you know that that's
that's what we what we expect for this year, and
we expect pretty much the same growth over the next
five to ten years. So gold for US continues to
be a great investment in the medium to the long term.
(26:50):
Let me just pick you up on something he said.
The evaluation isn't everything. Now, that's what they used to
say in the equity market, didn't they. That's that we
justified big tech going was. That's that we justified the
price of the US equity market in general. In fact,
that's how we justified the bubble. Valuation isn't everything. It's
all about growth. It's all about that. It's all about that.
We're practically back to eyeballs by the end of the bubble.
(27:12):
When we looking ahead then and remembering that valuation, well,
it might not be everything, certainly in the equity market,
it's it's almost everything which part of the global equity
market looks attractive to you for this year. Valuation, by
the way, matters. We know when it's extreme. And that's
one of the lessons sources of last year. Right, we
(27:32):
all knew that bonds were expensive, government bonds or let's
say bonus worth too law, but because we have seen
them for so long, load that they said, well they're
not really that. That's that's the new normal. But it
was not the new normal, but just wrong. And obviously
you can apply the same lodging in some area of
tech and and and as well. I think when you
look at just a valuation, first of all, let me
(27:54):
say that this massive valuation gaps that were present two
years go. Let's say emerging markets incredibly cheap, US equally
is incredibly expensive, government bond very expensive, death basically corrected.
So now all value versus growth in the same logic
you remember, Mary, we discussed that many times the value
(28:16):
stocks are incredibly cheap relative to grows up. Now the
valuation kind of anomalies or the extremes are much less
extreme than than than before. There are seen some pockets
of good value. Right, So obviously you may say I
think Chinese equities, for example, are attractive from evaluation point
of view. Then we can debate again if that's enough.
But I think valuation is attractive even small caps in
(28:39):
some countries, especially in the US, to look actually relatively
relatively cheap. But again, after the ready that we have seen,
is difficult to say that there are some very very
cheap equity markets across the globe. Is very difficult to
find them in relative terms, yes, but in absolute terms
is very difficult. And to be honest with you is
if I tell if I tell you, look inflation is
(29:02):
much higher than the normal grossed zero, you would explain
valuation to be actually very cheap. But it isn't, which
makes me think that also the upside for equities overall
is quite limited for this year, and we believe that
the real upside is an emerging market. This is this
is kind of I know, it's a difficult call. Given
(29:23):
what we have seen in the past ten years. It
has been horrendous for the emerging market but the real
value now is an emerging market, and especially if you
take into consideration that emerging market currency are chieved. So
you get the upside from China, you get the upside
probably from earnings, you get your upside from the currency
and and and I think investor not position for that.
(29:44):
Everybody is telling me we like emerging market, but when
you look at the actual positioning, the position seems to
be not in line with what investors are telling me.
So I think there is more upside on emerging market
for this year. Okay, that's an saying. Everyone is telling
me that emerging markets are the right call for this year.
And when I get told that by so many people,
(30:05):
I kind of seen that there's a little action to
follow the words, but perhaps there is not. Yeah, I
think It's something also that I it scares me a
little bit, is that I've been seeing clients a lot
in the past few weeks. There is a lot of
consensus around too many calls. So let's say emerging market
will do well, bonnios will fall, inflation be fall, interest
(30:25):
rates we probably be cut at the end of this year.
There is a lot of consensus, and that's actually scares
me because I know. That's my experience. When there is
too much consensus, typically you have a big surprise. I
don't know where the surprise is coming from, but there
is a very high level of consensus on almost everything,
and it's the first time in many years that I
(30:46):
experienced that at the start of the year. So I
think there's something that again scares me a little bit. Okay,
if you had to pluck with that, surprise might be
out of the What do you think it would be. Well,
let's look at the positive, right We always tend to
look at the surprise in negative terms. Now let's let's
be positive. I think some kind of I wouldn't say peace,
(31:08):
but ceasefire in Ukraine would be a massive boost. Would
be a massive boost because it would allow combody price
to fall more. Central Bank may cat grades. There will
be obviously a strong rebounding Europe. I don't know. I
hope this will happen sooner, as soon as possible, but
this could be something that can change things. The negative
one I think is that inflation, at some point we
(31:32):
reach four or five stop falling, maybe because as you mentioned,
Chinese recovering combody prices we go higher, and that's actually
can be very damaging for markets, right because if inflation
stopped falling, central banks are forced to basically continue maybe
they were forced to eye even more, and this would
be really damaging because you know, the decline in inflation
(31:56):
is the team that everybody is playing currently and a
few question that this is challenged. Well, then valuation is
too high. Central banks we have to like even more.
And that's actually would be basically going back to the
same environment of a year ago and offer it's not
going to happen. Okay, what about the UK. Everyone is
(32:17):
so down on the UK um and has been for
some time now, but it is still one of the
cheaper markets. The should been a massive outperformer and relatively
speaking right over the last year. And when you look
at the news, the the actual numbers as opposed to
the misery product and the papers on the press, things
don't look so bad. No, because I think we all
(32:38):
tend to make the same mistake that UK markets are
really is not really correlated with UK economy. We're talking
about a few big stocks, but not but a few
bestos that are basically multinationals right where the exposure to
the k economy is is very minimal. I think you
know the when you look at also the composition of
the UKA of the UK market is for us, it's
(32:59):
almost the ideal stack flation play, right because you have
a lot of defensive names, very solid, very cash generative,
and you also have the commodity exposure via biscuity, energy
and mining. So I think that and you know that
you've been very embolish on UK stocks mainly on the
on the assumption that the composition of the of the
(33:22):
UK index basically is very start flash and friendly in
a way. Now, what is the problem that then the
UK stocks face Now when we have ready the UK market,
This was really when nobody wants to actually even they're
not even thinking about invest in the UK. Now the
UK marketing is continuous to be cheap, but it is investable,
(33:43):
that's with it this way. So I think it's in
a phase where global growth may potentially re accelerate. And
I don't know, I don't think the UK market will
do as well in relative terms as last year, but
I can see the dvidend yield. The defensive names I
think would of really help the performance. But the best
probably of the UK market our performances behind us, and
(34:06):
there is have to say I don't want to be political.
