Video Q1 Market outlook webinar – Comebacks and setbacks

(00:01): Good afternoon everyone. Thanks for joining me today. I'm Anthony McDonald. I'm the Head of Portfolio Management at Aegon UK. And I'm joined in the background at the moment by Dan Matthews. He's a Senior Investment Manager in my team. Over the next 30 to 40 minutes, we're going to talk a little bit about comebacks and setbacks as we recap 2024. And then I'll look forward into 2025. Clearly most noticeable comeback has been that of President Trump and we're all remembering the reality of a Trump administration over recent days. And we've seen setbacks in the UK assets in January and in China's limited economic recovery. So I'll be talking through how we see all those things in the next half hour or so. These learning objectives capture those points that I've highlighted there.

(00:54): And this is the agenda. So after number two, looking back at 2024, I'll pass over to Dan for the market backdrop piece before picking back up. As we look into 2025, before we get into the meat of things, I do always like to kick off with a reminder of how we think about investing your client's money not least because it helps frame the way we kind of analyse some of the things we're going to show you. In the next few slides. We do take a long-term approach anchored by our valuation analysis. We think those are our edges in navigating the funds through different environments. We do believe markets are inefficient, that we go through cycles of fear and greed, and that with a better patience long-term return prospects are improved by avoiding overpaying for expensive investments. And on the other side of the coin, identifying those that look cheaper. And that's how we try to manage the portfolios over time.

(02:01): A quick look back at 2024 because I know we've ticked into February already, but this is our first webinar of the year. And I do always like to start off with not just a look back at last year but also what we said at this time last year and how it subsequently played through. So in our Q1 webinar last year we set these out as what we expected to be the key themes for the year inflation falling towards target which felt a little controversial as a time as it was starting to come in higher. And there was a lot of fears rising about sticky inflation. And then we focused on key areas of change that we expected political change around elections and the shift to a falling rate environment. And we felt, and still think they're important because at times of notable policy, political change we think investors really should think more carefully about the durability of the winning trades that have worked in the previous environment. Our last theme was China stimulus and the view that authorities were announcing ongoing measures to support their ailing economy. And so I thought we'd have a quick look at how they all played through over the course of the year.

(03:16): This chart shows that there really was solid further progress on inflation. As we all know, the headline rate reached a 2% target here in the UK also in the Eurozone. And the disinflation trend we saw from those really high peaks in 2022/23 absolutely persistent. As I put on the sub-header of this slide, it is too early to be complacent. You know, you can see all those measures have ticked up just a little bit in the final part of the year. And we think that does partly reflect the fact we need to see more progress on services inflation, on core inflation for it to be a definitively sustainable fall back to towards the target levels. But it was a really welcome backdrop, which as we can see on the next page, gave the key central banks enough confidence to start cutting interest rates in their second half of the year.

(04:12): You can see interest rates climbed that mountain over 2022/23 essential banks responded, arguably a little bit late to that substantial post covid inflation surge reaching over 5% in the US and the UK. And what you can see is kind of the last few months of 2024 starting to edge back down again as central banks gained more confidence that that disinflation trend was sustainable and had gone far enough to enable them to ease the handbrake just a little bit off their economies. And that's important because we think it does increase confidence that they won't necessarily be behind the curve in loosening policy if and when it's needed.

05:04): And so we get to political change. And this is an ongoing theme really and that we think a very important one. I've quoted some headlines here just to help remind us really the bigger picture that some unfolded over 2024 and into 2025. ‘Incumbent parties defeated in the US and the UK’, ‘governments collapsing in France, Germany, and Canada’. The French government collapsed after a no confidence vote in Michel Barnier. They're just now trying to force through another budget, and we will see if Bayrou, the latest Prime Minister, suffers a similar fate. And now we're of course, also a couple of weeks into the reality of a new Trump term. And we can see the uncertainty that the kind of political change can create around policy paths in key economies. So this is absolutely a big theme for last year, an ongoing into this year.

(06:04): And our last theme was China stimulus. And we saw another big acceleration in support measures in the second half of the year. You can see from, from the chart on left there that China's key interest rates have been falling since the end of 2021, really, even as they've soared elsewhere and pick up in pace with an unusually large rate cutter in, in the third quarter showed kind of the authorities stepping into kind of monetary support to try to kickstart their economy. And that was also accompanied by more forceful indications of government spending support. There were two important policy meetings in December the poll Bureau and the China Economic Work Conference. And there were signs of stimulus from both the policy stance officially moved to appropriately loose which is a clear sign of a loosening of policy. And that was followed through with signs of definitive moves at the CWC the week later. What does remain to be seen is when, or whether all these measures will have a meaningful economic impact. And that will be a story as we look forwards to 2025.

