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The Santa rally left a positive impression on markets at the end of 2023. Now, with another strong US earnings season behind us and economic data coming in ahead of expectations, we ask if the progress will be able to continue and what events in 2024 could shape markets.

 

The timing of expected interest rate cuts is up for debate and there is a heavy schedule of elections around the world to contend with. The increasing concentration of leadership in major markets is also a concern, although these companies (such as the Magnificent 7 in the US) are, in aggregate, growing strongly and providing the tools the for next technology cycle led by AI.

 

Access a transcript and the slides below. 

The Santa rally left a positive impression on markets at the end of 2023. Now, with another strong US earnings season behind us and economic data coming in ahead of expectations, we ask if the progress will be able to continue and what events in 2024 could shape markets.

 

The timing of expected interest rate cuts is up for debate and there is a heavy schedule of elections around the world to contend with. The increasing concentration of leadership in major markets is also a concern, although these companies (such as the Magnificent 7 in the US) are, in aggregate, growing strongly and providing the tools the for next technology cycle led by AI.

 

Access a transcript and the slides below. 

 

 

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  • Transcript of the video

    Piers Wilson: Hello and welcome to today's Investec Wealth and Investment Quarterly Markets webinar that is entitled Keeping Your Balance. My name is Piers Wilson, and I'm both an investment manager and a team leader in our London office. It is my absolute pleasure to welcome the many hundreds of IFAs to today's Quarterly Markets webinar, and also to be your host.

    I am joined by John Wyn-Evans, who is our well respected head of investment strategy and is known to many of you. Now, for the next 60 minutes, we will be considering the investment markets, looking back to the salient points of the past few years, and also looking forward to the key themes for 2024. We will also be considering what it means for the investment policies for your clients.

    That said, politics will most certainly play a major part in what is to come. However, and before we start, we have a few housekeeping points. Firstly, a massive thank you for those of you who have already posted questions to our experts in preparation for today. For those of you who would like to do so during this session, please do make use of the chat box facility.

    We will endeavour to answer as many of these questions as possible. CPD certificates will be available to download from the platform at the end of today's sessions. Importantly, and if you experience a technical glitch, or your screen freezes, please do click the question mark icon at the bottom of your screen As I have mentioned, today's webinar is entitled "Keeping your balance". Now, the past few years have been extremely challenging for us all and given that global interest rates remain high in order to quell persistent inflation, what are the implications for markets and portfolios?

    Furthermore, the performance of the global equity markets over the past year have been dominated by the magnificent seven. These stocks are Microsoft, Apple, Amazon, Alphabet, Tesla, Nvidia, and Meta. As John Bogle, the founder of Vanguard, said, don't look for the needle in the haystack, just buy the haystack.

    But given the sheer dominance of these magnificent seven against the global equity market, could passive investors now find that the metaphorical needle that they were so happy to hold within the haystack now ends up hurting them?

    Finally, and with limited expected GDP growth on the horizon, what is the probability of a recession? And do we face a hard or a soft landing? So what does all this mean for investors and how should advisors be positioning their portfolios? To look at this and more, I'm delighted to welcome John Wyn-Evans, our own Head of Investment Strategy. Over to you, John.

    John Wyn-Evans: Thank you very much for that introduction, Piers. Yes, good to see you all again for one of these quarterly updates. And as Piers mentioned, the title of the talk today is "Keeping your balance". So very much thinking about balancing portfolios, but also referencing our still cycling cyclist who still hasn't reached the top of the hill after all these years, is what we are going to talk about today.

    We'll have a quick look back to the budget because that was only not that long ago and thoughts about what it might mean for the UK political outlook and the election and then also looking back a little bit. We'll just look at the evolution of markets as we usually do, then we'll get into the themes that are driving markets and how we're applying that to portfolios.

    We have to have a look at the US election, obviously which takes place later this year. So plenty of stuff to be getting on with as usual. So in terms of UK politics, then, if we look at the Spring Budget and Hunt's headroom, what's that all about? This was basically the amount of money in the sort of kitty, as it were, that the Office of Budget Responsibility (OBR) had given Jeremy Hunt, the chancellor, for the Spring Budget, and it might sound like an awful lot of money. £12.2 billion. But in reality, it's not very much wiggle room at all because you have to keep some kind of buffer of safety there just in case things go wrong. And actually, the average over the last decade or so has been nearer £30 billion.

    Basically, Jeremy Hunt, as we knew, was coming into this budget with his hands tied, and he used up a little bit of the of the headroom, as it were, but at the end of it, this is what he had left. He used up about £3.3 billion pounds net in the end. As you can see, he shrunk that even further.

    That will have implications going forward, certainly, as we'll talk about. The key points, I think, to come out of the Spring Budget, was that there was nothing stunning necessarily out of there. I think in terms of the OBR's actual forecast, they were slightly more upbeat perhaps than they had been previously.

    So they upgraded the growth forecast for the UK and downgraded the inflation expectation. So that's certainly positive in terms of Hunt's Headline proposals. Obviously the two percent cut in national insurance contributions was the main one that would add another £450 pounds on average to people's take home pay, and that obviously added to what he did in the Autumn Statement as well.