Not with politics. There is still a Brexit. I think
the premium in the market and you see that in
the relative kind of evaluation of UK versus the rest
of Europe. And this won't go away. But I I
do believe though that for long term investors, when look
at long term investor in the UK market is still
a good place to be. As you said, it's not
(34:27):
it's not expensive. You have very good companies, well managed
and again the UK market has really nothing to do
or not so much with the UK economy that is
still struggling. Again, we're not in our recession, but it's
I think the UK economy will clearly struggle this year.
And so if you are thinking about invest in the
UK stocks, don't do it because you think the UK
(34:50):
economy will move just because of the multinationals and that
that are there that will generate still descent profits. I
love the idea that the U here's the perfect stagflation
and play. I'm given that we're prone to stagflation. That's great, right, well,
awfully the stack flational stories behind us, right, because we
are saying that gross will improve, an inflation will fall,
(35:11):
so actually, maybe what is interesting is that in a
year's time will be exactly the opposite scenario when gross
is back to normal and improving inflation is back to
normal and fully but a lot of things are to
go right to to be at that point and definitely
is not going to happen the next three months is
more like a story for probably the end of this
of this year. Let's talk about something that really really
(35:33):
has gone wrong. Um, and that's that crypto. And I'm
I drive really hard to be open minded about crypto.
I mean I really do. I know a lot of
our listeners and we just will think that I make
no effort at all to be over minded, but it's
simply not true. I've watched all the videos that the
crypto fans try and make me watch, I've read the books,
have done all of it, and I still cannot see
(35:55):
a viable future and a viable use case for cryptocurrencies
include thing bitcoin. By the way, um, and I wonder
how you feel about that, well, you know, when cryptors.
You know, obviously a few years ago everybody was was
asking us what is our view. My view back then
was that cryptocurrency are like a lottery ticket, right, you
(36:15):
buy a lot of re ticket, why because you know
there's a very very sucessal marginal in significant probability that
you're gonna win. But if you win, you win big.
And I think if you think in that way, you know, okay,
then you can say I can buy a fewer and
then let's hope. The point though here, especially what I'm doing.
(36:37):
My job is to advise people are to invest wisely
for the long term. And to me, a lottery ticket
is not an asset. Class is something different. You can
still have, you know, you can make money out of it,
but it's not something that would suggests my clients to want.
Then obviously I'm also not a crypto kind of specialist.
(36:59):
I can see the logic behind, you know, in a
peer where central bank where printing money like crazy, having
some kind of accurrency where the supply was fixed as
obviously appeal. I understand that. So this combination with you know,
easy money or let's say money printing by central banks,
obviously the tech angle, because the blockchain story is very significant,
(37:23):
so I can I can see why there was this bubble.
But any year we go, the easy money is over
monetary titling and the monetor exposes exactly the weak of
some of the assumption making about cryptus. Right, but again,
I don't think the cryptocurrencies will or should be a
building block of investment portfolioce it's like it's really like
(37:44):
continue for me to be a lottery ticket, and look
at what happened the last few months. It's still very
by the way, very Also dependent on regulation is something
that's difficult to value. So I still believe that there's
not from my point of view and as a class
that should be in PORTFOLI use for long term and
let's say relatively cautious investors. No, I don't. I don't
(38:06):
think so, and my view hasn't changed in the last
few In the last few weeks or months, it sounds
to me like you've got your own coin based accounts
with you know, a couple of thousand pounds worth a
bitcoin in it just in case. No, I have nothing
but to be honest, I can't blame if someone did
it and you know they make good money out of it.
So but again, you won the lottery. It doesn't mean
(38:27):
that you are an investment groule. I think you won
the lottery and that's it. And then if you have
to move on, well, I would like to win the lottery. Um, okay,
So here we are. It's a confusing year. It's a
difficult year. We're worried about consensus. But if I could
sum up where you might recommend or suggest a retail
investor in ordinary investor to go from here, you'd say them,
(38:50):
you know what you should have gold, you should have
emerging markets. You should know that commodities are a good
long term play. You should have learned from the last
couple of years to keep a close eye on valuation.
Is there anything else that you might say to an
ordinary investor looking at their portfolio and going, oh God,
I don't know what to do. Is there anything else
(39:11):
that you would say to them today? Yeah? I think, Look,
we don't expect this yet to be great right for
for equity, for equity investor, but it's gonna be okay.
It's gonna be okay. Something I think has changed significantly
is the outlook for government bonds and fixed income products.
You know, when I when I joined pick Tap ten
years ago, bonniers were much much higher. They were obviously
(39:32):
this kind of downtrend, But I remember, I don't remember
one year where we told investors, look, this is time
to increase your location to fix income, and I think
this is actually the right time to do it. You
start to see some real good evaluation, and government bonds
in the sense that you coupon is distant in the
(39:54):
US is you know, it's three point five could be
four percent. So the point is that there is this
is something that you know, we I haven't had in
a very long time. Considering that equities are not particularly cheap,
I think it's not a good idea to relocate some
of your money into government bonds with the assumption from
our point of view that we may not see a recession,
(40:14):
but we're not going to see a significant pickup in growth,
so nominal growth will actually be quite weak because inflation
is falling and real growth is very low. So I
think what we are actually advising or suggesting our clients
is to put some money back into fixed income products
right or could be government bonds in the US. We
like a emerging market debt because I think this is
(40:37):
the time, after a long period of financial repression that
basically kept real body is a really interest rates much
below where there should be. So I think that would
be my let's say something new may be different from
the past, is to reallocate money from maybe from cash
(40:59):
or from equities in two government bonds. But obviously you
need to be selective. We see more value, for example,
in US treasuries in government bonds, especially that in America,
much less in Europe, where I think there is the
risk of central banks to be even tighter and so
for bonn eels to rise, and so for retans to
(41:20):
remain quite low in the short term. So that would
be that's probably the biggest change in terms of our
long term view for for this year. Thank you. Look
at that's almost exciting. I can't remember the last time
I spoke to anybody on a podcast or an energy
of any kind where they actually recommended in Christening exposure
to the bond market. So thank you for that. The
(41:41):
government bonds exciting those seems to be a little bit extreme,
but I'm doing my best, look around my best. I
like that we have to pull some excitement from the
whole like that. Thank you so much for being with
us today. I hugely appreciate it. Thank you, Mary, thanks
(42:02):
for listening to this week's Marion Talks Money. We will
be back next week. In the meantime, if you like
our show, and I really hope you do, review it
and subscribe wherever you listen to your podcasts. This episode
was hosted by me Marion somethingset Web. It was produced
by Samersadi. Additional editing by Blake Maples and special thanks
of course to Luca Paolini and to John Steppe. Finally,
(42:23):
of course, this is your weekly reminder to sign up
immediately to John Staley newsletter money Distilled. The link is
in the show notes, and you won't regret it.