(07:26): So if I put it all together, I put a big tick next to each of those points that we said at the last of last year would be important. They did broadly shape the broader economic and strategic backdrop for markets. And I'll now hand over to Dan to pick up a little bit more detail on the market implications.

(07:49): So if we keep those, those four things in mind let's start by kind of having a, a very broad look at market performance. So if we can have the next slide, please. So, the chart here on the right shows performance over the year for you know, most of the assets in which we invest, and a few that we don't, including oil and gold. And as you can see, you know, the red there is the bar for 2024. The blue is just Q4, the most recent performance. And, you know, we can see, with the exception of, of UK gilts, most of the major asset classes enjoyed positive performance over the year with, again, if we ignore gold on the extreme left there, US equities leading the way, but reasonably closely followed by Japan and emerging markets. We'll talk a little bit more about US in, in the coming slides.

(08:37): Thinking about the narratives that drove the markets this year. Obviously soft landing was one of the core themes there. You know, that's interest rates being low gradually whilst growth is, is largely unaffected. So despite interest rates having previously been restrictive, that the market manages to get away with that inflation dissipates, and, and we emerge unscathed. This narrative has supported the markets pretty broadly. And indeed we've seen a little bit of that. Looking at the slides before, you know, we saw some rate cuts and growth, at least in the US has remained relatively robust. And then finally, we've touched on it before, unsurprisingly, we're going to touch on it again throughout the presentation, but we had the victory of Donald Trump in November last year, and his policy backdrop has added a bit more fuel to, well, not only equities, but also the dollar. We've seen big moves there. Bonds on the other hand, had a bit more of a mixed ride, so they've had a bit of a bumpy year. You know, initially they enjoyed that, that reduction in inflation. But then, you know, back end of the year, growth, growth accelerated. And we saw, you know, people start to become concerned about the Trump policy mix and the likelihood of further inflation on the back of that next slide.

(09:53): So let's look a little bit about what's happened as those interest rates have come down. So interest rates and bond yields are of course, intrinsically linked. You know, the interest rate is essentially, you know, the likely yield on a very, very short term bond. Bonds that we own in our portfolios, however, have duration. And so the yield on those bonds will also factor in things like the future anticipated path of interest rates, expectations for growth. So they're not just the short term number, but they are, they are linked to it historically. It's fair to say that as interest rates have come down, so have the yields on 10 year government bonds. And that's what we're looking at on this chart. So across the bottom, we have the number of days before and after the first interest rate cut. So the left hand side of the chart is negative.

(10:36): So those are days before the first interest rate cut we're down to about 180 days before. And on the right hand side, positive, so that's after the rate, interest rate cut. And then the axis on the right here shows the change in the, the yield of the 10 year bond. The pink line is the historical average. And that basically pretty clearly slopes left to right. So that suggests that bonds typically begin to fall, the yields begin to fall in anticipation of that first cut, and generally they fall after that first cut, as well as the market anticipates further interest rate reductions, because typically, you know, you have an interest rate cutting cycle. So that first cut is the beginning of, of further cuts, the green line that represents what's happened this year.

(11:18): So in this case, you know, we've seen our theme of inflation returning to target largely playing out. We've seen those anticipated interest rate cuts. And what we saw here is on the left hand side of the chart, before the interest rate cuts, we see the green line drop so that the, the yields fall in line with expectations and then following the cuts rather than the line. Continuing down in further, you know, in anticipation of further cuts, we see quite a strong rebound up into the right. This suggests the market is quite skeptical about the long-term path for inflation and indeed interest rates. The inflation represents a few things. One is, you know, US growth, growth and employment continue to be pretty good. And whilst we've seen inflation hit 2% in the UK, we have yet to fully see inflation dissipate in the US. And so some risks around that soft landing narrative remain.

(12:04): We haven't quite landed the plane yet. The second, of course, is the recurring theme of this presentation, which is the election of Donald Trump. And so the market has priced a little bit of the impacts to things like tariffs and immigration policy on the, the likelihood of future inflation. We think this market reaction to Trump is pretty understandable. It's reflected in our oppositions. We have an underweight in sort of overseas versus UK government bonds, but it's worth noting that you would see a very similar chart for the UK as well as the US. So, you know, the UK line would also flow up and to the right. This is despite the fact that the UK has a very different growth, inflation and political picture, and we think this difference presents a big opportunity for our funds. Next slide, please.

