Podcast Summary
UK House Prices to Decrease by 30% due to Mortgage Rates and Affordability Issues: UK house prices may decrease by 30% due to rising mortgage rates and affordability issues, while equities, particularly mid and small caps, continue to offer value
House prices in the UK are expected to experience a significant decrease, potentially by as much as 30%, due to rising mortgage rates and affordability issues. This forecast comes from John Stepak, who has extensive experience in the housing market. The increase in mortgage rates has already led to sellers having to lower their asking prices to maintain affordability for buyers. The Bank of England has acknowledged that house prices have risen significantly in the past few years and that a return to previous levels would not pose a major threat to financial stability. Meanwhile, UK equities continue to offer value, particularly in the mid and small cap markets, which have struggled more than the larger FTSE 100 companies this year.
Tom Slater's Investment Predictions and Ethical Considerations: Tom Slater, co-manager of Baillie Gifford Scottish Mortgage Investment Trust, predicts continued success for past-performing assets like value stocks, expresses reservations about house builders due to ethical concerns, and finds potential value in private equity investment trusts despite historic discounts and infrequent revaluations.
Tom Slater, the co-manager of Baillie Gifford Scottish Mortgage Investment Trust, believes that assets that have performed well in the past year, such as value stocks, will continue to do so. He also mentioned his reservations about house builders due to ethical concerns. Surprisingly, he found that private equity investment trusts, despite the historic discounts, could be decent value for the long run, despite his skepticism about trust net asset values and their infrequent revaluations. Overall, Slater's investment approach contrasts with John's, and he cautions against making rash forecasts. The conversation with Tom Slater provides insights into the UK's most popular investment trust and highlights the importance of considering various investment options and ethical considerations.
Long-term investment in growth companies: Volatility is inevitable: Long-term investment in growth companies can bring substantial returns but also significant volatility. Focus on company fundamentals and ignore short-term price fluctuations.
Long-term investment in growth companies, while potentially yielding significant returns, comes with inherent volatility. The trust, which specializes in such investments, has experienced impressive growth over the last decade but also substantial losses over the past year. This volatility is not unique to this fund, but rather an inevitable part of actively managed funds that aim for long-term capital appreciation. The performance of the trust is driven by a small number of exceptional companies rather than market conditions. The fund manager emphasizes the importance of focusing on the fundamentals of these companies and ignoring short-term price fluctuations. However, it's important to note that the current market environment, characterized by low interest rates and a craze for growth, has significantly contributed to the trust's past success. While the fund managers' stock-picking skills are undeniable, they have also benefited from this market environment. Investors should be aware of the risks and rewards associated with long-term investment in growth companies and accept the volatility that comes with it.
Understanding the gap between a company's fundamentals and valuation: Despite economic headwinds and rising interest rates, long-term growth prospects for companies in areas like electric vehicles, energy production, and healthcare remain promising. However, investors must carefully evaluate which companies can continue to grow and justify their high valuations.
While the market environment has been favorable for growth investing in the past, it's important to consider the gap between a company's fundamentals and its valuation. The past year saw a significant repricing of assets due to monetary conditions and the delivery of fundamental progress from companies. Looking forward, there may be short-term headwinds due to economic conditions and rising interest rates, but the long-term prospects for many growth companies remain bright due to ongoing trends in areas like electric vehicles, energy production, and healthcare. The challenge for investors is determining which companies can continue to grow and validate their high valuations. While some may argue that high valuations are a concern, it's important to remember that a company's valuation is not the only factor. Ultimately, what matters most is the company's ability to deliver on its growth potential.
Identifying mispriced assets with long-term potential: The fund seeks to invest in undervalued companies with a long-term vision, focusing on those with a structural advantage, strong culture, or head start in their industry.
The investment philosophy of the fund is centered around identifying mispriced assets, specifically those that are "unreasonably cheap," which have the potential for superior long-term outperformance. The fund acknowledges that prices are difficult to predict, but believes that in the long run, prices will follow fundamentals. The fund's strategy is to invest in companies building the future of the global economy, even in an environment where capital is abundant. The fund's portfolio is concentrated, with a few investments made each year based on a 5-10 year vision for the company. The approach may not always be in favor, but the fund believes that those companies with an edge, such as a structural position, strong culture, or head start, stand the best chance of building a long-term, return-generating business.
Concentrated investment strategy with strong management teams: Investing in a focused portfolio of strong companies with low fees and individual company focus, rather than a diverse set for an active fund.