John. Hello, Hello, I have a question for you. What
good are you to anybody? That's a good question. There's
one that I've often asked myself, but I haven't usually
as my wife I asked me that way, she would
never say that. And now listen, I'm asking you because
I was speaking to an academic and author of the
other night who specializes in writing about and we'll talk
(00:22):
about this more another time, a fantastic book I'm reading
about the history of wealth management and financial advice, which
I mean, it's so good. We will come to that
another time. But she was asked. I was at an
event where she was speaking, and she was asked what
use financial journalists are and what financial journalists bring to
the party, and she kind of said, well, nothing really,
(00:42):
she said, you know, everything any stock they might write about,
or any sector they might write about, by the time
they get to it, you know, the stories in the market,
it's in the price. There's nothing to be gained. Um,
so you know, they're reduced to kind of vendor. As
she said, I'm right, she said hocus pocus. So that's
an interesting nnswer. Yeah, but you know, she has a
(01:05):
point about some things. And I was thinking we'll hanging
on it. Take what use Army and John? What do
we bring? What are we for? You know, full existential
crisis after after you know, ten minutes of watching this event.
But do you know, I don't know what your answer is,
But actually I think the financial journalist writing for the
retail investor brings a huge amount to the party. I mean,
(01:27):
I was thinking about the podcast that we're going to
listen to after this. We talk a lot about how
suddenly the UK is investable again. This is great. Everyone
was invested in the UK. Now people are pouring in,
pouring in, and there's no longer as cheap as it was. Now.
Who was buying the UK last year and the and
the year before, your readers and my readers, because for them,
(01:48):
the UK was not uninvestable for them, They don't have
all the sort of international political blah fussing about Brexit whatever.
They just saw cheap because we told them stuff was cheap,
so they were out there buying. Yeah, that's delivering value, right.
I would agree entirely. Um, and I think I get
I do get the point. I agree about the if
it's in the press, it's in the price that that's
(02:09):
generally true. That's one reason why you and I tend
to take the contrarian view of things. It's true somebody
did interrupt during this conversation and say, Mary normally writes
about stuff that's going down, don't you marry Yes, but
a good way. That's a voice point. Um no. But
also to be fair, I think they on that point
(02:30):
that i'd make um And I mean, in a way
this is almost more the personal finance than the investment
inside is it was partly yours, a campaigning by you
actually very specifically, and if you select others that got
their financial conductor thought it so financial Services Authority Awards
then do the retail distribution review and basically put an
(02:53):
end to the fact that financial advisors in this country
with a freelance salesforce for like the fund management groups.
I mean, when you back and that it's utterly insane
that that was ever deemed acceptable. Fund my age was
getting kicked bikes from the people whose funds they solved
in order to you and them, I mean, why was
that ever your mind? Years but I remember finding out
(03:17):
about that for the first time, and that we know
when I was very very young journalist and someone explaining
this black like that can't be true. They could possibly
be true, but it was. And also years of campaigning
from the like use have brought down fees on funds
and all that kind of thing. We've had a significant
interest influence on the way that the fund management industry charges.
But the main thing I was thinking about is that
(03:38):
you know, when you write specifically for the retail investor,
the retail investor, the ordinary person invests differently to the
institutional investor, and if they don't, just because they don't
understand that they can have a much longer time frame,
they don't have to worry about liquidity in the same way.
So I would take another one, another example, energy stock.
For the last couple of years, we've been saying, look,
you know, if they weren't buy them, the institutional sector
(04:00):
won't buy energy stocks because he sgo cause whatever or
because not forward thinking. What as I look at it, um,
you can you can buy this cheap stuff that powers
the world. Uh. And you know I do think that's
the kind of thing that that adds value. Well, yeah, exactly,
I mean that I think I take this person's point
from the point of view that the kind of commodity
(04:21):
news element of it, and the kind of group think
element is, you know, not especially valuable. But I think
that if you've got people who are trying to, if
you like, for one of a better world champion the
retail investor against the massive kind of set of institutions
that largely want to funnel them into things that will
(04:43):
make money for the institutions rather than for the individuals,
then no, we you know, we do add value. We
had value as much as anyone else does. I mean,
what value did your average fund manager I had? I
mean seriously, I mean I don't know. I mean like,
if you look at I mean, you might as well
ask what what value does any individual component of the
financial industry? And I think most people will plunge in
(05:06):
an existential crisis if you asked them. I see, what
is the point of your job? I feel better now.
I knew that if I asked you about this, you
would validate me completely. Cognitive biases absolutely absolutely tell me
what I want to hear. Um, now tell everyone else
what they want to hear. Briefly before we go, you're
writing about house prices again falling faster, falling faster than
anyone imagined, but as fast as you thought they would,
(05:29):
he adds value everyone. See there you go. If you've
been listening to me, you'd have had the pint skilled
off your other anything. Quite right. We had the Brick
survey out right, which you and I both think is
the most validable the House Press Service. Yeah, and it's
it's surprisingly good government. It's just the opinion of the
agents and somebody. But but it does you know, it's timely. Um,
(05:52):
and they're certainly yeah, they're not. They're not feeling very
happy a bout of things. And actually the Eden was
worse than you know, the usual economists have expected. I mean,
I think the thing that just want to emphasize about
whose places this thing an there's I don't think he's
like whose places can come down without causing the massive
problem for the way that economy. And I also don't
(06:14):
think the way the economy has to be in a
massive state for whose places to come down? It really
is just partly so it's mostly a function of interest
rates not being at one and a half percent anymore,
going up to somewhere of closely four and a half percent.