(12:55): So now let's look at one of the other themes that came through this year. This is China stimulus. It's fair to say that despite China having sort of offered reasonable support with its markets, it's still suffering from a property de-leveraging that is weighing heavily on its consumer confidence. This is combined with, again, the sort of Trump re-election at the back of the year and concerns reigniting about a trade war occurring between the two nations. And we've seen developments with that this week. Here we have a couple of charts that sort of indicate the strength of that consumer malaise within China. So the top one being consumer confidence. And here we see a precipitous drop during covid. So we've yet to see that recover. And it's, you know, it's easy to forget that China had this policy of zero covid. They had far more extensive lockdowns than lots of Western nations, and that significantly damaged the relationship between the consumer and the government.

(13:45): The bottom chart is retail sales. So retail sales is often used by market participants as kind of a bellwether for consumer confidence. You know, consumer confidence is relatively fickle. You are asking people about their emotions, it can be affected by their politics, whereas the retail sales numbers are kind of more tangible. And again, you know, we see some volatility around those lockdowns, but overall, retail sales remain kind of well below those longer term peaks. So China, for us, represents a theme that played out. So we did see that stimulus, but actually it had minimal sort of real world impact on the, on the economics and, and, you know, the, the markets to a lesser extent. Next slide please.

(14:24): Now let's turn to everyone's favourite topic within the equity markets, which is the US. Earlier on we had that chart of the assets in the top performing assets over 2024. And we clearly saw that, you know, there was a decent sized bar there for North America, but there was also reasonable sized bars for Japan and emerging markets. Here we're looking at contribution to equity performance. So the green bar is global equity returns, and then the pick bar represents the amount of those returns that came from North America. And so, as you can see, almost all of the global performance was contributed in North America, despite the fact that we saw earlier on that, you know, there was reasonable performance in different regions. Why this is the case ought to be relatively familiar to anyone who understands that the, the weightings within different equity benchmarks. But let's just kind of remind ourselves and have a quick look at that. So, next slide, please.

(15:18): So here we have the weights of the A CWI serving all countries index. And as you can see, the large grey chunk there, so just under 70% is North America. You know, it's worth noting that this chart is done by region, so that's North America rather than the US. The, the dark blue there is Europe. So actually, if this were by countries, the difference would be more stark. You know, US would still be a very large chunk, but that European piece would be made with lots of little chunks. And so it's reasonable to say that, you know, the US had a pretty good return last year. It's 70% of global market cap. So of course it dominated the contribution to those returns. The question is, is it logical to have, you know, in a portfolio that's titled multi-asset and is designed to be held by clients over the long term, is it reasonable to seek all of your returns from a single region? Next slide, please.

(16:15): So let's look at a couple of different data points of the US. So here on the left we have GDP, and on the right we have population, the GDP numbers, at least kind of, they, they support the idea of the US ought to be the biggest market in the world. You know, it does in fact have the biggest GDP, however, it's fairly quickly followed by China. I mean, it's a little over half, but it's still a fairly sizable chunk. And then the rest are kind of a little bit smaller on the right hand side population, it's, the difference is very stark. So despite being a pretty large country, the US does not have the largest population. In fact, both China and India are significantly larger. And in fact, if you look at the other sort of bars on this chart, you know, the US has a population similar to, to many nations that we don't associate with, with equity investing at all. Next slide.

(17:07): So let's look back at that kind of original chart, but now we're going to weight it by GDP. So the left hand chart is the one we were just looking at. That's the current weights within the global markets. The right hand chart is that index, if it was weighted by GDP. So whilst we saw on the previous chart that US did indeed have a very large GDP, you can see here that the US has gone from being nearly 70% of the world to around about 35%. And I keep saying the US this is actually a chart of North America, but Canada is a very small sleeve to slip within that. So it's reasonable to say that these numbers are predominantly the US. And so by investing in the A CWI, its current weight, we are investing roughly double the weight that we would be investing if we were investing based on GDP in the USA right now. Next slide, please.

(17:59): And what about the US index itself? So now we're looking at the S&P and this is a chart of showing what percentage of the index is made up by certain parts of, you know, of the market. So in this case, the green line here represents the top 10 companies. So what percentage of the S&P 500 is dominated by the top 10? The pink line is a sector, in this case technology, which is the largest sector within the index. And again, we're looking at what percentage of the index is dominated by technology. The pink spike there in sort of May, 2000 is obviously a dotcom boom, where technology rises sort of precipitously and then, and then drops afterwards. So what we see in this chart, we can see that in 1995, technology was just under 10% of the index, whereas the top 10 stocks were around about 17% of the index.