    That's 900 pounds, so that's handy. Certainly the continuing freeze on fuel duty also helps too. If a cut had gone through, that would have raised the inflation rate by another 20 basis points. So that's not happening. But the problem is, actually, if you look out to the future, the projections for where the budget will be balanced by, 2029, assume that fuel duty will be going up and that the sort of 5p discount is going to be taken back.

    But obviously, that may well not happen. And it'll be a very difficult political decision to make for whoever has to make that. So on the other side, he obviously had to get some taxes back and did it. I'd say some fairly non controversial areas, vapes and tobacco. No one's going to really complain about that too much. Often people consume them. Air passenger duty, but on the fat cats who turn left when they go into the plane rather than those who go right. Non doms and some changes to the holiday letting rules as well.

    So as I say, I think you went for some fairly soft targets there. The British ISA is quite an interesting potential innovation, but quite how that is going to be classified as it were, what sort of stocks can go in it and how it'll be UK listed companies, their revenues, for example. So I think it's still worth looking at, and there's going to be some consultation to come on that, and we may learn more about that by the summer.

    But of course, what he didn't mention was the fact that you've still frozen all your tax allowances and the fiscal drag that's associated with that. Very much a case of giving with one hand and taking back with the other, and that is the constrained position that the Chancellor finds himself in at the moment.

    So really there was very little market reaction on the day. And in many respects, I think we're quite happy about that because we've seen in recent times when markets tend to react to budgets, it's not a good thing, as we saw back in September 2022.

    In terms of the politics then, here you may recognise people of a certain age, Arnold Schwarzenegger and Danny DeVito in the film Twins. And they obviously look very different but they were from the same genetic material and indeed they were twins. So what's that got to do with British politics? Because you have at the moment two leaders of the main parties in the UK who maybe look and sound very different. But actually, the truth is they are very similar in many respects in the policies that they are trying to put forward and also perhaps in the the voters that they are aiming at.

    Yes, there's always the sort of hard left and the hard right in the parties, but the swing factor always tends to be in the middle, and that is the middle ground that both parties will be gunning for in terms of gaining votes. And I think one of the interesting things about that list of taxes that was increased in the budget. One of them being on the non doms and the other one being the increased windfall taxes on North Sea oil producers. They were both things that Labour said they would institute themselves if they come to power. So basically, what's happened here is the Tories have stolen Labour's clothes on those particular potential policies, and that just makes it harder then for Labou r should come to power to find areas to raise revenue from.

    You can see how it's an interesting political budget, I think, from that point of view in terms of where we are in the kind of relative standings at the moment in the polls is very clear for everyone to see. And I'm sure you're all aware of this, that Labour is far ahead of the Conservatives. It's interestingly, though, that because of things like boundary changes, for example, and still maybe some residual uncertainty about exactly what will happen in Scotland, I've heard some Labour politicians saying there's no sense of triumphalism that it's game over already for the Tories. They're not being complacent about this. And, certainly it would have to be one of the biggest, if not the biggest swing in votes in history just to get a small majority in parliament at this particular point.

    Now, as mentioned, one of the key points is that, in Scotland, Labour only currently holds two seats. But I think with the sort of general implosion of the Scottish Nationalist Party they could well get 40 seats or something like that. It could be more. And I think that will make a huge difference in terms of their ability to get a bit of maturity in Westminster.

    But as I say it could be all over by the shouting, but nobody's shouting yet at this particular point. So I will leave it there. I think from the UK politics point of view, I think this is going to be the most boring election history in so many respects, and that will be very little change on the other side. I'll stop there and we'll how that prediction turns out.

    Now, looking back at the sort of market stuff now, I said that we've had to be very patient for the last couple of years. And what this chart shows in the equity world is the MSCI All Countries World Index. I think this is much more representative of the sort of equity exposure that we're looking to take these days, that we go to a more global stock selection and allocation process. And, the market peaked here back in December 2021, and it did not reach that peak again until December 2023.

    So it was a whole two years of going nowhere effectively. Now, obviously it wasn't going nowhere because it had a lot of drawdowns and recoveries and bounces along the way before finally taking off there in the last few weeks of last year, and then pushing on into this year as well.

    So we're now about 7 percent above that previous peak. And it's quite healthy that that looks like a decent breakout there. And I think more importantly as well, one thing that we've spoken about quite consistently in the past is that when markets do turn they tend to turn very quickly when the sentiment changes.

    And obviously from that peak, that trough we had there at the back end of last October, we're up in the sort of mid teens or so in terms of percent from that particular point. And the reason I've also put all these little red circles on here is to emphasise the fact that there are times when it would have been very easy to panic in the markets and to give up on it as well.

    And I think to emphasise the importance of, sticking to one's long term view in terms of equity investments, even though at times it can feel extremely painful, as it were. So this was the first sort of bottom here in June 2022 that was really associated with a big spike up in inflation at that point and worries about what it was going to do to interest rates.

    And we were still working out what the ramifications of Russia invading Ukraine was going to be. Then in September 22, that was the Truss-Kwarteng budget, for example, around about that time. Now it didn't affect the global market so much, but it was also a part and parcel of the concerns that we had there.

