Podcast Summary
Central banks prioritize financial stability over inflation: Central banks will maintain financial stability by pumping more money into the economy, potentially leading to a future where everyone banks with a single, Fed-backed institution, made easier by Central Bank Digital Currency.
That central banks prioritize financial stability over inflation, even if it means encouraging potential misallocation of resources. This was a consensus among the panelists at the Bloomberg Invest Conference, including Sima Shah from Principal Asset Management, Sean Bell from Goldman Sachs, and Alex Chartres from Rafa. They agreed that the banking crisis is unlikely to resemble the 2008 crisis and will mostly affect specific areas like Credit Suisse and US regional banking. Central banks' preferred solution to maintain financial stability is to pump more money into the economy, which could lead to a future where everyone banks with a single, Fed-backed institution. The convenience of Central Bank Digital Currency could make this transition easier as we become increasingly reliant on our mobile phones.
Markets are not constant, trends change: Trends can last for months, years, or even a decade but they won't last forever. Find fund managers prioritizing investor interests for best returns.
Markets are subject to change and trends, while they can last for extended periods, are not eternal. During a live recording at the Bloomberg Invest Summit, Meryn Somerset Webb spoke with Sebastian Lyon, the founder and CIO of Troy Asset Management. According to Lyon, markets are not constant, and trends can sustain for months, years, or even a decade, but they won't last forever. While Bitcoin, up about 30% this year, is not a guaranteed hedge against inflation, it does seem to be holding its ground in the uneasy "no man's land" of cryptocurrencies. Despite some skepticism, it continues to attract investors, especially those who may have panicked about the US regional banks. Equities, on the other hand, were recommended by Alex, but a multi-asset fund was suggested by Sebastian. The importance of finding fund managers who prioritize their investors' interests and returns was emphasized, as they are more likely to have a significant investment in their funds themselves. Overall, the conversation highlighted the importance of staying informed and adaptable in the ever-evolving world of markets.
New Era of Investing: Higher Interest Rates, Inflation, Deglobalization, and Increased Labor Costs: Prepare for a prolonged period of higher inflation and adjust investment strategies accordingly as the new era of investing is marked by higher interest rates, inflation, deglobalization, and increased labor costs, making investing more challenging and volatile.
We're entering a new era of investing marked by higher interest rates, inflation, deglobalization, and increased labor costs. This shift will make investing more challenging and volatile compared to the past decade. Valuations for good quality stocks were inflated during the low-interest-rate era, and they're now on a long journey back to more reasonable valuations. The last decade saw a trend of buy-and-hold investing, but the future requires more patience and a readiness for market volatility. The inflation trend, driven by various factors like post-COVID issues and geopolitical events, is not going away anytime soon. While some may hope for a return to the old normal, the current conditions are unlikely to change significantly. Instead, investors need to be prepared for a prolonged period of higher inflation and adjust their strategies accordingly.
Wages are the primary driver of long-term inflation: Wages, particularly in the services sector, have been rising post-pandemic. Union membership is a sign of this trend, but persistent wage increases could challenge the view of returning pre-COVID inflation levels. The economic environment is expected to be volatile with potential inflation fluctuations.
Wages play a significant role in driving inflation over the long term. Despite fluctuations in commodity prices, oil prices, and food prices, it is ultimately wages that sustain inflation. We have seen material wage pressure in recent times, particularly in the services sector post-pandemic. Union membership is a key indicator of this trend, and its rise may not be a bad thing. However, if wages continue to rise, it could challenge the view that interest rates and inflation will return to pre-COVID levels. The current economic environment is expected to be more volatile, with inflation likely to be falling this year but potentially rising again in the future. The volatility in inflation is a result of various factors, including geopolitical events and base effects. It is essential for investors to be prepared for this volatility and potential second waves of inflation.
Merging of tech and banking sector bear markets: Stay informed on banking sector and shadow banking companies for potential issues. Consider gold as a potential safe haven during uncertain economic times.
