Speaker 0:
hello and a very warm welcome to this video update on the Premier Portfolio Management Service. My name is Jonathan Wilcox, Global head of distribution here at Premier Min. I'm delighted to have with me today Neil Birrell. He's not only the chief investment officer of Premier Mitton, but he also chairs the Investment Committee

Speaker 0:
of the Premier Portfolio Management Service, which makes all the investment decisions and strategy decisions of how to allocate your your money. So, Neil, let's just get into this now, you know, as we talk through and we'll get on to the portfolio management service in a minute. But let's just step back and look at it from the the macro perspective, the top down perspective

Speaker 0:
markets seem to being whip soared by the inflation numbers and response of central bankers. So maybe the first place we should go is there. So, looking forward, do you think inflation is peaked? Do you think interest rates have peaked? What happens next?

Speaker 1:
Blaming. Let me take a step back. First of all, maybe there's a lot in there. Um, for first of all, you know, you mentioned macro data. I mean I. I think it's probably worth just explaining, you know, a little bit how we how we think about that. And by that, what we mean is is is macroeconomic data. So that's that's, um, all the numbers that are coming out on a weekly basis on on

Speaker 1:
on economies or whether that be inflation, whether that be what central banks. And by that we mean the Bank of England, the Federal Reserve in the US, the European Central Bank, Bank of China, et cetera, et cetera. What they're saying about sort of interest rates, um, news that's coming out on economic growth news that's coming out on retail sales. All those things that are the data points on on the whole economy.

Speaker 1:
Um, and they seem to have driven sort of like thinking and certainly the front page of newspapers for a long period of time now and particularly the inflation sort of point. And also that the R word recession, which I'm sure we'll get on to at some point or other, um, and that they've dominated the, um, the sort of investment markets financial markets for for a long period of time.

Speaker 1:
Um, over and above what I? I sort of think of or the term sort of fundamental. So, in other words, by that, what you mean is sort of how companies are doing what their profitability is, Um, how their businesses are performing all that type of thing. It is. Macro influences have been very, very significant. And they absolutely hone down on these points that you're talking about here and asking me to answer, which I don't really want to, is whether interest rates and inflation have peaked.

Speaker 1:
Now we can't just we gotta look that on a global basis. I. I think, first of all, when we will focus on on on the UK because it's our domestic economy in a in a moment or two, you you get the the economic cycle. So and that's exactly what it is. Is this sort of wave, the cycle sort of that goes like this. And we go through growth and we go through slowdowns. We go through recession. We go through growth, et cetera, et cetera. Now, each each cycle is different. They don't just sort of repeat themselves. Um, and this one is embedded back on on. Frankly, um, what happened through through covid?

Speaker 1:
Um when? When you think about it. Um, you know, we had this huge amount of money was thrown at the economy in covid. Interest rates went to basically zero to support the economy. Uh, furlough schemes were put in place, companies were supported. Money was thrown at the global, um, the the global economy. Um,

Speaker 1:
and And what that's done is to be that was inflationary. In the sense that the more money there is around, the more likely there is to be spent. The more goods and services get consumed, the more likely it is the prices go up exactly. And and that's what sort of you know, that was expected to come through. Frankly, it took quite a long time to sort of to to to to come through.

Speaker 1:
Um And we first saw it again as a result of covid. And and I think it was the last quarter of 2021. We saw energy prices going up. We saw petrol prices going up. We saw a lack of supply of petrol just simply waiting to fill our cars up.

Speaker 0:
And that was way before Ukraine and the Russians.