    In March of 2023, that was when Silicon Valley Bank and a few other US regional banks went bust. And also we had the problems with Credit Suisse in Europe. But another period in which people were talking about a potential financial crisis developing. And again, when you would do the proper analysis of this that we did at the time, we realised it wasn't going to, at least we judged that it wasn't going to turn into something that bad.

    And again, there was no reason to be panicking at that moment. And similarly here with that last dip down in October last year, which is associated a lot of with a sell off in the bond market and concerns about whether the US government in particular will be able to fund itself in future again when we saw yields getting up to certain levels with all that was being overdone to.

    One of the key principles about investing is it's not about what you buy necessarily. It's about when you don't sell. And it's very important that you hold your nerve and do the proper analysis to, realise that this is not going to turn into something worse at these market lows.

    As I mentioned, the bond market has a, been through a similar sort of disastrous period as it were, but it hasn't recovered by any stretch of the imagination to the same level. This is the Bloomberg Global Aggregate Bond Index hedged back into sterling. The performance is actually even worse in dollars. But, from the peak again towards the end of 2021 to the lows in September 22, that was down about 16%. And we've had a recovery since then with yields stabilising, but it's been, tracking around in a range really on that basis. Now, I think the stability that you see in here, it's nothing to be massively concerned about I think at this point, I think we've seen the sort of major shift in yields that was required to get us back to a more normalised interest rate world and also moving away from that zero and even negative interest rate policy world that we had in the aftermath of the financial crisis and through the pandemic as well. And interesting to note that we just had the Bank of Japan, the last holdout on negative interest rates, shift to a very small positive interest rate.

    So we finally left that era behind. You And then what that means from a balanced portfolio perspective, I've taken a sort of representative, the FTSE Private Investor Balanced Index from the beginning of 2020 to the present. And again, just to emphasise the fact that from December 2021 until December 2023, it failed to make any new highs, but again, has now broken out finally above that level to the extent of 5 percent or so.

    Again, importantly, one should look back over the whole period. So if you go back to the beginning of the period here, the beginning of 2020, we've had the pandemic, we've had the Russian invasion of Ukraine, you've had these extremely high inflation rates and then the big increase in interest rates that followed that. So that's an awful lot of things to throw at a portfolio over a four year plus period. And yet, this represented portfolios of about 26 percent over that time, so around about 5.5 percent annualised. And if you plug in what the expectations are for a portfolio over a reasonable distance of time, it's not going to be very far away from that.

    Actually, in many respects, if you just zoom out a little bit and look at the periods when things accelerated and did slightly better than you might have expected and then go through more of a fallow period, it all works out in the end. Now been alluded to, there are some very interesting differences between markets and particularly between a very narrow focus of stocks in certain markets. And what I've shown here in this chart is this sort of performance at the top from the magnificent seven. So these are the highly rated tech stocks, including the massive stocks in the US - so Apple, Microsoft Alphabet, Meta, Tesla, Amazon and, the key one in all of this, Nvidia . Now, Nvidia itself has gone up multiples over the last year or so - a little bit about that specifically in a moment. But if you look at how this has affected markets, you can see the Bloomberg magnificent seven index since the beginning of January last year, more than doubled, up 125%.

    And obviously these are big components that have helped the performance of the S&P 500 index, which is up almost 30 percent in total return terms. The next o ne down is JP Morgan's MSCI Europe ex UK index, which still hasn't done badly. Start up 23 percent over that period. And then you've got the TOPIX in Japan, I put these all in sterling, by the way, so that they can be seen in constant currency basis, how they would flow through to us as UK based investors. The FTSE, something of a laggard here, only up 9 percent over that period. Obviously, we haven't got the right sort of companies in the UK. If you look at some of the things that have done exceptionally well over that period, particularly in the technology sector, in the pharmaceutical sector with the appetite suppressing drugs, for example, in luxury goods stocks, for example.

    We just don't have that sort of mass of companies. What I think is also interesting about the UK is the almost 9 percent total return. The capital return is under four. So again, a big component of UK market returns. J ust to prove that there's always somebody worse off than you, in an element of schadenfreude perhaps, the Chinese Shenzhen 300 index is down 14 percent over that period as the country has continued to not be able to recover from the pandemic and is still struggling with the aftermath of a massive property bubble, which is being unwound at the moment.

    Another interesting element of what's been going on is this dominance of passive funds. So index funds are basically people just putting money into the market with any regard for stock pricking. It's just buying the index. And we've reached a point in the last few months where the passive ascent of all ETFs and mutual funds in the United States, certainly, which is a dominant market has reached now more than 50%. And the question is whether this will continue to dominate, whether money will continue to be channeled to those mega cap stocks, for example, or whether it's going to throw up some opportunities for more active managers to put on decent relative value trades. And I think there is some evidence of that, which we will talk about in a moment.

    And then I also wanted to just show that, for all this talk about the concentration of markets, it tends to focus on the US. Interestingly, the top 10 holdings in the US account for about 32% of the market. I think that's quite low compared to a lot of other countries actually. I think take Ireland outta that maybe because it's a relatively small index. For example, Switzerland, a big country, top 10, and they're dominated by companies like UBS, the big pharmaceutical stocks, Walsh and Novartis and Nestle, for example. Big global companies, which yes, they do a little bit of business in Switzerland, but most of it outside dominated the index there.