We're facing unprecedented times with rising interest rates and potential financial instability, which could lead to a merging of the tech and banking sector bear markets. The S&P could fall significantly, and it's unclear where to hide as there aren't many obvious, cheap assets left. The speaker suggests keeping an eye on the banking sector and shadow banking companies for potential issues. Additionally, the speaker mentions the parallels between the current situation and the financial crisis and dotcom bubble. Despite the differences, the merging of these two bear markets could result in something significantly worse than previous crises. It's important to stay open-minded and aware of potential accidents ahead. One potential safe haven is gold.
Gold as a hedge against inflation and economic uncertainty: Gold's proven track record as a hedge against inflation and economic instability makes it essential for portfolio diversification, despite low interest rates and potential currency debasement.
Gold has proven to be a reliable hedge against inflation and economic uncertainty, as evidenced by its performance during the pandemic, the invasion of Ukraine, and the current high inflation environment. The speaker believes that central banks will keep interest rates low, leading to potential debasement of currencies, which is beneficial for gold. Gold should make up a significant but not overwhelming portion of a portfolio, providing enough defensibility without excessively impacting the net asset value. Bitcoin, on the other hand, is considered too volatile and uncertain for the speaker's portfolio. Gold's proven track record as a hedge against inflation and economic instability makes it an essential component of a well-diversified investment portfolio.
UK market: Attractive valuations but cyclical risks: The UK market offers attractive valuations and good dividend yields, but investors should be cautious about cyclical sectors like oil, mining, utilities, large telcos, and banks, which may struggle during a recession. Unilever is an exception.
Despite the UK market offering attractive valuations, high-quality companies with good dividend yields, and a wide valuation differential compared to the US, there are concerns about the cyclical nature of many UK sectors and the potential impact of a hard economic landing. The speaker mentions sectors like oil, mining, utilities, large telcos, and banks as being heavily represented in the UK market and prone to cyclical fluctuations. While these sectors performed well during the previous cyclical upturn, they may struggle with earnings during a more traditional recession. The speaker also notes that many UK investors have already sold down their holdings in UK stocks, leaving fewer sellers in the market. However, the speaker's largest holding is in Unilever, suggesting that not all UK companies are equally cyclical. Overall, the UK market presents both opportunities and risks, and investors should carefully consider the specific companies they are investing in.
UK market challenges leading companies to consider moving HQ to US: Some UK companies consider moving HQ to US for higher share prices due to market challenges, but portfolio remains conservatively positioned
The UK market faces challenges that have led some companies to consider moving their headquarters to the US for higher share prices. Unilever, for instance, is currently undervalued compared to its peers, but the gap isn't massive. The UK has lost some great companies over the years, like Cadbury's, which have not been replaced. The decision for a company to move its headquarters is not an easy one, as seen with Ferguson (formerly Wolseley) and British American Tobacco (BAT) being potential candidates. The process is bureaucratically tough, and a company's share price could potentially double. However, the portfolio is currently underweighted in equities due to concerns about multiple contraction, earnings risk, and increased interest rate costs. Companies have taken on too much debt, and tax increases add to the burden. In summary, the UK market presents challenges that have led some companies to consider moving, but the portfolio is currently conservatively positioned due to these concerns. The good news is that within a year, the hope is that the portfolio will be more optimally positioned.
Investing in the stock market in the next 18 months: Monitor market valuations like CAPE and Price-to-Book for investment opportunities in the coming months through bottom-up stock picking
According to Sebastian Lyon, a prominent figure in the equity market, the next 18 months could be an opportune time to invest in the stock market. However, it's essential to be patient and keep an eye on valuations, such as the Cyclically Adjusted Price-to-Earnings ratio (CAPE) and the Price-to-Book ratio. By monitoring these valuations and practicing bottom-up stock picking, investors can make informed decisions and secure longer-term returns. So, the key takeaway is to focus on market valuations for investment opportunities in the coming months.