Speaker 0:
They did that as well. That was happened way back, you

Speaker 1:
know, But when they forgive the pump that turbo charged it. I mean, you got the whole thing, just sort of, you know, moving, you know, even more so of inflation. Got a got a another boost from that. And there's not many ways you can. Actually, inflation is a bad thing. It's damaging for economies. Um,

Speaker 1:
and there aren't many ways you can. You can tackle it, to be honest with you. Now, these central banks, including the Bank of England, have all got inflation targets. They're expected to meet, but it's rather quaint if if if inflation actually goes above the target in, in in the UK, the bank of the government of the Bank of England has to write to the Chancellor of the Exchequer and explain why, and he still does he be quite long letters

Speaker 1:
at the moment. Yeah, and, um and that's sort of, you know, what we're expecting is is for, um, you You want to put up interest rates in order to to reduce inflation. That's the tool that the Bank of England uses. Why? Because if if interest rates go up, it means you're more likely to put money on deposit in your bank account because you're you're gonna get a better return there, which means you're not spending it.

Speaker 1:
Uh, it also means you want to go and borrow money because you need to or want to. Um, it gets more expensive, so you're less likely to do that. So there's less economic activity, less spending in the economy. As a result of that, what it means is there's less, um, pressure on prices so they start coming down. Inflation starts coming down. That's the idea now. Part of the problem is that no one really knows how what the impact of a a rate increase will be. An interest rate increase will be or how long it will take to have full effect.

Speaker 1:
Most people think it takes 12 to 18 months for the full effect to to to to be to be felt now. That means we don't really know the actual full effect of the very first ones, let alone the one last month. And and so you know, there's this concept of policy lag. It's called How influential is that that going to be, which makes it really difficult to sort of forecast inflation.

Speaker 1:
Uh, in fact, it's a bit of a fool's game, and the Bank of England can't do it. I'm not gonna have a go at it. Um, but I mean, I suppose to directly answer your question. Um, I'll be past the worst of inflation. Probably. Um, and and I think some of that can be seen simply because of the numbers. Just because mathematically all the price increases that are coming through last year will fall out of the year on year numbers. So they'll come then, anyway. But in in spite of that, we should still think about the concept of core inflation. And in the UK, that's quite well driven by

Speaker 1:
we're having to import, um, a lot of food. We import a lot of clothes. Um, that's not within our gift. Interest rates here don't necessarily stop the prices of those goods. Is that

Speaker 0:
why UK inflation is to be higher than other markets? Do you think

Speaker 1:
I think that's part of it? Yeah, I do. I do. I mean, it's the It's the structure of sort of the economy. Um, and and if you look back over, you know, a very long period of time, then inflation here tends to be sort of a bit higher,

Speaker 1:
uh, than it is internationally. Although interestingly, it wasn't in that period post the global financial crisis. But it has been again over the course of of the last, um, the last 18 months or so and I think it'd be really interesting to see in the UK you know how rates come down interest. Um, sorry, inflation.

Speaker 1:
And as the rest of the world at the moment, it still feels stickier. Which could be that could be part of the reason for it. Are we at the peak in terms of interest rates that depends on inflation. I think the central banks and and and governments as well have got absolutely clear in their minds

Speaker 1:
that longer term, higher inflation is more dangerous than a recession. So I think they are willing to risk an economic slowdown or a recession by putting rates up further or by holding them at those higher levels for longer in order to make sure inflation's beaten

Speaker 1:
in order to. That's I think that's their key point, their key objective. And they are willing to resist, um, not to worry too much about a recession. Sort of, you know, coming through. Clearly, it's not a good thing, but I don't think it's It's certainly their secondary consideration as a as a function of that. I think it depends where you look. I think the U SI think rates probably peaked there. Uh, inflation seems to be reasonably under control, I think in Europe, maybe another increase, maybe not the UK. I think it's more certainly see an increase simply because of that stickiness of the inflation.

Speaker 0:
And And you talk about recession, Neil, you know, should we be worried about a recession? Do you think it could potentially happen? You know, we see job cuts, house prices falling. Uh, people who got less money to spend, you know, is a recession coming or not? And should we be worried about

Speaker 1:
it, uh, to take the second one first? Should we be worried about it? Well, um um at its highest level. No, uh, and I and I think firstly, because recessions aren't necessarily bad things.