(18:47): But in recent history in part, due to the kind of magnificent seven, technology now represents about 30, just under 35% of the index, whilst the top 10 is 37% of the index. So what we can see is that the US is not only kind of a large piece of global equity markets, and every increasingly number of sort of smaller company, sorry, a smaller number of companies have come to dominate sort of an ever increasingly large portion of the US market underneath that. So if you are buying a global index, thinking that you require a high degree of diversification, that might no, might no longer be the case. Next slide, please.#

(19:27): So this is the last slide in this section, and then I promise I'll get to the point. So these are the anticipated returns from a long-term CMA. So for anyone that doesn't know what a CMA is, it's a set of long-term return assumptions. It's the capital market assumptions in this case for different equity markets. And they're typically produced to support decision making for strategic portfolios like pension funds, multi-asset funds, endowments, people that are looking to invest over the, the longer term. They're usually based on kind of a combination of historical return, the historical relationship between different assets, the level of historical premium people expect in different assets. So how much more do people want to earn for an equity over a bond, etc. So, you know, if we take these at face value, they are a reasonable set of assumptions for the long-term expected returns of equity markets that are kind of anchored to, to the history of equity markets.

(20:20): So this is kind of a reasonable long-term expectation for your portfolios. The key takeaway here is that, you know, equity markets aren't anticipated to differentiate from each of the tremendous amounts over that longer term. You know, there's some difference with the UK being sort of slightly lower here. I've lost the slide. It's gone black for me, it's back. Yeah, so there's some difference here where, you know, we see slightly lower returns in the UK slightly higher from emerging markets, but for the most part, these bars are all relatively the same size. Nor do we see the US as being the tallest bar here. So there's nothing in these long-term returns that suggests that the sensible way to generate, you know, a decent long-term return for your clients is to put 69% of your portfolio into the pink bar there. So what's the point of all this?

21:11): You know, the US is without doubt the position that we get asked about the most. It's the one that within our long-term valuation framework, we suggest is most expensive. And it's simultaneously the largest portion of any multi-asset portfolio that is choosing to be market cap weighted. Often, because we talk about the US a lot and we stress that valuation piece, and it's a key part of our philosophy. People think we're more negative on the US than we are. You know, we, we do believe that the US exceptionalism is partly justified, and that economy has undoubtedly been performing strongly. They have a unique flavour of capitalism that benefits businesses operating there. Trump, again, the Trump theme he's of course a question mark, but there are some policies that are being talked about that are potentially beneficial. Further growth tax cuts, you know, deregulation, if they can manage, manage it in a relatively sensible way, are potentially sort of ACC recruited to growth.

(22:07): We do, however, think that the market has become overexcited about the US. So even if we maintain a relatively benign back backdrop, the soft landing stays in play. It is not reasonable to try and generate a long term return, you know, long term diversified return for your clients by having 69% of your portfolio or potentially more if you are overweight in an incredibly concentrated equity market. It's also worth noting that if we keep having years like 2024, that 69% doesn't stay at 69%. It becomes 75%, 80% very quickly. So you are, you know, by assuming that this continues, you are making assumptions about the future that are quite, you know, quite significant. And finally, if we just bring it back to, to the slide that's on the screen and look at that longer term data over the longer term, the US is not necessarily anticipated to outperform. And we believe that when you have an expensive start point like you do today, it's even less likely to outperform over that longer term. You know, this longer term assumption does not tell you where you are starting from. And so we believe it's worth diversifying your portfolio a little bit more and not having all your eggs in one basket. And that's it for me. I'm going to pass back to Ant

(23:21): Thank you, Dan. Sorry about that slight glitch in the slides where they went black, my whole laptop went black. So hopefully we'll get through the last part of the presentation without, a repeat. So I come back to look a little bit into 2025. I'm sure there'll be plenty of questions and opinions out there. So please do use the button on your screen to ask questions. We will have time to answer questions at the end. We'll try to go wherever you would like us to go. About that time also the CPD certificate should come through to the chat area. But as we saw for 2024, we do like to think about the broader themes that we expect to be more dominant over the year as we look forwards.

(24:13): And, and so these are, these are our themes for 2025, what we think will be some of the major themes for 2025. We do think interest rates can fall further. We expect investors conviction that to swing around a bit around policy and inflation developments. We've already seen with the tariffs this month the news can come quickly and can develop quickly. But we think there is space for interest rates to fall further. And a link to what I was saying about tariffs, where we expect the reality of policy under President Trump to be important driver of both sentiment and fundamental developments. We've been talking about that for much for the last year. The last few days have served a good reminder as modus operandi and we should expect probably an uptick in policy noise and related volatility.

(25:01): And we think that will be an overarching theme for the year and most of the next four is China's policy support. We think that does remain an important theme for markets especially for an acceleration that we looked at earlier in the latter part of 2024. And we'll think about kind of whether and when that that might start to have a, a, a more meaningful impact on the economy or Chinese market. And finally, fourth, we highlight UK investment opportunities. Something absolutely felt quite contrarian two to three weeks ago when Sterling, the equity market gilts were selling off together. And we do think that there are areas of increasingly exciting longer term value in some specific UK markets.