That happens, whose places just half to come down? It's
just it's just part of the Great normalization, the Great normalization.
(06:36):
I was looking a wonderful chart today of the volume
of negative yielding bonds around the world, and I haven't
seen this chart. Is absolutely wonderful. It's basically zero zero,
zero zeros forever and then suddenly it goes absolutely berserk
stores to the sky the line, and then suddenly straight
back down to Earth. We're basically at zero again. It's
one of the most wonderful reversion to the mean graphs
(06:58):
you've ever seen. What is the plankage of and was
the last was the last hold out? Wasn't it? So
the g GPS now at all largely kind of like
positive yield in a game um and that was that
was the that was the thing that brought it back.
But it's it's it's one of the weirdest financial phenomenon
that we've seen in the last ten years of a
(07:18):
lot of weird financial phenomenon and hopefully we won't see
it again, I mean ideally in our lifetimes, and I
certainly think that's possible. Although french Band did point out
to me a couple of days ago that he's still
paying to have this deposit account still paying. It didn't
shooast very nearly over. They still use fact season white
(07:38):
seals into fans. We're all were doing this. There's there's
a lot of yeah, yeah, we better. Welcome to Marion
Talks Money, the podcast in which people who know the
markets explain the markets. I'm there in some set well
(08:00):
this week, I guess there's Luca Plini, who's the chief
strategist to pick t A asset management. He's got a
long history of being a strategist at various places, so
we can simply accept before we start that Luca knows
pretty much everything about everything. We started our conversation discussing
the World Economic Forum taking place this weekend Davos, and
I was telling Luca about everything I've been reading about
last year's summuch, the comments made by attendees on what
(08:22):
they're expecting in the year to come, and how most
turned out. We're worried about all the wrong things, very
few of them. For example, we're worried about the collapse
of a great financial bubble. They just didn't see it coming.
So given that it wasn't actually that hard to see coming,
I started by asking Luca how that could be, you know,
(08:43):
to be honest, maryn Last year was was abnormal in
a number of respects, right because we had obviously a
massive duo political shocks. We we had what I would
I like to say, and I'm very unwelcome guest, it
was inflation. You can also blame central back that you know,
they didn't see it coming. So I think it was abnormal.
(09:04):
But I think, you know, when you look at this year,
it seems like there is a consensus and that was
that it would be a recession and maybe they will
be wrong again. So but I agree with you that
looking back to you know, a year ago, where the
expectation was, you know, market will be fine, central Bank
would be very very slow. In I can rate it's
inflationer we rise, but you know it's a one off. Well,
(09:26):
a lot of things have changed. But you know, let's
project ourselves and at the end, by at the end
of this year the situation we actually look much much
better than than everybody seems to expect now, so we
will see. But yes, I think, look, last year was
really abnormal and we and I think we a lot
of people got wrong quite a few things. So I
(09:46):
think it's we have to accept that. We just have
to let that go, I'm not sure I'm prepared to
do that that easily, and that you know, these are
the people who run our world right now. You and
I know we we we used to think we knew
that in a few briend a lot of money you
get inflashed, and that inflation pretty much always comes from
money printing from lest fiscal policy. Add in an oil
price spike, exceptera last year, and a bit of war.
(10:08):
It amazes me that we can look back and people
would have thought that we would not have an inflation problem.
In the same way it amazes me that we can
we can look back and think that people really believed
at the beginning of last year that central banks had
the ability to control inflation in individual countries when the
inflation was coming from a more global orientation. And it
also amazes me that we can look at where valuations
(10:31):
were at the peak of this bubble and say, well,
we don't really have to worry about a collapsing bubble.
But but I think you know, the real issue that
we have here is that you know, on our own models,
we saw inflation going up a lot, but you know,
the last thirty years we have seen only very low inflation,
and it's difficult to go against your the history, the
(10:51):
lot of the last three decades. Obviously, looking back, it
was obvious right as you said, too much money, supply constraints.
People are told with a lot of money to spend.
During during COVID, there was kind of an almost a
perfect mix of things that would push inflation higher. But
when you have three decades of four decades where the
(11:12):
main world was low inflation, it's difficult to change that.
This is one of the lessons I think of last
year that you know, things may change. There are some
historical patterns, but they may change. But at the end
of the day, basic economics hasn't changed. As you said,
if you print money and for a long time, at
(11:32):
the end you're going to get inflation. This is actually
the really the big lessons that we that we go
from from two thousand and twenty two. It's amazing, isn't
it That lesson needs to be learned over and over
again every generation. We have to relearn that this is
how money works. Yes, and look, the only good thing
about this rising inflation is that everybody now understands that
(11:56):
inflation is never a solution, is always a problem. Do
you remember when a few years ago the debate was
we need more inflation, because you know, if you have
more inflation, if we reduce the depth to GDP ratio,
it doesn't work like this. Inflation is attacks is a
very by the way, is not it's not progressive, and
it's attacks on the consumer, but those attacks on on investors.
(12:19):
And I think we we finally realized that inflation is
really never a solution. And and and and last year, if
you look at the you know, if you look at
bounds equity, almost all as a classes went down. Why
because inflation went up. Is as simple as that. I
think the last few decades we got into this kind
of mindset that we need more inflation. With more inflation,
actually inflation and one or two percent is fine. Inflation
(12:42):
attend is not fine. But then a dream world. Look
what people really want? What I'm assuming that central bankers
and politicians wanted inflation four or five percent? Well I did.
Look at the end of the day, I'm not that
excited about this debate about it. Should the inflation target
be for percent instead of two? What really matters is
the volatidity of inflation. So if you know, marrying that
(13:05):
inflation is going to be four percent for the next
ten years, and you are one sure the central bank
and deliver on that. It doesn't matter if it's for
two or one percent. It doesn't matter because everybody will
adjust their expectations. The problem is when you go in
you have a target of two, inflation goes to ten
or the other way around. So I think that by
the way, changing or moving the goal post now, given
(13:28):
the central banks have done a huge mistake, would be
an horrendous mistake. Honestly, I think this debate on on
inflation target I think is not particularly helpful. Let's try
to to get inflation down to two percent and then
if it's three percent in a way it doesn't matter.