    The Netherlands, for example, dominated by ASML, the company that provides the machinery for making semiconductor chips. France, interestingly, the biggest single sector there is luxury goods. And in the UK, it's a sort of smattering of energy companies, resources, companies and the banks as well.

    John Wyn-Evans: So it's all depends a bit on where you look, all these countries have different drivers as it were, but it is interesting how there is a kind of dominance in markets of a few stocks. And in some ways, as I say, it's not as dominant in the United States as it is elsewhere. It isn't a problem necessarily. There's no particular reason why it should be. There's an awful lot of charts doing the rounds saying this is the 10 largest stocks at the beginning of one decade. And you can see that they're not at the end of the decade. . And often the reason is because it's a cyclical phenomenon and that was a period that was good for them, and then the next decade is not so good.

    At the end, it's down to fundamentals. There's no specific reason why a winner in one decade shouldn't necessarily be the winner in the next one. And that's where the analysis comes in. Looking at those magnificent seven stocks in the US, there's certainly been some interesting dispersion in the performance of them so far this year, showing that investors are beginning actually to say 'we can't just buy this group of stocks because they've got a catchy name to them'. In fact, it's almost always when that starts to happen, it's the somewhere near the end of the line for that particular trend.

    And what's so interesting this year, Nvidia is up, 78 percent almost and Tesla at the other end down 34%. So over 100 percent of relative performance difference between those two companies just in the first two and a half months of this year. And there's no doubt about the fact that Nvidia has found itself in the absolute sweet spot in terms of the chips that it provides particularly in terms of the growth of artificial intelligence.

    And, the market is obviously placing some faith in its ability to keep on doing that for some time. Again, it's all down to analysing it, but also from our perspective as well, if we do it, own it in portfolios, it's owning it in the right size. We'll never let, Nvidia suddenly become 10 percent of somebody's portfolio. You have to scale these things in a sensible way. But I think one of the interesting things about what's going on here is it has allowed active managers to show better than what their recent average of performance has been, and I think if you've certainly looked back through this period here in the sort of post financial crisis world up until, last year in a period certainly where interest rates have been very low, and we've had quantitative easing, it was an environment in which was actually very difficult for active managers to outperform their benchmarks.

    And we do think that, Periods of disruption as we had in 2022 when we had the, big sort of correlated trade between bonds and equities and a writing rising yield environment. And also, now where we're seeing a bit more selectivity in terms of the winners that actually gives a bit more.

    Active managers more of a chance of outperforming the benchmarks. Another thing I should just mention on pass on, as it were about in video, because I think it's an amazing sort of fact is that in the sort of 10 weeks up until a week or so ago, when I did the analysis in video, put on somewhere. I think it was between 800 and 900 billion dollars of market capitalization, which was the equal to Berkshire Hathaway.

    So extraordinarily, Jensen Huang created more market cap in the space of 10 weeks than Warren Buffett has managed over six decades, which just puts everything into some sort of perspective. Okay, next we'll move on to the market drivers. So this is the stuff that everyone's looking at the moment and certainly, we are looking at it very closely as well.

    What are going to be the key things which decide which way markets are going to go, what's going to drive particularly central bank policy at this point, and I think the key one, I think for everybody, and interestingly, I actually just was looking at the Bank of America fund manager survey, the latest one that came out this morning, and it was top of the list about what everyone's worried about.

    It's inflation and inflation is back again on people's radars, and certainly we're not in the position that we were a couple of years ago. So this chart, which comes from J. P. Morgan's state of the markets document, which is actually available online. You can go and find it for yourself.

    It's quite a handy one to look through. So you can see here, obviously in 2022, all this red in terms of where inflation was. And, we're, Double digits in some countries and the UK was amongst those. And as we went through 2023, we started seeing smatterings of a bit of, rosy and pink coming through.

    And as we came through the back end of last year, that was pretty prevalent in most territories. And in fact, in some areas, you're in blue territory, Italy, for example. I guess the one, one that, stands out here to some degree is China. China, as is often the case, tends to run a completely different direction.

    The rest of the world, which is doing at the moment, if anything, has got a bit too much of a deflation or lack of inflation problem at the moment, which is a signal of the struggle that the economy is having to pick up some momentum again. But as I say, the key thing here is that these numbers are still in Generally sort of light pink colors as it were.

    So there's no sort of major inflation. Problem going on at the moment. We've certainly seen just some The last few bits of data that come through particularly in the u. s The inflation rate has not come down as fast as people were expecting There's some stickiness in certain areas of the market particularly in services, areas of the market driven by Higher wages in particular and there's still definitely seems to be something of a shortage of workers in the world as well.

    So you put those together, that's, an area of concern for the market right now. And I think that's the single most kind of closely watched piece of financial data or economic data that's produced at the moment. And, what everyone is worried about, particularly the central banks, and I've written about this in this week's weekly digest called the ghost of Arthur Burns.

    Arthur Burns was the chairman of the Federal Reserve back in the middle of the 1970s. So he presided over the economy during a period in which inflation rose quite sharply here in the early 1970s and then came down. back to a lower point in the mid 1970s. Unfortunately the Fed sort of declared victory over inflation at this point, somewhat prematurely as it turned out.