(25:56): So if I start with the lower interest rates theme and, and this chart shows that we really, the interest the, sorry, the red line on this chart is US interest rates and the, and the blue line is the federal reserves, the central banks projection is the average of the each individual policymaker the projection for longer term rates. And when the red line is above that purple line that's an indication that interest rates are likely to be weighing on the economy. You know, I think of it as obviously a massive simplification. But I think of it simply as, you know, the Fed driving a car. And when that red line’s above the purple line the brakes are on to a varying degree. The car can still go but it’s got something that's holding it back a bit.

(26:53): And, you know, that might be fine when you're travelling downhill, but if you hit a bit of an uphill, you know, a bump in the economic backdrop up or something, then the, the, then those breaks can have a really sudden impact. And the alternative, you know, when that red line is below the purple line policy, typically easy kind of the foot's on the accelerator rather than the break, you can see now that gap's closed a bit. Partly there has been a view in the Fed that the longer term kind of mutual interest rate where you're neither on the accelerator or the break has maybe pushed up a bit from the you know, post financial crisis lows there. So, you know, that purple line's nibbled up a bit. And of course, the red line’s come down as we've seen interest rates falling in the back end of 2024.

(27:41): But the red line's still above the purple line. And we think that does offer scope for further policy loosening. We would agree when any assertion that cuts could be a little bit slower going forwards, and they were back in the last year, given that we're closest to neutral, there are absolutely uncertainties and risks around Trump's policy platform. So the US Central Bank may go a little bit slower, but that scope is there. And we think this idea of kind of restrictive interest rates is highly relevant for other countries too, not at least here in the UK actually. Where interest rates are substantially higher than any estimates of the neutral rates. And where there may well be bigger risks to keeping policy tight for too long. So we think that's an important theme that will play out in a bumpy way over the course of the year.

(28:30): But here the latest Fed meeting was last week and Chair Powell did devote part of his press conference to thinking about the idea of restrictive rates. Are rates restrictive? You know, is Central Bank still a little bit on the breaker in in the us? And I thought that was important because there are some counter arguments out there, and he was very clear, I put it here. You know, he says, you really just have to look out the window and see how your policy rates affecting the economy. And I think we see it's having meaningful effects in bringing inflation under control. So he absolutely thinks that rates are still kind of containing the economy and kind of by extension that if necessary, there's scope to for them to fall a little bit.

(29:20): President Trump - those of you who kindly joined our webinars over the course of the last year, know we've spoken a fair bit around his kind of proposed policy platform kind of in the run up to and then after the election. What I've captured at the top there, you know is that we still see it as an uncertain mix. We know that the stated priorities were tax cuts, deregulation, tariffs, and immigration policies, you know, the first two there are naturally likely to be more economically positive than the second two. You know, have to think through implications for inflation interest rates, but kind of in themselves are more positive economic measures than the second two. But they're all kind of in the mix this last week. We’ve seen tariffs absolutely in the mix.

(30:10): Immigration too, the two have been entwined to some degree. And what the chart there shows is the development of consensus growth forecasts over time. And so it's another negative to positive days axis. And, you know the x axis across the bottom shows kind of if you take the purple line in 2024 as an example how growth expectations for 2024 progressed before 2024 started just over the year 2024 started, that's the negative numbers. And then kind of over the course of the year, as data started to come in, that's the positive numbers. And so using that as an example, you can see that expectations before 2024 started were quite negative, but they picked up quite quickly early in the year as the data showed a resilient economy, thinking about that soft landing that Dan was talking about.

(31:07): The green line shows the same for 2025. Obviously, we haven't got to the end yet because we're only early on in the year, so we've just ticked into the, the positive days on the axis. But what you can see is that kind of more recent upward trend from, you know, just over one and a half to over two. Which has kind of come about as expectations picked up in the back end of last year you know, around the time of the Trump election. And that seems understandable. We know that there has been talk about extending tax cuts, although of course they, the regional Trump tax cuts are still in place for this year and deregulation. But we do wonder whether kind of the willingness to accept a positive growth shift might underappreciate the kind of the breadth, the potential outcomes if we think about some of the kind of the, the tariff immigration policies on the other side of things.

(32:05): So again, not necessarily looking to sound the alarm on the US economy. It clearly has healthy momentum. But when we think about uncertainty around policy change, one of the themes we were talking about at the start then we are concerned that kind of investors may be anchoring more on the positive side of potential developments rather than negative side of potential developments. So we think a little bit of care is necessary there, especially in the context of some of the weightings Dan was talking about in US markets generally at the moment.