But really moving the goal posts when we just or
(13:50):
central memberedis horrendous call, and inflation I think would be
really really an helpful. Yeah. I suspect that it's volatility
that we're going to get. And maybe the big mistake
that we've made for the last couple of day case
and are still making now, is to think that it
is actually possible for central banks to control inflation. And
that's the mistake that we as in a way as
an industry were making this that we give too much
(14:11):
I think importance to what central banks are doing. Do
you remember marrying the time where they were really boring
and very if you paid attention to them. Now they're
basically like the biggest players. So everybody's obsessed what the
central banks are doing. You have to read every single statement,
the commas what, And I think they're also not helpful.
At the end of the day, the economy obviously needs
(14:33):
central banks, but central banks shouldn't be the one basically
playing the music all the time. I think it's not
it's again, it's not healthy, it's not helpful. But that's
actually has been the story of the last basically the
last decade or the last two decades. It's important to remember,
someone was pointing out the other day, I'm putant to
remember that central banks weren't actually originally set up to
control inflation, but to burrow money for governments. That's true.
(14:57):
Some of the involved in this completely different which there
are absolutely useless at whereas you know, they're quite good
at raising money for governments and really really useless at
controlling inflation. So we've got it slightly the wrong way around, right,
So let's talk a little bit about what you might
have been expecting coming into this year. I mean, as
we came into this year, there was something of a
consensus building right that you know, you shouldn't touch China
(15:18):
with a barge pole, entirely uninvestable. That you know, Europe
is moving into recession, the UK is moving into recession.
Everyone's moving into recession. Then reflation is going to slow
very quickly as a result, etcetera, etcetera. The general consensus
coming in. But already that consensus seems to be slightly
breaking up in that there sort of very dramatic and
sudden reopening of China clearly must produce a big bump
(15:41):
of global demand that perhaps will will totally derail the
recession story. Um and of course markets that most people
at the end of twenty twenty two, when I looked
at the expectations of the year ed most everyone was going, well, well,
you know, now the bubbles started bursting, it's kind of
going to keep going. There's some way to go here.
And of course we've had a rather good start to
the years, so already all the expectations for this year
(16:01):
are beginning to turn out to be not quite right.
Brackets again, Yeah, I mean, it's it's interesting that when
you look at the performance of portfolio fifty percent equities
fifty percent bonds in US dollars, last year has been
the worst basically in in a century. You know, we're
talking about minus seventeen percent. Again, we're talking about a
fifty percent equities fift government months portfolio orrendous here. This
(16:26):
year is one of the best. Okay, we just that
two weeks and a half, but the start of that
has been incredibly good. Positive. You see actually what brokers
are doing that everybody is revising up. They're kind of
GDP forecast for this year. Everybody seems to be getting
much more positive about Europe. Europe has outperformed massively US
(16:46):
talks in the last three months in dollar terms. But
you know, to be honest, what has really changed, and
I think that's that's important, is the inflation outlook. You know,
just a few months ago, the idea was inflation with
forb for very it is slowly what we see is
significant decline in inflation across across the globe, even in Europe.
(17:07):
And this has changed really everything, right because now there's
an expectation of rate cuts, the expectation of the consumer
across the group, we feel better and so they will
spend more. But I think it's amazing, especially where the
the What has changed in terms of the expectations around Europe?
As you mentioned, everybody was expecting a deep recession in Europe.
(17:28):
Then we say, well, it's gonna be mine. Now most
actually economies expect no recession in Europe, even in the UK,
where you know wearing the situation is not great. But
the number seems to suggest the economy is is more
resident than we thought. And this is if if it
happens the most widely anticipated recession in a living memory.
(17:48):
Everybody was expecting a recession, me too, But the number
seems to suggest that there is some underlying kind of
resilience that I think is surprising. So what is that resilience?
What what has gone right? I think the conventional kind
of wisdom is that there is so much money that
in bank accounts, and so much money that's been saved
during the pandemic that is there to be spent. I'm
(18:12):
not buying that argument, because if you're really worried about everything,
you just save more. You don't be saved. I think
what has changed, really, I think is that the outrut
for inflation as significant and improved. You see that actually
in consumer service as well. And there is also another
element that has changed is obviously China. You mentioned that before. China,
(18:33):
I mean in the last three months as standing incredibly
well is almost fifty right. Obviously that comes from a
long period of underperformance. But the fact that the Chinese economy,
which let's not forget is the second big in the world,
is basically reopening, well, that's that's a massive boost to everything,
right to the global economy, to commodities as well. So
(18:55):
I think there isn't again China reopening boost to growth,
the commodity prices fully, you know, inflation down, so both
to um to consumption in developed world. There are a
lot of things that are going right, but I would
say you have to mention one is the declining commodity price,
especially Europe. It's amazing how for example, natural grass prices
(19:17):
are below the level of a February of last years.
So when Russian Bay, Ukraine, and that's maybe one lessons
that for all of us is that the economy is
economies consumer can adjust pretty well. You know, Germany is
a fantastic example. You know, GDP and industry production a up.
You have a year, but the imports of gas is down.
(19:39):
So I think we have to give also europe and
credits sometimes and I think this is actually one of
the positive surprises of last year. I would say, but
we might see commodity prices across the board, not necessarily
natural gas, but commodities in general beginning to rise toplic
at once that they already are they already are as
China opens properly. I mean as as it's regularly pointed
(20:02):
out at the moment, China has been looked down for
so long. But the in various different ways that the
consumption impulse from the population has got to be absolutely huge.