    And then it went up to a massive new cycle high in 1980 and famously Paul Volcker who was then Appointed as the chairman of the Federal Reserve had to raise interest rates well into double digits of 20 percent to bring inflation down setting up actually what turned out to be the beginning of the Longest and most massive bull market in both bonds and equity markets that was able to start In the early 1980s and so people have been running these kind of parallel charts of inflation back in the 60s and 70s and inflation today and they do look eerily similar and the Concern of the central bankers at the moment and it's not just the fed.

    Everyone's on the same page about this Andrew bailey christian guard you name them? Is worried that if they declare victory over inflation too soon, it'll take off again And that's why you've getting a lot of kind of cagey comments from central banks about saying yes, we would like to, cut interest rates at some point, but not just yet.

    We need to see a little bit more data. And as it turns out, that data is just not being quite as compliant as they would have hoped in the last few weeks and to some degree justifying their caution. And now what this has meant in terms of interest rate expectations has been quite interesting. So as we came into the year there were expectations, at least in the way they're priced in futures markets, the interest rates were going to fall quite sharply this year.

    So if we look at the US, for example the federal funds rates, what I've called the base rate here, five and a half percent. The 1st of January, the market was effectively pricing in that it would be 4 percent by the end of the year. So six quarter point cuts down to Make a 1. 5 percent reduction. As of a couple of days ago, that was up to 4.

    6%. So you've taken out at least, two of those Rate cuts between now and the end of the year. And of course, the US situation is somewhat complicated by the US election as well, with some concerns, around the Fed that maybe as you get close to the election, they won't want to be seen to be dabbling with interest rates at that point as it may affect the outcome.

    In the UK, it's, not dissimilar situation. We started out the year thinking that rates would go close to 4%, 4 percent is now 4. 6 and it's the same in Europe. At the beginning of the year, thought was it would be 2. 6 down from 4 and now it's 3. So basically Not only have we done that, but also the timing for the first rate cuts has been pushed out.

    Again, there was an expectation that rates would start to be cut this week, in fact, in the US and the UK, and now we're looking more at June, July, possibly even August for that to happen. Obviously massively dependent upon what comes out next in terms of the inflation data on in terms of, what that then means for the economies.

    So looking at the US specifically here, so this is the one the US economy is the one that's defied gravity in many respects. On the left hand chart is the global, the Bank of America fund manager survey again, and you can see how the percentage of people going for a no landing. I know recession at all in the U.

    S. Has gone from low single digits up to 19%. I think actually the latest one. It was 23%. So there's a growing sort of expectation that actually the U. S. Economy will carry on growing. And if you look at the sort of expectations of recession, As priced in by economists polled by Bloomberg, it was 65 percent in the middle of last year.

    It's now down to 40%. There's no doubt about the fact that one of the reasons why inflation is turning out to be a little bit stronger is because the U. S. economy in particular has been stronger than expected. So that's not necessarily the worst reason necessarily, but it does mean that there's no particular need to cut rates at this particular point.

    And I think if you look at the growth forecasts around the world for 2024 in the U. S. A. Again. This is the consensus of Bloomberg at 2. 1 percent GDP growth for next year, and we're not exactly storming away elsewhere. I think it's fair to say in Europe, it's 4. 5 percent with Germany still in the mire at 0.

    2, having been in recession, and the other economy that's obviously in recession at the moment is the U. K. Even though the outturn for 2023 is growth. It was negative in the last two quarters of 2023. And the expectation is for 0. 4 percent in 2024. We're not roaring back to growth by any stretch of the imagination in 2024.

    And then there'll be incremental growth in 2025, but no better than trend at best, as it were. There still looks like a sort of fairly damp recovery, if that's the case. And that would suggest that there's something, Very sticky happens with inflation. Those rates will be coming down over time.

    Just looking elsewhere. What are the other things that we continue to worry about at the moment? It's the stuff that everyone's worrying about, not only from the market perspective, but existentially, you might say as well. We've got the China, Taiwan situation.

    There's a, a Various American generals have gone on record as saying it will happen. China will invade Taiwan in 2027, but I'm inclined to believe that's what American general would say. Anyway you've got the current sort of position in the, what's going on in the Middle East and then how that's affecting the Red Sea.

    That's interesting how that has come about. Created problems with traffic through the Suez Canal, which has had to be rerouted around the Cape of Good Hope, which takes about an extra 10 days, and there's a lot more expensive to do. So there's a little bit of supply problems there, but nothing drastic.

    And I think as long as they're not met by a big kind of, demand stimulus on the other side as they were of it. During the pandemic, it shouldn't turn into another big burst of inflation, for example, obviously, what we don't want to see in this case is things expanding more in the Middle East and disruption to oil supplies.

    We've seen some sort of pick up in the oil price from its lows recently, and we're certainly aware of the risk of that potentially happening. Russia, Ukraine. It just seems to be something, intractable at this particular point. And I don't think anyone has a real clue as to how it is going to end.

    We've certainly, not priced in either. I don't think an ending or an escalation of this particular point. So that's still a potential risk factor out there. And I mentioned the UK election. I'll mention the US election. In a moment in terms of how this sort of plays out through our portfolios, I've shown you this graphic before this matrix which shows a different kind of sort of market environments that we could see ranging from the best of all, which is immaculate disinflation.

