Speaker 0:
hello and a very warm welcome to this edition of talking markets where we're gonna be talking about financial markets in general, what's been going across the asset classes and what we think might happen. Going forwards.

Speaker 0:
My name's Jonathan Wilcox, global head of distribution here at Premier Min and seated in the talking markets armchair this week. It gives me great pleasure to introduce Neil Birrell, who is the chief investment officer of Premier might and probably best placed amongst all of our farm managers to give a view of what's going across the world. Now, it seems, from everything that we read, see on the news that markets financial markets have been dictated to by all the news flow on inflation,

Speaker 0:
how the market is responding to that And, of course, the response from central banks. So perhaps that's the best place to start. Neil, Let's get straight into this inflation interest rates. Have they peaked or not?

Speaker 1:
Well, first of all, Jeffrey, thank you. Those kind words in the, uh, in in the introduction, um, have interest rates and inflation peaked. Well, we we're talking of, I think of quite a poignant time, actually. Um, in in in terms of that, I mean, they've dominated sort of thoughts. What's been going on in inflation and rates since the advent of covid? Arguably, since the the global financial crisis has been sort of the the key issue.

Speaker 1:
But but clearly, since probably the final quarter of 2021 it's been the truly the dominant factor, as as inflation came through as everyone expected, except it came through at speed and in in a greater quantum than most people expected. And we've been living with it ever since. I mean, you think back then it was it was the supply chain issues, you know, people queuing up at the petrol pumps, which are all a lot of fun. Um, and then it's all sort of came through in energy prices and food prices, and it's happened

Speaker 1:
all around the world. I mean, that we should remember. This is a global phenomenon, not just a UK phenomenon, although it does feel that it's a little bit more, uh, embedded here as as as we sit here today, and clearly rates have got to go up to in in order to meet that. And I think the big problem we've got, though, is this concept of policy lag. And no one really knows how long it takes a change in interest rates up or down to to have their full effect. I mean, academic studies or research will tell you it's 12 to 18 months, so we don't

Speaker 1:
actually really know the full impact of some of the very first interest interest rate increases yet, let alone what's happening at the moment. And that's got to come through. And I think you know what? It's been really quite surprising and quite pleasing to see that the strength of the economy has been quite robust through all this process as well. But it clearly is influencing inflation. It clearly is having an impact. We are seeing the data come down. Part of that is just mathematical. And there's the previous, um, increases

Speaker 1:
come through, uh, fall out of through through the year on year sort of calculations. Arithmetic is going to come down. However, we are going to see core inflation fall, as well as the, uh as well as sort of headline inflation, which is all sort of good news. Are we at the peak, which I think was your question? Um, I, I think in terms of rates, Um, probably in the US. Uh, maybe in Europe. Probably not in the, uh in in the UK and in terms of inflation, have we seen the peak?

Speaker 1:
It's very, very unwise to predict inflation. No one gets it right very often. And so I'm not going to say yes. Although I think at the moment the signs are good.

Speaker 0:
OK, thanks, Neil. And can I just ask you one quick point or question that you raised? Why is the UK inflation number much stickier than almost anywhere else in the world?

Speaker 1:
Well, it's a good question that and it's one I get asked quite often. I'm not sure I've got the exact answer to it. I mean, you got to think of inflation comes through in two different ways. One is sort of,

Speaker 1:
you know, wage push or or or sort of, and the other is sort of demand led. And what we've had in the UK for a number of years is both those sorts of elements of it. The labour market in the UK is is is not as flexible as probably as we'd like it to be. We're seeing increasing um, increasing wage pressure, sort of sticking through a reading about it on the front page of the paper, sort of every single day. I know it's sort of improving at the moment, but it's still still very much there and also on the other side. We still got a lot of demand built up in in the UK economy,

Speaker 1:
So it is taking quite a while to sort of come to come through. Um and you know, are we at the peak? I don't know. The data that's coming out at the moment is still sort of pretty embedded with, which is a shame. But looking back through history, the UK is a more inflationary environment than other countries. It does tend to go higher and does tend to be a little bit higher. Now

Speaker 0:
that's quite interesting. I hadn't realised that as well, going back through history as well. And then you talked about the lead and lag effect of monetary policy, taking 12 to 18 months. So what happens

Speaker 0:
the economies of the next 12 to 18 months from this huge surge we've seen in interest rates and there's a lot of talk now about a recession is coming. And you said that. Actually, economies have been quite resilient so far. So what's the outlook from here,

Speaker 1:
Do you think? Yeah. I mean, I think looking globally clearly, you've got to start with the US. It's the largest, the most important economy in the world. And that has remained robust. I mean, it did genuinely, at the moment, as as we sit here and talk, it does look like the Fed is pulling off this trick of, of getting interest rates