The investment strategy of the discussed portfolio focuses on partnering with strong management teams in a concentrated portfolio, while keeping fees low and ensuring differentiated exposure. The portfolio, with over 40% of assets in the top ten holdings, is concentrated, and investors should expect a more focused set of companies rather than a diverse one for an active fund. The managers prioritize individual company fundamentals over macroeconomic factors, but acknowledge the importance of context. In the case of China, they have sold down some holdings due to changing political and regulatory environments, acknowledging that they don't operate in a vacuum but don't claim expertise in macroeconomic predictions.
Impact of China and Market Conditions on Investments: China's rise as a global economic powerhouse and market conditions can significantly impact investments. Regular revaluation of unlisted assets is essential for accurate asset valuation.
The investment landscape has undergone significant changes in the past decade, with predictable technology trends and shifting geopolitical dynamics impacting companies and industries. The emergence of China as a global economic powerhouse and the subsequent shift in attitudes towards it have led to new challenges for some companies. Additionally, the performance of unlisted investments, such as private equity, may appear to be holding up well due to infrequent revaluations, but their true value can be significantly impacted by market conditions. Scottish Mortgage Trust regularly revalues its unlisted assets based on listed stock markets to ensure accurate asset valuation.
Private companies' valuation and capital raising strategies in the current economic climate: Private companies can delay acknowledging economic reality and adjusting valuations, but investors are cautious. Attractive opportunities exist in well-performing private companies, and it's uncertain if the trend of staying private longer will continue.
The current economic climate has led to a shift in how private companies are valued and approach raising capital. Private companies have the flexibility to delay acknowledging the economic reality and adjusting their valuations if they don't need to raise new funds. However, this waiting game may change as companies come to terms with the new economic environment. Investors are currently cautious about deploying capital into private companies, but there are still attractive opportunities in companies like SpaceX and Northvolt that are performing well. The last decade has seen a trend of growth companies staying private longer, but it's unclear if this trend will continue or if companies will return to public markets. Regardless, it's important for investors to maintain flexibility and be open to opportunities in both private and public markets.
Scottish Mortgage's edge in accessing private companies: Scottish Mortgage's long-term investment approach and 10-year holding period give them an edge in gaining access to private companies, resulting in significant investments in growth companies like Moderna.
Scottish Mortgage Investment Trust's role as a long-term, serious investor in growth companies, with a 10-year average holding period, gives them an edge in gaining access to private companies for their shareholders. However, maintaining these long-term relationships and making the decision to sell can be challenging. Moderna, one of their top holdings, is an exciting and important company that is transforming the field of respiratory disease. While its recent performance may not be impressive, its potential to create a single shot for both COVID-19 and the flu, addressing the accuracy and effectiveness issues of current flu shots, makes it a significant investment. Moderna's technology also holds promise for targeting other respiratory diseases, ultimately combining them into a single shot. This growth-focused approach and philosophy is not easy, as it requires having a clear investment process and demanding growth ambitions for their companies. Ultimately, the goal is to not be all things to all people, but to maintain a concentrated portfolio and have grown-up conversations with management teams about their fit with the investment philosophy.
Moderna's Expansion Beyond Infectious Diseases: Moderna aims to develop vaccines and treatments for latent viruses and personalized cancer vaccines using mRNA technology, reducing toxicity and increasing success rates in drug development.
Moderna, a biotech company known for its COVID-19 vaccine, is expanding its horizons beyond infectious diseases. They aim to develop vaccines and treatments for latent viruses like CMV, EBV, HIV, which contribute to serious health issues including cancer and MS. Additionally, they are working on personalized cancer vaccines using their mRNA technology. This platform technology allows for the modification of a single molecule, reducing toxicity and increasing success rates in drug development. Moderna's work in programming our own cells using genetic tools is akin to IT programming, and while it may take time for acceptance, the potential results could convince skeptics. Another promising investment is MercadoLibre, a Latin American ecommerce platform that enhances the buyer experience while building a finance business, including payments and lending. The team's local knowledge and ability to compete despite difficult economic conditions make it a strong contender.
Investing in a phenomenal executor during a sell-off: During market downturns, consider investing in strong performers at attractive prices. Stay informed through podcasts like The Big Take DC and The Big Take from Bloomberg News.
During this time of widespread sell-off of growth assets, there is an opportunity to invest in a business that has been a phenomenal executor and is available at an attractive price. Tom Slater, a guest on the latest episode of Merrin Talks Money, discussed this potential investment opportunity. For those interested in staying informed about the economy and its impact on people, check out The Big Take DC podcast, which explores how money, politics, and power shape government. The Big Take from Bloomberg News is another podcast that covers the stories behind what's moving money in markets and helps listeners understand the economic news. Overall, it's important to stay informed and educated about the economy and the investment opportunities available.