And we also in our own economies the massive boosting
demand as we were released from all these the Bonker's lockdowns,
and that was only after a few months here and
a few months there and a few months here. China,
we're talking close to three years now, people coming out
(20:24):
to spend. That's got to be a consumption enhanced demand
impulse great than anything we've seen elsewhere. Yeah, But but
the year. The point though, is that the consumption boom
that we're going to see in China we're going to
see would be basically focused on services. So tourism for
example is a good example. So the demand for commodity,
you know that, you know when you look at copper
(20:45):
or iron or China consumed roughly fift of what is
produced globally, so it's a massive obviously, But I have
to say that the demand for copper and iron ore
normally goes into infrastructure projects, let's say housing. I think
there's not much demand. So I think the when you
look at where the consumption will we come from Chinese
(21:06):
many service is not going to be very commodity intensive.
But there is no question on the fact that everybody
see the connection between China's growth and commodity price, So
there is obviously commodity prices will go higher, but I
think again the rebound will not be very commodity intensive
for China, so I think we may actually not see
the usual spike in commodity prices then typically follows a
(21:30):
period of strong Chinese growth. Okay, interesting, So a lot
of the people I'm speaking to the moment are telling
me that when they're looking at the asset classes they're
interested in over the next year or so, the commodities
is right at the top. It doesn't sound like you're
in that gang. Yeah, so what what I'm saying is
that if we if we look at what asset classes
are doing, or what are the best asset classes in
(21:51):
this inflation and growth environment, commodities the well when the
economy is booming and inflation is booming. Two, But the
economy is not me anymore. So I think the best
time to buy commodities was probably a year ago. Now
we are more into the kind of in an area
where goal should do well because inflation is high and
(22:12):
gross is weaker, and then we should go potentially into
a bond phase when both inflation and gross are weaker.
So I think that yes, I can see commodity process
stabilizing from here, but I don't see a big rebound
because global gross let's not forget it's still weak. China
is rebounded, but the rest of the world is effectively slagnating,
So I don't see a big rebounding commodity process. Even
(22:34):
if I see the secular gross story, low inventories is
probably one that has been supplies very limited. So I
buy the long term story and commodities, But for the
next six to twelve months. I think it's much more.
I think it's not that obvious to me. Okay, when
you say by the long term story and commodities, what
does the you mean by that just as a general
(22:56):
long term supplied mond story. Yeah, it basically means that
where are the two key drivers of commodity prices? Dollar
and the supply and demand balance. Now, the demand is
dependent obviously on on global growth. Supply is very weak
because there have been very limited investment in the past
ten years. When you look at industrial medals and oil
(23:17):
as well, and and and the dollar, we expect the
dollar to be much weaker. So this is normally a
good combination for commodity prices. Right again, if you look
at this year, yes, the dollar is down, but the
global economy in fact, in fact is stagnating. So I
I yes, there is more demand from China, but it
is not a booming economy that would normally allow commodity
(23:39):
prices to rise. So I think it's yes, you're going
to see an improvement probably on on on old private
I think the upside is on gold, and I know
the gold is also something that you like, But I
don't see a big, big spike in commodity prices for
the in the for this year. Now, okay, so explain
in a little more detail if you don't mind, why
this is a good environment for gold. I refer to
(24:00):
this kind of diagram right, inflation and let's keep it simple.
Gold typically as well, you know, it's typically seen as inflation. Hatch.
Last year didn't workwide because the dollar was exception is strong.
So what gold needs is a weaker dollar, inflation being high,
and actually a decline of real interest rates, because this
(24:23):
is actually the opportunity cost of all the goals. So
when you on gold, you don't basically don't get any interests,
you don't get any couple, nothing. So the opportunity cost
of all the gold invest in goal is the real
interest rate. They're still low. We tend to forget that
interest rates have gone up quite a lot, but if
you look at the interest rates relatitive inflation is just
(24:43):
didn't get it. So I think this combination of you know,
still low real interest rates and the weaker dollar and
inflation risk, to me makes gold very attractive. The only
issue that we have with gold is that on our
evaluation metric, the gold prices asn't. Let's say, it's still
relatively high. So the evaluation case for gold is not
(25:05):
the strong but all the drivers that historically has pushed
the gold higher they are all present now. So I
think gold and funny enough, I was actually looking yesterday.
If you look at the performance of gold here to day,
is actually the best among the major as a classes.
But also in the last five years. If you look
at the last five years, gold is the best as
a class. So I think it's it's not just tactical.
(25:27):
You know, we are very abolish and gold, let's say
from a second point of view, but tactically, given the
weakness in the dollar and is still relatively eye inflation risks,
I think gold should do well this year, and it
is doing well so far. Yeah, last question on gold,
because you know, I'd like to hang around on gold
for a best. When you say that in valuation terms,
(25:47):
it doesn't look that attractive, how do you value gold
eading that relative to silver, relative to oil, relative to inflation,
how is it working well? We have a very simple
model based on the dollar and the interest rates, and
obviously the model is clearly but otherwise it wouldn't be
a good model. Very cool, litty with actual prices. But
(26:08):
now the gold price is higher than it should be
given the strength of the dollar basically last year. So
in a sense, you know, the evaluation the gold price
is not cheap, but valuation is not everything. Valuation is
one of the elements that you have to look at
when you make an investment decision. So that's why we
(26:29):
expect gold to go high this year, but not to
to go up I think probably if you go to
tenient is what we expect. But you know that that's
that's what we what we expect for this year, and
we expect pretty much the same growth over the next
five to ten years. So gold for US continues to
be a great investment in the medium to the long term.
(26:50):
Let me just pick you up on something he said.
The evaluation isn't everything. Now, that's what they used to
say in the equity market, didn't they. That's that we
justified big tech going was. That's that we justified the
price of the US equity market in general. In fact,
that's how we justified the bubble. Valuation isn't everything. It's
all about growth. It's all about that. It's all about that.
We're practically back to eyeballs by the end of the bubble.
(27:12):
When we looking ahead then and remembering that valuation, well,
it might not be everything, certainly in the equity market,
it's it's almost everything which part of the global equity
market looks attractive to you for this year. Valuation, by
the way, matters. We know when it's extreme. And that's
one of the lessons sources of last year. Right, we
(27:32):
all knew that bonds were expensive, government bonds or let's
say bonus worth too law, but because we have seen
them for so long, load that they said, well they're
not really that. That's that's the new normal. But it
was not the new normal, but just wrong. And obviously
you can apply the same lodging in some area of
tech and and and as well. I think when you
look at just a valuation, first of all, let me
(27:54):
say that this massive valuation gaps that were present two
years go. Let's say emerging markets incredibly cheap, US equally
is incredibly expensive, government bond very expensive, death basically corrected.