Speaker 1:
Um, but when you think about it that they come after a they only come because we had a really good time. What happens when you've had a growing or booming economy is that, um you know, prices have gone up. Um, people have had more money, whether it be property, you know, property prices tend to go up. You can get these sort of like, if not bubbles. Certainly these asset price inflation sort of comes through,

Speaker 1:
and and it's quite important that you don't just carry on booming and booming and booming, because then you can get hyperinflation. That's certainly not what the what the, uh, central banks or governments want. They try to control it, they try to keep it smooth. And and because because you're never just going to have this sort of gentle, straight line of Oh, that'd be really nice to go. We have the The economy is going to grow at 3% per year with 2% inflation.

Speaker 1:
That doesn't happen. I mean, you've got all these dynamic sort sort of moving, um, within it. And so, um, recessions come and and what happens is during recessions and people lose their jobs. Uh, which isn't good. But, you know, if you're one of those people, I mean it. It's clearly not a nice situation to go through. Uh, but What it does mean is that bad companies go bust.

Speaker 1:
Uh, money recirculates in into the economy. New companies start new companies form, the better companies grow. And as you go through the recovery phase, then you get a healthier type of economy without these sort of bubbles within it without these sort of other stresses and strains within it. So we shouldn't worry about it Sort of too much from from that point of view, is it coming?

Speaker 1:
Um, look, II, I don't know, Um, at the start of this year, I probably would have said, Yeah, we're going to hit a recession in the UK. We might hit a recession. Um, in in the US and probably almost certainly in Europe as well as time goes on, it looks like that's possibly not gonna happen in the UK. And almost certainly not going to happen in in sort of other major,

Speaker 1:
um, world world economies, which is is is a really good outcome. Does it matter if we go into recession from the point of view of, um, markets, whether it be bond markets or stock markets or, you know, company shares, that type of thing, um, markets discount. And by that I mean, they look ahead.

Speaker 1:
So what they're not looking at is what's happening tomorrow or or whether we're gonna have, um, you know, sort of a a technical recession in the second half, Um, of of this year. But they're much more worried about what's happening next year because, you know, that's what they're forward looking rather than sort of looking today or backward looking. But it doesn't mean they won't react very quickly to to the release of a data point, which might suggest that things aren't quite as good as they they thought they were. So does it matter if there's a recession?

Speaker 1:
Well, the answer is yes or no, as everything always is. No

Speaker 0:
good answer. Good answer. OK, let let's you talked about asset classes. Let's talk about asset classes now then. So in the context of the scene setting that you sort of laid out already so far, you know how asset classes performed this year and and kind of what happens next? Do you think?

Speaker 1:
Um, so so far this year, um, but bond markets overall have been actually quite volatile. Um, and and the reason they've been volatile is because they're reacting to interest rate expectations.

Speaker 1:
Um, and and they've changed quite dramatically through through through the course of the year, Not least, um, in in March with the with the banking crisis, which clearly, um um, although looking back on it, it doesn't seem to be in the crisis now, but it's certainly we all thought at the time, um and that's driving sort of bond prices because, you know, bond prices are very reactive to to interest rate expectations,

Speaker 1:
Um, and and current interest rates, they've been volatile, and I haven't performed that well, Um, stock markets, um, have been, um, there's been a huge difference in what's happened in stock market within markets. It's I'm finding it almost impossible these days to talk about markets. Um, you know, when you think about it, you know, So the stock market is everything from from Apple, the largest company

Speaker 1:
in the world, all the way through to the the smallest retailer in in in in a an emerging market or an emerging economy, a less developed economy, um, in in in Africa or Asia or or or uM or or Latin America or somewhere. So there's huge huge difference. Um, and and clearly we we tend to within the the management service. What we're doing is, um, sort of focusing on sort of mainstream,