    So that's where inflation just comes down naturally through the cycle and growth continues and that's good for bonds and equities. And there've certainly been the last year where that's. Kind of what the market thought was going to happen. I think particularly through the back end of last year. The one, the worst of all would be where inflation really comes back a little bit harder and central banks have to raise interest rates again.

    So that would be in the bottom left hand corner here. So tightening 2. 0 on air for longer. That would be bad news for equities and bonds. If that were the case, it would be somewhat reminiscence of 2022. But. I don't think as bad from the bond market perspective, just because obviously we've already had that sort of resetting of rates with bond market already.

    Resilient growth is where I think we are a little bit at the moment. It's where the bond market has been under a little bit of pressure because growth has been stronger and inflation's not coming down fast enough necessarily. And equities is a bit of a mixed bag. Actually, if you look within markets, even though the, the indices are doing one thing.

    There's quite a lot of dispersion under the hood there. In terms of where we're generally positioned at the moment, we're still in this sort of mild recession camp. Slightly defensive on equities, but certainly not massively underweight by any stretch of the imagination and still looking for that buying opportunity and a little bit overweight on bonds as well.

    But as you can see from all the sort of different percentages here, it's very difficult, I think, from a tactical allocation point of view. perspective at the moment to be taking very strong views on one particular outcome. In terms of, if you are a bit nervous around equities at the moment, there's no doubt about the fact that some markets are, cheaper than others.

    And this graphic shows on the left hand side that the US is the expensive market. And, Europe emerging markets and the UK certainly look cheap. But even within that, you have to ask yourself sometimes you might say, going more global in your investments and putting more money into the U.

    S. For example, but the U. S. Definitely has a, it's a fantastic track record of what it's achieved. And if you look at this chart of the relative earnings, which is the light blue line, and then the relative performance of world markets X, the U. S. Versus the u. S. There's a very good reason why the U.

    S. Has done so well. It's earnings have grown a hell of a lot faster over the last sort of 14 years. And also, I think, when you look at companies, everyone talks about, P ratios, 12 month. He's this sort of thing. I think you have to look a bit beyond the P ratio. You have to look at the, the profitability, the the economic value that companies are creating which allows them to change, to trade on higher multiples of book value, for example.

    And so if you're generating a high return on equity, that would be the case. And a lot of these companies that are doing so well today have a much lower, of equity and capital requirement that they've done in the past, enabling to generate very high returns, very high margins and very strong cash flows, for example.

    All this chart here shows there's a sort of line of best fit between on the y axis. The price the bid price. The price to book value, and then the X axis, the return on equity. And as you can see, it's a fairly constant line through there. And there are not many things that are the long way either side of that necessarily, and certainly not egregiously.

    So I think any talk of, a bubble in us tech or whatever is definitely overplayed at this particular point. I'm going to Just move on a little bit in the interest of time. I've got some charts in here again. Valuation as we often say, it's a dreadful market timing tool. So you have to have some very good reasons to bet against the market at some points when it's at the levels it's at.

    When we look at our current sort of asset tactical asset allocations, you can see, we're not taking very big risks. That's against the neutral. As I say, we're slightly underweight on global equities and U. S. equities within that. We've been overweight, recommending overweight on Japanese equities, which has been a nice place to be slightly defensive in our exposure right now, which fits in with that feeling of, the potential for.

    a bit of a slowdown, but again, nothing dramatic slightly overweight in the bond world. And in the alternatives, we've been recommending an overweight in gold, for example, which has done reasonably well over the last few months and acts as a hedge, I think, against geopolitical risk, but also against the devaluation of fiat currencies as well, which I think is a.

    At a tail risk, which we should be aware of in a world where governments still have enormous amounts of debt that they're dragging behind them and how they get out of that. And it might be some form of, financial repression, money printing that sort of angle, which would certainly play well for real assets such as gold.

    And just the last thing in this section, just to talk about cash is not king. Again, there's another paper being produced at the moment, which will be. Be available just showing going back to 2000, which I thought was a reasonable benchmark to use I think it's the modern world as it were the new technological world, but it also sets quite a high benchmark in that you're starting to measure your equity performance from a time when we had very high valuations So it adds a little bit of an extra hurdle there if you've got a year or two earlier, it would have been even more flattering.

    But I think the key point of to make of this is over those, 24 years by far the outstanding performances for the MSCI World Index. I could have been just put the US index and they would have done better, but I think we'll look at it from a more kind of global perspective a total return of 411 percent over that period.

    And, always to mention that fact, if you've got that sort of time horizon in front of you, you'd say, I will play that mind game with people. If you take 7 percent compound return, what would it do over 24 years? A lot of people wouldn't come up with that number of 411%. But also, the fact that the capital return is 187.

    So again, it's the reinvestment of dividends, which is again, a very important part of that compounding aspect of returns. The FTSE index. Again, you can see the importance of the dividends there. Yes, it's gone up. Total return 174 percent but in capital terms only 22 over that period.

    This is the UK bond conventional bond markets up 130 percent index linked up 96. And then that's inflation over the period is the next one. So the actual, inflation base has gone up 83%. Now, again, thinking about inflation, the annualised rate is 2. 5, 5, and yet 2. 5, 5 percent over 24 years can turn the.