Speaker 1:
of beating inflation and keeping economic growth sort of fairly strong. And you look around the world as well. And the Europe is surprisingly good, I think, and as possible, we see some negative GDP numbers, but it's sort of doing pretty well. Uh, the UK is probably the one that's going to be going into more of a technical recession than, uh than other countries. It looks more likely at the moment. I think the one we got to spend quite a bit of time thinking about, though in a global sense, is China. Um, it's it's hitting the headlines today

Speaker 1:
by day. At the moment, uh, you've got the economy slowing quite sharply after it came after the boom after it came out of the covid lockdown. What we're also seeing is problems in the property sector there now, now, bearing in mind, China is the second largest economy in the world. And bearing in mind that the property sector there is probably the largest part of it, certainly a very important part of it, so have problems there in terms of finance and corporate issues within the largest part of the second largest economy in the world is quite important for the strength of that economy.

Speaker 1:
Um so I, I think, as we sort of, we sort of go through. I mean, are we going to go into recession again? I don't really know the answer to that, but, you know, in terms of markets, I'm not really sure it matters, to be quite honest with you. Well, let let's pick up on that,

Speaker 0:
then. You know, we've talked about rates. We've talked about inflation. We've talked about the economies.

Speaker 0:
What happens to markets going forward from here, and it's a tough question to ask, but you know, what's your feel now about cross fixed income bond and equity markets.

Speaker 1:
I, I think. I mean, I'm gonna put this in sort of short term, medium term and long term. But I, I I'll try and do it quite quite briefly because that could take quite a long period of time.

Speaker 1:
Um, in in the in the short term, I I'm genuinely talking about probably the rest of this year, OK, the medium term, let's say it's sort of 2024. The early part of, you know, sort of first three quarters of 2024 the long term sort of beyond that, I think the long term is the easiest one to sort of deal with just at the moment. Uh, because what we'll get there is sort of, you know, we've got to get reasonable economic growth. It's not gonna be very exciting. We're not talking about a big sort of like economic boom time any anywhere in the world unless we have a deep recession, which is possible. And then we get the recovery from it. Um

Speaker 1:
and I so coming back to the short term, I think this is where the uncertainty is because as we see this concept of policy lag the impact kicking in what it's going to do to economies, therefore, how that's going to feed through into bond yields. How that's gonna feed through into equity markets is is probably the most difficult one to predict. I think as we get through the medium term, assuming this is all gonna happen by, by the way, in the next sort of few months or so. Um, and it's quite interesting because everything sort of seems to have taken longer to come through, um, than than we expected,

Speaker 1:
uh, the early part of next year. Let's call it the medium term, the first sort of 6 to 9 months of next year that will be very much a reaction to what's taken place. But I I in in the first element of it. But I, I don't think it's sort of, too. I mean to be, to be honest about it, I'm sort of getting more positive on on the outlook than I have been for Sort of People are not used to it,

Speaker 1:
and that's all it is. And, um, and it's sort of in equally, you know, And when I talk around the the the the team, Um, whether it be the diversified funds that I'm in, that I'm that I managed the lead manager of other fund managers within within the organisation there is quite a spread of sort of views in all this, which is, sort of, I think, somewhat unsurprising.

Speaker 1:
But as, uh, let me call us one or more senior citizens of the, uh of the group and that whilst I can't say you've sort of seen it all before because you've never seen everything before because it's always different this time. I. I think we're getting to the stage where markets will be looking through the the economic ramifications of of what we're seeing in the shorter term.

Speaker 0:
That's interesting and actually sort of thinking this through. I mean, one of the things that's been surprising. I think this year has been the extraordinary strength of the so-called Magnificent seven, the sort of tech and and not telecommunications companies out out in the US. Now, can that continue, or does this gonna broaden out to the rest of the market at some point?

Speaker 1:
Well, I mean, I suppose the simple answer to that is yes, it can continue. Uh, will it I think it's less likely. And and should it? I think that's probably less likely as well. I mean, let's start off from the point of view that these these big communications and and, uh and and tech companies we all know the names of the Amazons, the Googles, etcetera, etcetera. First of all, I think I I know nothing about Netflix, by the way, Uh, but all the others are good companies, and they've been around quite a long time. They're highly profitable. No one can tell you Apple is a bad company.