Speaker 1:
uh, mainstream markets and mainstream companies within that. But what we're seeing is a huge sort of bifurcation of difference that's taken place in markets. If you take the US, for example,

Speaker 1:
I mean, it's been impossible to get away from from the the dominance of the share price, performance and share price growth of of the Big Eight technology and communications companies Apple, Netflix, Microsoft, Google, et cetera, et cetera. This is all self evident, and what we've seen is a dramatic increase in their share prices, as as investors are sort of run to safety to some extent, um, in in these more uncertain sort of conditions, the reason they run to safety

Speaker 1:
is because these companies are growing and growing quite quickly. But the problem is you keep buying their shares. Um, it just drives the the valuation of them, the priciness of them up to sort of higher and higher levels, and and also you do start worrying about their ongoing growth prospects. I mean to be flippant about it. There's only so many iPhones one person can own and and therefore and we are we are seeing it now that I I you know, um, Apple sales numbers are not growing. In fact, they're falling, um, and have

Speaker 1:
for a couple of quarters and are expected to continue to do so. So these These are no doubt in the quality of the companies. Then I'll I'll part Netflix. I don't really understand Netflix or or or its sort of business model. We look at all the others Amazon, Netflix, Microsoft and these are all super companies. It's got more and more expensive

Speaker 1:
and and therefore that's driven sort of like market sort of overall. But then you go and look at the other 492 companies in in the United States as part of the S and P 500 Index, which is literally the index that's made up of those 500 largest US companies and is a good sign of of how they they're sort of doing. Generally. Those are 492. Their share prices have only risen a little bit,

Speaker 1:
and so we can see lots of value. There much less value in in in the big names. You come to the UK, for example. I mean, the UK stock market looks cheap. Uh, by international and historic comparison, there can be no doubt about that. And within the UK stock market, uh, smaller and medium sized companies look attractive relative to larger sized companies. So within all

Speaker 1:
all these different bond markets again, when you're looking at, you know whether it's sort of like very short dated by that I mean short time to maturity bonds issued by the US government. Or they could be, um, bonds issued by, um, by lower quality companies again, in, In, In, uh, I'm gonna say Taiwan just as an example. Um, you know, it's a It's a massive, massive, um, market, and

Speaker 1:
to be in the right areas of that because some areas are really attracted to other areas around. So what I'm basically saying here is that that there's such a difference as as as that I I'm not sure I can remember a time when I've seen such sort of potentially absolute value sort of created and the moving bond market since since the advent. You know, since the middle of the covid period has been extraordinary.

Speaker 1:
Um um, and and also in other sort of asset classes, such as a listed property companies where there are levels that you have only been seen, sort of, you know, four times since the 19 sixties. So you're seeing absolute value being created at asset class level, but also within asset classes. I'm not sure I've seen such bifurcation within them. Um, so, you know, basically, and I think what we the way we're thinking about things is don't own markets. Don't own asset classes. Care about what you're owning within them is the really important point.

Speaker 0:
Thank you. And then bringing that, you know, as an investor in the premier portfolio management service

Speaker 0:
with across the range of income and growth portfolios that, you know, as chair of the investment committee, you didn't make this as allocation decisions. What have you been doing over the course so far of the year to date? And what sort of things are you investing in now? Going forward as a consequence of what you've just said?

Speaker 1:
Yeah. I mean, we came into the year, um, more cautiously positioned than than we ever have been, um, and I need to talk generally here because clearly there's some very low risk portfolios and much higher risk portfolios. And we got the the income,

Speaker 1:
the income portfolios. But, yeah, we were typically cautious in our outlooks, the best way to put it. And that was reflected depending on the on the on, the different, the different for all the reasons that you talked about. Yeah, exactly. It's just sort of, you know, the concerns that you know we had for for for the outlook, which meant typically, we had more in bonds than we've ever had them. And it also meant that we had more in in. And I'm sorry less in in stock markets than than we ever