(32:40): China support we spoke earlier about the support measures that we've seen in China. We think there are questions around what the details of any fiscal package whether it may be more focused on consumption than some of their earliest support measures. Again, Dan showed you rock bottom consumer sentiment, kind of anaemic retail sales. We do think measures targeting the consumer are likely to be necessary to help lift the economy back up again. And we have seen a number of false starts in recent years around kind of well received support announcements that didn't necessarily kind of move the needle or some of those consumer measures that we've seen. So we think it's going to be a key theme. We think it's going to rumble, you know, we are seeing progressive in some ways accelerating kind of support announcements over time as we think the authorities absolutely have the will to try to prudently address the protracted economic slowdown there. But we do think it's important to look at the details, to have a think to when they come through. We're expecting that kind of March-time to have more indications of whether or not it's the kind of support that is likely to be sufficiently supportive for markets and the economy.

(34:02): And as I said, our last thought was opportunities in the UK market. As I said, please do ask questions we're going to have a good amount of time to answer questions at the end here. So it would be good to make sure we go in any direction that that interests you. But here in the UK we had a, well, Dan showed it, in the back end of last year there was a reasonable sell off in gilts in line with the global bond sell off investors are a bit more worried about the policy developments the potential for kind of less interest rates cuts this year. And while Trump was, you know, the key global poster child for kind of policy developments and threats to lower interest rates this year there was obviously also here in the UK the new Labour governments poorly received first budget contributed to some question marks around the kind of outlook for taxation, government spending and growth. And you’ll remember that came to a head with a really sharp, further sell off in the first half of January.

35:05): We feel very strongly at that kind of excess selloff was overdone. We added a bit to our overweight in gilts at the time. And, and clearly, you know, there are some risks about around the fiscal position and the choices the government will take around fiscal discipline if forced. But we do also look at measures in economies such as those you see on this page, a trend for rising unemployment a slowdown in growth momentum, you know, left and the right even before that, most recent jump in bond yields, which is likely to tighten conditions further. And we do really think the economy will struggle to withstand bond deals up towards 5%. And if they stay here, that'll most likely bring forward rate cuts in our mind, making it a self-limiting move. So we do think that the sell off has created particular opportunities in gilts, even if it's a little bit bumpy around kind of global bond news and Trump developments.

(36:05): This next slide just shows kind of the feed through of the backdrop into markets. It's the market implied interest rates here in the UK for this coming September. So kind of from back in September 2024, the left of this chart. You know, the expectation was that UK trade would be down around 3.5% this September coming up in, you know, seven months time. And you can see kind of that government bond sell off pricing out a lot of those rate cut expectations such that you got to mid-January. And the expectation was for an interest rate kind of comfortably over 4%, 4.25%. So, you know, three rate cuts effectively priced out of expectations come this September. Now that's come down a little bit. Gilts have recovered a little bit from that sharp sell off in the first half of January. But we do think, you know, given the economic backdrop, we've spoken about that the balance of probabilities is tilted towards more cuts, particularly in the second half of the year than markets currently employ. So that's another way of kind of framing the opportunity.

(37:09): And the other part of the UK market that we think offers you know, compelling long-term opportunity is mid-caps, you know, I've spoken to some of the shorter term economic growth risks, and, you know, they're absolutely relevant. They may provide a short term headwind to mid-caps. But that part of the market, it does look very cheap, absolute and relative terms on a number of the measures we look at. And the economic outlook isn't all one sided. You know, I absolutely think we need to see yields come down a bit, for interest rates come down to support the economy and the Bank of England. And, you know, we spoke earlier about restrictive rates has the capacity to help with that. And if that comes through at the same time is on the left here, business surveys are stabilizing at reasonable levels.

(37:56): And real pay growth on the right remains healthy. You know, that line is comfortably above zero and towards the higher level than it has been over the last 10 years. Then some of the growth fears that we're reading headlines may just be a little bit overstated. Even with the upcoming national insurance rises that are starting to come through, we've got a good starting point here. And it's indicative that the consumer may remain in reasonable shape for the kind of short to medium in terms. So we do think to kind of put together the combination of gilts and UK mid-caps. They work quite well together in the portfolio. We think they both have good kind of longer term valuation drivers in their own rights. And we think kind of building a long-term portfolio they can come together quite nicely.

(38:48): So if we then put it all together in our overall kind of convictions for the key sectors and markets in the portfolio I've marked the changes since our last webinar in October. You know, reflecting that conversation on gilts by pushing the UK government bonds up to a large overweight in the teeth of that conviction in the teeth of that sell off in, in January. And we pulled down emerging markets. We reduced the position ahead of the US election. Just the kind of combination of valuation and risks made us a little bit more concerned about the outlook. And then we took more off, again after the election when the reality of the Trump presidency seemed to post some headwinds to global trade where emerging markets and China are a clearly a little bit more exposed. More broadly around that, you know, we've kept the neutral equity weighting. We knew that a little bit before the election, but kind of not significantly the preference for the UK and Japan and in bonds, it's the UK government bonds that are the main positive conviction.