Speaker 1:
Um, and and they've been driven by by their by their own sort of prospects, how well they've been doing their growth and profitability, but also by this sort of run to safety and more difficult sort of economic conditions. So I think the key issue with them is not so much the quality of the company. I think it's worth remembering that they can't keep growing at the speed they've been growing at that there are only so many

Speaker 1:
iPhones an individual can have and and so you get to that sort of point, and we're seeing with Apple at the moment we saw the numbers come out fairly recently, we're seeing sort of the revenues sort of going through a roll over. They're predicting it's not going to be a great fourth quarter, Uh, for for them as well. I think that might be typical of an awful lot of these other companies. Tesla are sort of seeing sort of, um, issues with sort of margins and pricing. Also, the sort of question marks over the

Speaker 1:
for electronic vehicle sort of going going forward. So I think it's possible we see the fundamentals for those businesses come under a little bit of pressure, a little bit more scrutiny, but probably more importantly, the valuation of them come under an awful lot of scrutiny. Now, I'm not going to roll out the numbers here. We've all sort of seen that the dominance, the multiples they've got to the PE numbers are at eye watering. In some cases,

Speaker 1:
um, and then you look at the other sort of, you know, the other 400 sort of 91 92 93 stocks in the S and P 500. Just they look amazing value relative to to to to those, um, that that very small number of companies. So I think I I would expect that gap to close. Now they can close in in in sort of one of three ways. One is that the the the you know, the

Speaker 1:
stocks will come down The other way is that the, um, the other 492 will go up or it's somewhere in between. And I would guess it would probably be that, you know, to be honest with you, what I'm trying to get away from is talking about markets because it hides so much. OK, I mean, you you can't just talk about the US stock market because you see those. There's such bifurcation within it that it's quite extraordinary and and therefore what I want to do is to talk about the within markets within asset classes because I think it's so much more interesting,

Speaker 1:
uh, opportunity there, whether the S and P 500 goes up or not. Over the next few years, I haven't a clue. OK, but will those other 492 companies where there's a huge lot of opportunity do well? I think it's more likely than it is the large ones. So do you think

Speaker 0:
stock markets are cheap or expensive at present?

Speaker 1:
Well, um I don't know. Um However, what I can tell you is if I look at sort of markets overall and we'll we'll come back to within markets in a moment or two because I think that's actually the important point.

Speaker 1:
If you just look at the the MS C i World index of the world Index, which whichever one you choose there, that much difference and you look at the PE, the price earnings ratio, the multiple evaluation it's standing on, it's not far off the long term medium. Now that means you know it. It does make it expensive, doesn't make it cheap. Does it mean you can go up or down?

Speaker 1:
I mean, either of those things, frankly, I mean, it can go up for one of two reasons, you know, Firstly, we sort of just get prices go up or go higher. Um, without earnings for profits, driving it through so they get more expensive or they can go up because profits grow and earnings grow, and therefore they go up without getting more expensive. And the same could be said on the way down. Sort of clearly,

Speaker 1:
um, so, you know, I think that OK, value, uh, we got to care about earnings growth more broadly. It's going to be lower this year. Um, and it'll be up next year, probably. Or certainly that's what current expectations are. So I think we're in an overall terms, sort of pretty reasonable shape in in in terms of the valuations of the global stock market.

Speaker 1:
Within that, there's clearly differences. We've always already talked about the difference that takes place in the US. But then you start looking at different geographical regions. And, um, frankly, I think the UK stands out as being really quite cheap at the moment, just on a PE basis, and and some and some other sort of areas. There's reasons for that, and which, which, which probably sort of somewhat embedded

Speaker 1:
so but within sort of the world stock market. Yep. You can find bits of the US that are really attractive. You can find the UK that's really attractive within the UK. Bits of it are much more attractive than others. And I think wherever you go, you're gonna find sort of things to do. Japan's back on the radar again. Now, for example, has performed really well this year. One is because the economy is improving, but two, because eventually Japanese companies are beginning to be run for shareholders rather than management and rather than founders, which makes a fundamental difference to to how they're going to be looked at, how they're going to be valued.

Speaker 1:
Possibly more importantly, in terms of international, um, interest in buying of of Japanese stocks. So again, within mark, my markets are probably OK value within it, I think some great value and some bits that are less great value

Speaker 0:
right now. I do want to ask you about politics in a second. We've got a couple of large elections coming up in the next 12 or 18 months. But before I do that, can I just sort of finish off in this piece that we've just been talking about? You'll be talking about equity markets, but obviously, clearly, with this CIO view, there are other asset class that investors can access. So what are you thinking about? Or investment grade, etcetera?

Speaker 1:
Well, well, first of all, having a diversified portfolio is very important, as we all know, and, um You know, I I'm sure everyone watching the video will be taking that for, for for for granted. And it's certainly something that that we appreciate, I think looking at Bonds, first of all again more interesting, though, right? I mean, I think Bonds you can't just talk about Bonds. I mean it. It goes from everything from from the sort of the shortest dated, highest quality U US government issue through to the the lowest quality corporate issue that you'll probably get in, you know, in in a frontier market or something. So it's a huge universe of bonds.