Speaker 1:
than we ever had them. Um, and more importantly, within those areas, we were focused on the thoughts that were the bits that we thought were were the best value, the bits that we thought were going to provide the best long term returns. And we are long term investors. You know, we're not making decisions on a month by month basis here in terms of trading and trying to sort of, you know, to to make short term returns or investing for for for long periods of time,

Speaker 1:
Um, and and so that we, as a result of that, we had relatively low exposure or, um, or probably very low exposure, the best way to put it across the the the different portfolios to these large US companies. Also, in bond markets, we are relatively defensive, which hasn't been the right place to be as well. The exposure we've got to to property companies has been, um, a little bit painful, um, through through this sort of period of time as well, because they've reacted

Speaker 1:
badly to concerns about the the economy. And also we invest in what's called alternative assets, and they could be any sort of asset class. But we aim for the aim for them is to be lowly, correlated to bonds and equity. So typically they do Well,

Speaker 1:
um, can you give me a couple

Speaker 0:
of examples of what do you mean by

Speaker 1:
alternatives? Yeah, sure. I mean, we we use them in a number of ways. But the easiest way to describe it is through investment trust or investment companies. And that could be, um, energy storage, renewable energy. It could be music streaming. I mean, I'm sure you read in the papers about sort of people buying all the, you know, the rights up to sort of all the, you know, the artists.

Speaker 1:
Um, so we invested in that that type of area, it it could be listed hedge funds that that we invested in which, um, which we typically quite like because they produce sort of lowly correlated returns and tend to do better When, um when? When? When Bond and equity markets, uh, are doing poorly. It could be shipping. It could be space technology. It It's a very, very broad remit.

Speaker 1:
Um, and but we're almost agnostic to the underlying asset class, so long as it's a good investment in its own right and lowly correlated to the main asset classes is is what we're looking for there. And they because we use investment companies. They've struggled a little bit through, you know, one or two

Speaker 1:
specific issues. I'm not into it now, So it's It's not been a great year in in terms of, uh, the returns, um, to date equally. Um, what went on through through the banking crisis? Sort of. That was a bit of a microcosm of it all and that we had a pretty poor march and a pretty poor sort of first quarter.

Speaker 1:
And so I mean, the way I've got to think about this, though, is is we should be looking forward rather than looking back. Now. Clearly, we think about we analyse what's happened because that sort of helps shape your thoughts. You understand what drives the prices of the assets, the asset classes and the individual investments that that that you've got but equally care about my going forwards and when, as I sit here and everything I've talked about in terms of the economic environment and I've talked about in terms of the markets more broadly, I I couldn't be more convinced about the strategy that we've got in place at the moment is is the right place for us to be,

Speaker 1:
because I don't want to be holding everything that everyone else has been buying up to this point. I want to be holding the stuff they haven't been, because I think at some point they just gonna we're gonna move back to sort of what I think as fundamental. So in other words, the the the actual underlying qualities and growth rates. Of the of the specific investments we've got, I think we start becoming a focus once we move through the cycle and people get away from this obsession with where interest rates are and where they're going and where inflation is and where it's going.

Speaker 0:
OK, so hopefully fundamentals come back to the fore

Speaker 0:
again, which will be helpful. That would be great. OK, so my last question, then, Neil, as you look back to you, talked about being cautious at the beginning of the year and you reflect upon what's happened in the course of the past six months. Are you more positive or more negative than you've been in the last six months? As you sit here today,

Speaker 1:
I am more positive on the outlook for economies. Um, than I was I am, um, probably a bit less positive. Anything on overall, um, I'm gonna say market levels or as say, class levels. Part of that's been driven by the you know what's been going on in markets, but I am convinced about the strategy that we've got in place Within the portfolios is the right one,

Speaker 0:
Neil Birrell. Thank you so much for sharing all of your views, all of your thoughts on the Premier Portfolio Management Service and thank you to you as well the viewer for taking time out of your day to watch this video from Premier my thank you very much.