So now all value versus growth in the same logic
you remember, Mary, we discussed that many times the value
(28:16):
stocks are incredibly cheap relative to grows up. Now the
valuation kind of anomalies or the extremes are much less
extreme than than than before. There are seen some pockets
of good value. Right, So obviously you may say I
think Chinese equities, for example, are attractive from evaluation point
of view. Then we can debate again if that's enough.
But I think valuation is attractive even small caps in
(28:39):
some countries, especially in the US, to look actually relatively
relatively cheap. But again, after the ready that we have seen,
is difficult to say that there are some very very
cheap equity markets across the globe. Is very difficult to
find them in relative terms, yes, but in absolute terms
is very difficult. And to be honest with you is
if I tell if I tell you, look inflation is
(29:02):
much higher than the normal grossed zero, you would explain
valuation to be actually very cheap. But it isn't, which
makes me think that also the upside for equities overall
is quite limited for this year, and we believe that
the real upside is an emerging market. This is this
is kind of I know, it's a difficult call. Given
(29:23):
what we have seen in the past ten years. It
has been horrendous for the emerging market but the real
value now is an emerging market, and especially if you
take into consideration that emerging market currency are chieved. So
you get the upside from China, you get the upside
probably from earnings, you get your upside from the currency
and and and I think investor not position for that.
(29:44):
Everybody is telling me we like emerging market, but when
you look at the actual positioning, the position seems to
be not in line with what investors are telling me.
So I think there is more upside on emerging market
for this year. Okay, that's an saying. Everyone is telling
me that emerging markets are the right call for this year.
And when I get told that by so many people,
(30:05):
I kind of seen that there's a little action to
follow the words, but perhaps there is not. Yeah, I
think It's something also that I it scares me a
little bit, is that I've been seeing clients a lot
in the past few weeks. There is a lot of
consensus around too many calls. So let's say emerging market
will do well, bonnios will fall, inflation be fall, interest
(30:25):
rates we probably be cut at the end of this year.
There is a lot of consensus, and that's actually scares
me because I know. That's my experience. When there is
too much consensus, typically you have a big surprise. I
don't know where the surprise is coming from, but there
is a very high level of consensus on almost everything,
and it's the first time in many years that I
(30:46):
experienced that at the start of the year. So I
think there's something that again scares me a little bit. Okay,
if you had to pluck with that, surprise might be
out of the What do you think it would be. Well,
let's look at the positive, right We always tend to
look at the surprise in negative terms. Now let's let's
be positive. I think some kind of I wouldn't say peace,
(31:08):
but ceasefire in Ukraine would be a massive boost. Would
be a massive boost because it would allow combody price
to fall more. Central Bank may cat grades. There will
be obviously a strong rebounding Europe. I don't know. I
hope this will happen sooner, as soon as possible, but
this could be something that can change things. The negative
one I think is that inflation, at some point we
(31:32):
reach four or five stop falling, maybe because as you mentioned,
Chinese recovering combody prices we go higher, and that's actually
can be very damaging for markets, right because if inflation
stopped falling, central banks are forced to basically continue maybe
they were forced to eye even more, and this would
be really damaging because you know, the decline in inflation
(31:56):
is the team that everybody is playing currently and a
few question that this is challenged. Well, then valuation is
too high. Central banks we have to like even more.
And that's actually would be basically going back to the
same environment of a year ago and offer it's not
going to happen. Okay, what about the UK. Everyone is
(32:17):
so down on the UK um and has been for
some time now, but it is still one of the
cheaper markets. The should been a massive outperformer and relatively
speaking right over the last year. And when you look
at the news, the the actual numbers as opposed to
the misery product and the papers on the press, things
don't look so bad. No, because I think we all
(32:38):
tend to make the same mistake that UK markets are
really is not really correlated with UK economy. We're talking
about a few big stocks, but not but a few
bestos that are basically multinationals right where the exposure to
the k economy is is very minimal. I think you
know the when you look at also the composition of
the UKA of the UK market is for us, it's
(32:59):
almost the ideal stack flation play, right because you have
a lot of defensive names, very solid, very cash generative,
and you also have the commodity exposure via biscuity, energy
and mining. So I think that and you know that
you've been very embolish on UK stocks mainly on the
on the assumption that the composition of the of the
(33:22):
UK index basically is very start flash and friendly in
a way. Now, what is the problem that then the
UK stocks face Now when we have ready the UK market,
This was really when nobody wants to actually even they're
not even thinking about invest in the UK. Now the
UK marketing is continuous to be cheap, but it is investable,
(33:43):
that's with it this way. So I think it's in
a phase where global growth may potentially re accelerate. And
I don't know, I don't think the UK market will
do as well in relative terms as last year, but
I can see the dvidend yield. The defensive names I
think would of really help the performance. But the best
probably of the UK market our performances behind us, and
(34:06):
there is have to say I don't want to be political.
Not with politics. There is still a Brexit. I think
the premium in the market and you see that in
the relative kind of evaluation of UK versus the rest
of Europe. And this won't go away. But I I
do believe though that for long term investors, when look
at long term investor in the UK market is still
a good place to be. As you said, it's not
(34:27):
it's not expensive. You have very good companies, well managed
and again the UK market has really nothing to do
or not so much with the UK economy that is
still struggling. Again, we're not in our recession, but it's
I think the UK economy will clearly struggle this year.
And so if you are thinking about invest in the
UK stocks, don't do it because you think the UK
(34:50):
economy will move just because of the multinationals and that
that are there that will generate still descent profits. I
love the idea that the U here's the perfect stagflation
and play. I'm given that we're prone to stagflation. That's great, right, well,
awfully the stack flational stories behind us, right, because we
are saying that gross will improve, an inflation will fall,
(35:11):
so actually, maybe what is interesting is that in a
year's time will be exactly the opposite scenario when gross
is back to normal and improving inflation is back to
normal and fully but a lot of things are to
go right to to be at that point and definitely
is not going to happen the next three months is
more like a story for probably the end of this
of this year. Let's talk about something that really really
(35:33):
has gone wrong. Um, and that's that crypto. And I'm
I drive really hard to be open minded about crypto.