Speaker 1:
Um, but but for for mainly I think probably we should say Yes, I think bonds are attractive. And the reason for that is, as Lloyd Harris would say, who is our head of fixed income? He's been repeating a number of times over the course of the last 18 months. It's almost like being forced to buy bonds. And as the price of the fall in the yields have gone up, there's a completely different risk profile to, uh to to the bond market

Speaker 1:
overall than there has been for a very, very long period of time. When you think back to, um, you know, through Covid. And prior to that, that huge amount of negative yielding debt that was all around the world, you know, interest rates were virtually down at zero. Bond yields were sort of very, very low. Now they're attractive. The risk of all profile is different within it. Um, in government bonds are probably going to be more reactive to immediately to, um

Speaker 1:
to to interest rate sort of moves. Uh, credit is clearly going to be more affected by what's going on with the profitability within within an equity market of of the companies that are issuing the bonds, which is clear. But if you just look at a high quality portfolio In other words, investment grade portfolio, which is reasonably short dated reasonably, um, insensitive to interest rate moves. You can get some pretty attract in sterling or euros or dollars. You can get some pretty attractive,

Speaker 1:
um, returns at the moment. So I think yet again within. Within the bond market, there's lots of things to do, and any portfolio should should be exposed to them. I think elsewhere, and one area of expertise that that we've got at premier might is is listed property companies reach across the UK and Europe.

Speaker 1:
You start looking at the valuation of those on a historic basis Either discounts to NAV or just in terms of P relatives again, they're at levels that haven't been seen for for a very, very long period of time. You start looking at alternative investments, particularly maybe in in in terms of sort of investment companies, alternative investment companies.

Speaker 1:
Um, they they're looking really attractive. And I think overall, you know, across the the the full spectrum of of asset class at the moment, uh, I mean, I'm not going to talk about Bitcoin or gold or anything like that. I don't really understand it. Uh, but you look at the main sort of asset classes. I think there are attractive valuations available and within the asset classes, some very attractive, um, investments available. Now that's really

Speaker 0:
helpful. Thank you, Neil. And then I think that's my penultimate question. I think we can't ignore this now because we do know there's a

Speaker 0:
elections coming up towards the back end of 24. We also know we've got a general election probably coming in the UK towards the back end of 24 as well, at some point will be called. And what sort of impact do you think that will have or increase? Do you have on financial markets as we sort of head over the next 12, 18

Speaker 1:
months? Um, people are going to focus on it. Of course they are. Um, And it it's sort of saying something that doesn't need to be said. But markets hate uncertainty. Investors don't like the unknown. Um, the political change brings unknown with it.

Speaker 1:
Um, first of all, the US where, um, I think we know more about the the sort of the political parties there and and how they'll behave. I. I think we know less about the candidates that are gonna be put up for president how they're going to behave. But but the US, you know, depending on how it works out through the through the different houses, um, there there are sort of control mechanisms built in there, so presidents can't just go off and do what they they they want to do. Even though the chief executive and got the power there are. There are constraints and controls around them, which is sort of a good thing.

Speaker 1:
And I think as we move through to towards the election in the US, when there's some clarity as to who the candidates are going to be and what their economic policies might be and then that'll have a bit of an impact. So then I, I don't think it'll be too, too bad in the UK. You know, again, I think part of the reason that the UK um market equity market and possibly bond market have been,

Speaker 1:
um, I'm gonna say under invested in the phrase they're gonna use by by international investors has been political uncertainty which has existed for for quite a period of time, not just in terms of what the government will be but also within the government. Who's going to be leading that? That sort of government?

Speaker 1:
Um, and I think as we move through the first half of next year, as as we start gearing up towards an election as as we start seeing what all the opinion polls are going to be showing us, we can all see them at the moment. Yes, I think that would create a little bit more more uncertainty, I think if there's going to be a change of administration. Change of of, of, of party, Um, in charge of the government again. That's maybe something international investors might take a step back from and try to understand a little bit more about.

Speaker 1:
But ultimately they're going to care about the economic policy rather than anything else. So once we've got clarity, then I think we can have a proper think about it.

Speaker 0:
OK? Thank you, Neil. So my last question.

Speaker 0:
You know, you talked about the market generations this year, and you kind of hinted at something earlier in in one of your answers. So I'm gonna give you the last word. Are you more positive or more negative about the view going forward than you've been for the last six months?

Speaker 1:
More

Speaker 0:
positive, Neil Burrell. It's been an absolute pleasure having you on talk at markets today. Thank you. Also to you, the viewer, for spending your time to listen and watch this video today. We very much look forward to seeing you on the next edition of talking markets. Thank you.