    You can turn a pound into 55p. So again, you have to be very aware of, protecting against inflation. And as you can see from this cash has not done that. And I think, for a lot of certainly, the first 10 years of that cash rates were actually, roughly where they are now, obviously they were down during the, the period of the teens and more latterly, but certainly over the cycle, that huge gap.

    So again, I think there's a. Right now, people are quite find alluring the idea of 5 percent or so deposit yields. And yes, there's no problem holding cash if you have immediate liabilities and you want to be absolutely certain of the value of that. But from a long term investment aspect, particularly if interest rates are going to come down, which is going to increase that reinvestment risk as you, as time goes by, and it just doesn't compound in the same way.

    Finally, in this in this talk, we're just going to talk about the presidential election. It's Biden versus Trump round two. It's the first time that we've had a rematch since the 1940s, which already makes it quite interesting election. And there's going to be lots of finger pointing going on differently, but I think the key.

    points. I want to make about this election is just how polarizes it's going to be so messy. I think the UK election will look like a teddy bears picnic. By comparison, this is going to be a total bun fight. And, you can see here how people feel about their kind of opposing party president as it were.

    So under the Trump presidency, Democrats gave him an approval of 5%. And Trump has gave an approval of 90% and in a Biden presidency, similarly, the Trump Heights gave Biden 5%, but the Democrats gave their own man. Not as popular as Trump, only 80%, but even it's just.

    All depends on, who your party is, as it were. And there's definitely that sort of siloed effect of politics in the U. S. seems to be more dominant than ever before. And interestingly, this plays out in some interesting ways in the market as well from the economics point of view. So what this chart shows, I hope you can see it clearly, is what the one year ahead inflation expectations are by party allegiance.

    For example, if you are currently a Republican, you think that inflation a year from now is going to be 3. 9%. If you're a Democrat, you think it's going to be 1. 9%. And that's partly the messaging I think that you're getting from both parties, but also that sort of prejudice that you feel about the economy depending on who you are.

    And we've seen this actually flip in the past. When you, if you get a change in president, then the numbers will actually. Jump the other way. And independents are in the middle there at around about three. People's views of the economy are actually being colored by their party allegiance, which is extraordinary.

    And then. I think a look generally at what's going on in the U. S. This is a poll done by Gallup last year showing, they asked the question, what is your confidence in various political and social institutions? And they're all forming Supreme Court, Congress, the presidency, even the church and organized religion.

    public schools newspapers, TV news, you name it, everything. Nobody seems to trust it anymore, if that's the case. And that makes a very interesting background, I think, particularly in a world where so much stuff is done online and social media and the potential for kind of disinformation to flow through the presidency.

    Presidential campaign. In terms of, who's gonna win it? It's still a tough call at this point, I think. And in reality, can we even say that both candidates are going to make it to November for various different reasons? It's 47 percent Biden, 48 percent Trump in the betting markets.

    At the moment, this is predicted, which has been quite a useful model in the past. We're looking at it. We'll have to wait and see if Kevin Newsome ever shows his hand as an independent, but obviously Nikki Haley has now disappeared from that chart. After last week And, the other thing you have to ask is, does it actually matter who wins?

    You can see over the years that the returns from Democrats and Republicans are not dissimilar in many respects. So it is interesting that The Republicans have had the two worst performances. I think George Bush Jr. He had the TMT bust and the financial crisis to deal with.

    So maybe a bit difficult for him. And Nixon had the sort of, blowups in the inflation problems and the the oil embargoes in the early 1970s, not to mention his own proclivities. And actually, I found this study from the University of Colorado, which actually tried to rank all the presidents going back to the 1950s in terms of their value added, and it concluded that Jimmy Carter was the only president who actually added any value to the economy in terms of the kind of starting point of valuation.

    And interest rates and financial conditions, et cetera. And interestingly Ronald Reagan his school report should have read could do better because given where his presidency started in such a sort of abject point for the US economy he should have done a hell of a lot better with it from there.

    Um. I'm all I'm going to say is, I think there's going to be, a buildup in volatility ahead of the of the election, and we will have to deal with that as it comes on. But I think trying to make a kind of point at the moment and building portfolios on who's actually going to win is we're just too far out for that at this stage.

    Okay, so to conclude, finally we're preparing for all weathers as we already know. Often do. I think the key point is inflation. We think has peaked, but it certainly might be slower to fall from here that will have ramifications for interest rates, which we also believe of people again. How fast will they be cut and when that might start?

    Then the good news is we're leaving behind what's been a long period of flat returns, but we're still finding it difficult to make big tactical application shifts at this particular point. But we do think. That more alpha will be generated from stock picking. There is some evidence of that happening already.

    And in terms of those elections, as I say, I think the UK election will be relatively benign, but there could be more election. So I will leave it at that at this point and pass back to Piers for the Q& A. Thank you very much indeed, John. First, we had a very early question on the use of AI within investment management, and I think we could probably do an entire session on that in another day.

    A question that is really quite pertinent, and you touched upon this, John, towards the end, and I think you used the words Cash is not king. Now if cash isn't king, what are you suggesting for risk averse investors? For risk averse investors okay. That's a different thing if you're totally risk averse, but you still have to make a return on that basis.