(39:54): So to put everything together Donald Trump’s election has had substantial market impacts, and we think we, that we should view that both as a point of change in its own right. And one part of a broader change in the kind of global political environment that's ongoing that creates uncertainties and longer term questions As to the ultimate market winners and losers, we do think it's right to take a careful approach to expensive US equities in a diversified portfolio. If we think about the themes for 2025 interest rate cuts can continue. And we think if and when, there are times when investors get very pessimistic on that, like in the first half of January, then that may create opportunities to add value if yields rise far enough to tweak our kind of long-term valuation antenna.

(40:49): And specifically we think that gilts are a good opportunity for investors at these levels. I will stop there and we've got some questions coming through here, which is excellent. Please do keep the questions coming through and we'll answer as many of them as we can in the next 5 to 10 minutes or so. Dan, why don't I ask you this. Unsurprisingly there's several here on Trump tariffs, the risks associated with Trump tariffs and kind of what that all means. So I'll pass over you to kind of try to cast some light on that.

(41:34): It's a nice, easy one to start. I think it will, well, it means different things to different countries, but I think what the most interesting thing is, you know, I would break tariffs down into kind of two baskets, which is kind of one, you've got the traditional trade war type tariffs, which is what we saw of Trump in 2016, which is essentially you turn around and you say, China is stealing our intellectual property. They are taking manufacturing away from the US by subsidising certain industries. You know, they are essentially committing trade/kind of production related kind of, you know, crimes in the sense of the way Trump will talk about it, but kind of, you know, they are doing something wrong in their production capacity to gain a benefit and therefore we will tariff them. And that was what we saw a lot of in 2016.

(42:20): And then you now have to separate from that, which is tariff as a weapon, which is essentially you are just doing something we don't like, and therefore we are going to tariff you. And that is not the same, you know, you can't then fix something in your production chain or the way that you are producing things to respond to that tariff. And I think we've seen two different kind of paths here. You know, the Chinese way is much more the kind of the traditional trade related issues, which is we have issues with the way you do trade and therefore we'll put sanctions on you. And that feels, I mean, not reasonable, but at least intellectually justified and easier to process and understand for market participants. And so, you know, it will create volatility, but it'll create volatility in a more managed way. And then you have the second part of that, which is, you know, we are going to put tariffs on Mexico because of fentanyl, because of drugs, and we're going to put tariffs on Columbia because they didn't take people we were trying to deport.

(43:13): And, you know, those tariffs last an hour. And different nations are at different kind of risks from both sides of that coin. So take the UK for example, I don't particularly think the UK has any trade related reason that it ought to suffer from tariffs. You know, we don't, we have a surplus of the US you know, our trade is generally pretty, you know, the way we engage in world trade is generally pretty fair. Could the Trump administration take exception to something the Labour government is doing around the way we regulate social media and free speech, or something that's happening with the Chagos Islands or something, you know, just something else that is happening within our politics and use tariffs as kind of a weapon there, then I think that is a possibility, but by its nature, those things are hard to predict.

(43:57): So I think, you know, column one, there are some places that, not necessarily understandably, but I think we can say safely, that tariffs here will, you know, both exist and persist. And then column two is less, you know, more volatile and hard to predict, which is the kind of more socially alienated tariffs and the more kind of, yeah, the more global bullying style of tariffs that we've seen. I'll go with another Trump related one since we seem to have a theme here which is what's Elon Musk been up to and what impact is that likely to have?

(44:45): Yes <laugh>, that is a really good question. We think it kind of leads quite on from, you know, the concept of tariffs that last hours on Columbia kind of not many more hours on Mexico, which is whatever Musk is doing, he may or may not do for very long. And we have to kind of understand that reality of policymaking in the US at the moment. That said you know, the US budget deficit is high best that the new treasury secretary does absolutely want a lower deficit. And Elon Musk's DOGE is tasked with finding savings as common efficiencies. I suppose our observation would be that making cuts to the US government is not necessarily the same as cutting Twitter's workforce by a huge proportion.

(45:55): And the orders of magnitude, the implications, the challenges around it, the difficulties of doing it are a lot larger. And whether or not going in and just cutting spending is actually an efficiency remains to be seen. You know someone could come in and take my oven away because I'm paying too much on the electricity for it, but it doesn't necessarily mean my life is more efficient or better. So we do think that the search for savings comes with quite a few risks in a country where the fiscal government spending we think has been one of the pillars that has been absolutely supporting the economy over the last couple of years. We also think that efficiency savings are notoriously hard to find and tend to be more for accountants to justify more spending than for reality.