I mean I really do. I know a lot of
our listeners and we just will think that I make
no effort at all to be over minded, but it's
simply not true. I've watched all the videos that the
crypto fans try and make me watch, I've read the books,
have done all of it, and I still cannot see
(35:55):
a viable future and a viable use case for cryptocurrencies
include thing bitcoin. By the way, um, and I wonder
how you feel about that, well, you know, when cryptors.
You know, obviously a few years ago everybody was was
asking us what is our view. My view back then
was that cryptocurrency are like a lottery ticket, right, you
(36:15):
buy a lot of re ticket, why because you know
there's a very very sucessal marginal in significant probability that
you're gonna win. But if you win, you win big.
And I think if you think in that way, you know, okay,
then you can say I can buy a fewer and
then let's hope. The point though here, especially what I'm doing.
(36:37):
My job is to advise people are to invest wisely
for the long term. And to me, a lottery ticket
is not an asset. Class is something different. You can
still have, you know, you can make money out of it,
but it's not something that would suggests my clients to want.
Then obviously I'm also not a crypto kind of specialist.
(36:59):
I can see the logic behind, you know, in a
peer where central bank where printing money like crazy, having
some kind of accurrency where the supply was fixed as
obviously appeal. I understand that. So this combination with you know,
easy money or let's say money printing by central banks,
obviously the tech angle, because the blockchain story is very significant,
(37:23):
so I can I can see why there was this bubble.
But any year we go, the easy money is over
monetary titling and the monetor exposes exactly the weak of
some of the assumption making about cryptus. Right, but again,
I don't think the cryptocurrencies will or should be a
building block of investment portfolioce it's like it's really like
(37:44):
continue for me to be a lottery ticket, and look
at what happened the last few months. It's still very
by the way, very Also dependent on regulation is something
that's difficult to value. So I still believe that there's
not from my point of view and as a class
that should be in PORTFOLI use for long term and
let's say relatively cautious investors. No, I don't. I don't
(38:06):
think so, and my view hasn't changed in the last
few In the last few weeks or months, it sounds
to me like you've got your own coin based accounts
with you know, a couple of thousand pounds worth a
bitcoin in it just in case. No, I have nothing
but to be honest, I can't blame if someone did
it and you know they make good money out of it.
So but again, you won the lottery. It doesn't mean
(38:27):
that you are an investment groule. I think you won
the lottery and that's it. And then if you have
to move on, well, I would like to win the lottery. Um, okay,
So here we are. It's a confusing year. It's a
difficult year. We're worried about consensus. But if I could
sum up where you might recommend or suggest a retail
investor in ordinary investor to go from here, you'd say them,
(38:50):
you know what you should have gold, you should have
emerging markets. You should know that commodities are a good
long term play. You should have learned from the last
couple of years to keep a close eye on valuation.
Is there anything else that you might say to an
ordinary investor looking at their portfolio and going, oh God,
I don't know what to do. Is there anything else
(39:11):
that you would say to them today? Yeah? I think, Look,
we don't expect this yet to be great right for
for equity, for equity investor, but it's gonna be okay.
It's gonna be okay. Something I think has changed significantly
is the outlook for government bonds and fixed income products.
You know, when I when I joined pick Tap ten
years ago, bonniers were much much higher. They were obviously
(39:32):
this kind of downtrend, But I remember, I don't remember
one year where we told investors, look, this is time
to increase your location to fix income, and I think
this is actually the right time to do it. You
start to see some real good evaluation, and government bonds
in the sense that you coupon is distant in the
(39:54):
US is you know, it's three point five could be
four percent. So the point is that there is this
is something that you know, we I haven't had in
a very long time. Considering that equities are not particularly cheap,
I think it's not a good idea to relocate some
of your money into government bonds with the assumption from
our point of view that we may not see a recession,
(40:14):
but we're not going to see a significant pickup in growth,
so nominal growth will actually be quite weak because inflation
is falling and real growth is very low. So I
think what we are actually advising or suggesting our clients
is to put some money back into fixed income products
right or could be government bonds in the US. We
like a emerging market debt because I think this is
(40:37):
the time, after a long period of financial repression that
basically kept real body is a really interest rates much
below where there should be. So I think that would
be my let's say something new may be different from
the past, is to reallocate money from maybe from cash
(40:59):
or from equities in two government bonds. But obviously you
need to be selective. We see more value, for example,
in US treasuries in government bonds, especially that in America,
much less in Europe, where I think there is the
risk of central banks to be even tighter and so
for bonn eels to rise, and so for retans to
(41:20):
remain quite low in the short term. So that would
be that's probably the biggest change in terms of our
long term view for for this year. Thank you. Look
at that's almost exciting. I can't remember the last time
I spoke to anybody on a podcast or an energy
of any kind where they actually recommended in Christening exposure
to the bond market. So thank you for that. The
(41:41):
government bonds exciting those seems to be a little bit extreme,
but I'm doing my best, look around my best. I
like that we have to pull some excitement from the
whole like that. Thank you so much for being with
us today. I hugely appreciate it. Thank you, Mary, thanks
(42:02):
for listening to this week's Marion Talks Money. We will
be back next week. In the meantime, if you like
our show, and I really hope you do, review it
and subscribe wherever you listen to your podcasts. This episode
was hosted by me Marion somethingset Web. It was produced
by Samersadi. Additional editing by Blake Maples and special thanks
of course to Luca Paolini and to John Steppe. Finally,
(42:23):
of course, this is your weekly reminder to sign up
immediately to John Staley newsletter money Distilled. The link is
in the show notes, and you won't regret it.
Host
Merryn Somerset Webb
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Therapy Gecko
An unlicensed lizard psychologist travels the universe talking to strangers about absolutely nothing. TO CALL THE GECKO: follow me on https://www.twitch.tv/lyleforever to get a notification for when I am taking calls. I am usually live Mondays, Wednesdays, and Fridays but lately a lot of other times too. I am a gecko.