    So there are certain elements of, corporate bond market, which still look reasonably attractive. For example I think, if you look at lower volatility equities, for example, if you look at higher dividend yielders certain sectors of the market, I think, you'll be okay in that.

    So I think I would go with this kind of what I would call a sort of value dividend strategy if that was the case. If you were of the. More cautious persuasion. And yes, you can blend a little bit of cash in there, certainly, but I don't think you just want to be hiding in it a hundred percent.

    Thank you. I, it appears actually, I will just say, because there was actually a question in the inbox which mentioned, I mentioned infrastructure in the last one and yes, that, that is an area of the market. I mentioned, solid dividend growth, for example, and in our latest capital market assumptions work that we've done infrastructure does actually come out very attractively.

    And that I think it's had a big sell off associated with the rise discount rates, for example. But there is some kind of inflation linking to quite a lot of the contracts of businesses that they own. And there's no problems with, balance sheet risk or anything like that generally as we see in them.

    That might be another area to look at, for example. John, can I take you back to the Magnificent Seven? And we've got a question regarding the dominance of these stocks. Has passive investment become a bit too risky for the average investor? John.

    It would be difficult to say it's risky necessarily because it depends what you're measuring your risk against. If you're measuring your risk against a benchmark, you're taking no risk whatsoever. However, if those benchmarks are being juiced up by data, Do much flow into in certain areas of the market, then yes, there is definitely a risk that you will see some, some fallback in some of those things that have been pushed too high because of that.

    And, there's no doubt about the fact that a lot of investment managers who are They have to perform close to the benchmark, and if they can see that certain elements of the market are getting too far away from them, and they don't own them, then they have to buy them. And I find it quite interesting, looking back to the TMT boom when I was working on the other side of the fence as an institutional stockbroker, I can remember, a client ringing me up almost in tears one day, saying, go and get me a price to buy, millions of pounds worth of this particular stock.

    And I said, are you mental? This thing has gone up so much. He said, yes, but it's now, it's now more than half a percent of the index. And that's the most I'm allowed not to own it. And therefore I have to start buying it today. And regret as it turned out, but you do get people forced into buying things cause they, Because they have to have definitely, but I think the current round is more, in a way, because in indices have done so well, it's easy.

    It's low cost all of those particular reasons to be doing it. But as I said, I think you can see under the surface, there's a bit more dispersion going on at the moment. And I think as time goes by, we will see that more active management will Play its part and and provide better returns.

    Thank you now back to politics bit timely this one Can the UK economy be set for growth given the high level of debt? Sorry, john. Yeah it's difficult. It's really difficult. And You know what the economy needs is investment in productive, capital of some variety which it would seem that the government cannot really afford.

    To do at the moment, so maybe it takes more private capital. If that's going to be the case, and, let's look somewhat positively and say if investors feel that under a Labour government, actually, they have a more business friendly environment in which to invest, then you may well, see more capital investment coming into the UK economy, if that's the case.

    But it, it's difficult of that. There is no doubt. And find it hard sometimes to see where that sort of silver bullets is coming from. And John, finally, one last question on risk. If you look out on the horizon, what would you say is the risk that's got the greatest potential to unsettle the market?

    I think, we mentioned the geopolitical risks out there, and I think they're all tail risks as it were. In some ways, they'd be, easy to just list one of those and say it's China invading Taiwan, and then doesn't leave. There's a whole conflagration and you haven't got the access to the high value computer chips or whatever it might be.

    And, in some ways, it's such an obvious one that to say is a risk, and yet it's almost impossible to defend against it in a portfolio environment without If it doesn't happen, then you will just lose so much value. If that was the case, you can't put your chips or the worst possible outcome.

    So I'd say for my money, the thing that one should be continuing to look out for is that inflation. The inflation regime does change. We have spoken about this in kind of view of the webinars over the last couple of years in that, the combination of the kind of slow slowing. I'm not gonna say reversal, but let's say neutralizing of globalization.

    For example the kind of we'll call it populist for want of a better word politics, which demands more and more spending. The sort of the fact that countries are spending more on defense now for example all of these factors come together to suggest and in demographics too, that there's a potential for inflation to settle down at somewhat higher levels than it had been in the pre pandemic era.

    And I think that's where you have to be looking at how you structure portfolios. And as well as how Inflation might be somewhat more volatile than it's been. We went through a long period when it was just stuck in a range not far from 2%. And I think central banks might have looked at that and thought aren't we geniuses?

    Because we set 2 percent targets and we stuck to them. But as it turns out, I think there were other factors which may have made them look better than they actually were. So for me, I would say that's the single largest risk, is a higher inflationary environment making sure that one's investments keep up with Inflation, but also how you kind of balance portfolios against the potential for more volatile shifts in Inflation over shorter periods of time as well.

    Thank you. Absolutely brilliant as always now I webinar insightful And that it's helped you think about the way you shape your conversations with your clients and also position portfolios and strategies for the coming year. If you'd like to know more about any of the points that we've touched upon, please do speak with your usual and local business development manager.

    Finally, I'd like to remind you that your CPD certificates are now available. From the platform and can be downloaded. Thank you for joining today's webinar your participation And also your continued support. Thank you very much. Thank you

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