(46:51): And so that, that, that's the prism through which we're going to be watching and analysing developments very closely. A good question here, Dan, when I pass it back to you, it’s very good actually. Do you think the budget has created an issue with regards to jobs? I've seen a large number of employers laying off staff dramatically. Will they then see faster reduction in rates to try and the economy or we had to further into recession? Before I pass that over to you, Dan, I would just frame it from my point of view which is, you know, we saw the UK unemployment rate and it, you know, it was drifting up before the budget. You know, in a noisy passive definitely drifting up before budget and has continued to afterwards. So you know, I think that point about UK economic fragility may have been has been running for longer, but there clearly were important developments last year. And I'll pass over to you to kind of talk to the meat of the question there.

(47:47): Yeah, so I think one of the important things to sort of start with here is from a data perspective, we don't know, you know, the UK unemployment data has significantly worsened post covid and, you know, the ONS themselves kind of, put significant disclaimers on the data that they're putting out at the moment. So, you know, whatever is going on is, is slightly hidden within the data at the moment, which is kind of a very different circumstance to, to what we've seen in the past. I haven't seen huge amounts of layoffs occurring on the back of the budget. We've definitely seen, we've definitely seen the budget impact in consumer sentiment and that in turn, you know, has, has had a reasonable drag on the economy. We believe. So we think that, you know, it turns out that having a budget six months after you get elected and then spending those six months telling everyone that things are bad, they do eventually listen to you.

(48:37): And I think that has had a, you know, a fairly meaningful impact on the economy more widely. We are now seeing Labour having realised that, and, you know, the inverse is happening. Every speech is about growth. There's quite a lot of signs that they are trying at least to say the right things. There's some skepticism around them doing the right things. But that sentiment piece they are trying to turn around, which I think is quite positive. The wage data is pretty good. Real wages are growing in the UK. So whilst, you know, we are seeing, you know, some behaviour changes reported from companies in response to the budget we aren't, you know, we haven't seen mass layoffs and we are still seeing pay rises running ahead of inflation. So overall, whilst the consumer has been hit by this, they're also gaining on the other side of the ledgers.

(49:21): So there's a bit of a mixed picture here, which probably means that it holds up for a while, but I think the short answer is we won't, you know, it hasn't happened yet. You know, the tax rise is occurring at the moment, and I suspect what we will see is people not replacing staff rather than mass layoffs in response to what is a, you know, it's a meaningful tax, but it's not a huge change to corporate budgets. So, you know, we're likely to see jobs not replaced rather than mass layoffs in response to this. But overall, undoubtedly, it's been negative, the budget has had a negative impact on the UK economy. We've seen that in the growth numbers. I suspect we're going to have a fairly weak quarter when we get this quarter's data, if not slightly negative.

(50:04): But it hasn't been a disaster either. You know, the economy does not yet appear to be in recession. And so there's a good chance that actually we muddle through. And if you think back to the slide we had before, some parts of the, you know, the UK investment landscape are pretty cheap. And so actually muddle through could be a pretty good, pretty good outcome for those assets. And so, you know, mid-caps are priced for that recession. If we don't get it, it could be, could be a pretty good opportunity. You know, rate cuts. We are overweight gilts, and we do believe that that, you know, should there be more weakness, rate cuts are likely to be the response and therefore, you know, that we expect the bonds to benefit from that.

(50:49): We've got a last question here I'll do quickly, but we do like to try to answer everyone's questions if we can, on UK EU relationships, which is the dinner last night so it's obviously a very live question. There's, I suppose the economic and the political element. I'll deal with the economic element first, which is the EU is the closest neighbour and important trade partner. If the UK can have a constructive two-way relationship with the EU probably one that's a little better than the immediate post Brexit relationship then it's likely to be to the country's economic benefit. We will have to see how the reset goes and what it means in practice in terms of what it covers you know, whether there are kind of clear winners, losers, etc.

(51:48): From the political point of view you know, we can see the Reform party. Yeah, we're a long way from the next election, but the Reform party did win it seats at last year's election. We can see that they're currently very high in the polls. There do seem to be clear political risks to pursuing anything that looks too much like EU membership ‘lite’ on a populus which voted for Brexit and seems to be currently voting against the kind of the long term status quo if we think about the rise in the Reform vote share generally over the last election. So I suspect that the developments there over this year and coming years may be contained to some degree by the political reality that remains to be seen, but we think that does absolutely complicate the landscape. On that note, I will say the link to CPD certificate is now in the chat, so please do get that. And I will say thank you very much for joining us. I hope it was useful session, and we hope to see you again in three months’ time or so for our Q2 webinar as we see how these themes have developed. Thank you for your time and all the best.

(53:14): Thank you.